AMR Corp.'s (AMR) American Airlines said it would pull its
flight listings from Orbitz Worldwide Inc. (OWW), beginning Dec. 1,
unless the two companies can agree on how the online-travel agent
gets access to the data.
Airlines--American in particular--have been vocal in wanting
travel agents and online travel sites to share the expenses of
accessing flight listings. American's move is an attempt to change
how that data are distributed, reduce the airline's costs and
enable it to get a bigger piece of online-travel purchases.
Orbitz said American is threatening to disrupt the current
system.
American wants to "force agencies to connect directly to
[American's] system to access content as opposed to using global
distribution systems," or GDSs, Orbitz President and Chief
Executive Barney Harford said Thursday.
Traditionally, a GDS--such as Travelport Ltd. and Sabre Holdings
Corp. (TSG)--acts as intermediary between travel agents and travel
providers, facilitating the search and booking of flights. The GDS
charges the airline a fee when a travel agent books a flight.
Cory Garner, American Airlines' director of distribution
strategies, disagreed with Orbitz's characterization. He said
American isn't looking to bypass the GDS; rather, the airline wants
to use new technology that routes the data differently and allows
flights to be customized. It also would make optional service
costs, like priority seating and baggage fees, more
transparent.
Garner said American also would like to include the option of
communicating directly with travel agents through its Direct
Connect program. He said American has been in talks with the GDS
companies about using Direct Connect, but no agreement has been
reached.
GDS companies were established before the Internet to make it
easier for travel agents to access flight booking information.
Sabre was built by American in the 1960s and was spun off from the
company in 2000. GDS companies remain big players in linking
airlines to high-margin business travelers via travel agents and
corporate accounts.
American's Garner, however, said the cost has risen beyond what
American considers market-competitive prices, leading the company
to rethink the distribution model.
The travel industry was hit hard during the recession, with
consumers and business travelers scaling back on spending. To deal
with waning revenue, airlines slashed capacity and costs, and
charged customers for everything from beverages to checked luggage.
With little left to cut, airlines have looked to distribution costs
as the next big frontier in terms of reducing expenses.
American said the decision wasn't made because of anything
Orbitz did and that the airline is in various stages of discussion
with other online travel agents.
"It's very clear that American has drawn a line in the sand and
is girding itself for a fight," Forrester Research analyst Henry
Harteveldt said. "I understand American's desire to reduce costs
and have more control over its distribution strategy, but if it
pulls out of GDS, it's possible it may be the only airline doing
this and it may be counterproductive."
Orbitz CEO Harford said no other airlines or partners have
approached Orbitz to terminate their agreements like American
has.
"We have very strong relationships with the vast majority of our
supply partners," Harford said. "This really is an initiative that
is unique to American."
Orbitz shares, down 23% this year, closed down 17% to $5.63.
Representatives from United Continental Holdings Inc. (UAL), Delta
Air Lines Inc. (DAL) and US Airways Group Inc. (LCC) didn't respond
to requests for comment.
American said customers can still compare and purchase American
fares on Orbitz sites at this time and that the airline continues
to negotiate with Orbitz to reach a "viable, mutually beneficial
agreement."
Travelport said American's action may violate its "contractual
obligations" and could lead to inefficiencies and associated costs.
Travelport said it would take "a number of actions to defend travel
agents and consumers" but didn't specify its moves.
Travelport, which owns about 48% of Orbitz, is a private company
owned by Blackstone Group L.P. (BX), One Equity Partners,
Technology Crossover Ventures and Travelport management.
Representatives from Orbitz rivals Expedia Inc. (EXPE) and
Priceline.com Inc. (PCLN) didn't respond to requests for comment,
nor did Sabre, which also owns online travel agent Travelocity.
A representative from Travelocity said in an emailed statement
that the company "has not received any correspondence from
[American] on this matter" and said the company has nothing else to
say at this time.
Expedia shares slid 5.3% to $27.17, and Priceline added 13 cents
to $380.12.
Meanwhile, Orbitz reported a third-quarter profit of $15.3
million, or 15 cents a share, above year-ago earnings of $7
million, or 8 cents a share, and the average estimate of analysts
surveyed by Thomson Reuters of 9 cents a share.
Revenue increased 4% to $194.5 million. The company in August
projected revenue growth of 3% to 6%, below analysts' views at the
time.
Gross bookings climbed 12%, mostly on higher air fares and
transaction volume. Flights bookings rose 13%, while hotel-room
nights soared 57%.
CEO Harford said Orbitz factored in the potential impact from
the American Airlines issue into its financial forecast for the
year. The company said it expects revenue to rise 1% to 2% from
2009. It also lowered its expectations for full-year earnings
before interest, taxes, depreciation and amortization to 4% to 6%
growth from previous estimates for 5% to 10% growth.
-By Shara Tibken, Dow Jones Newswires; 212-416-2189;
shara.tibken@dowjones.com
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