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American Airlines in Fee Battle With Web Agencies

A traveler searching two of the four largest online travel agencies, Orbitz and Expedia, is not going to find any listings for American Airlines flights — at least for the moment.

American Airlines
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American Airlines

That is because American is in a standoff over the fees it must pay to list its flights with the agencies. And while that is the immediate reason for the dispute, a broader issue is at stake: how American’s tickets are displayed and marketed to travelers.

American has developed direct connection distribution technology — which Orbitz and Expedia have refused to adopt — that could change the way it displays and sells tickets. Rather than displaying fare listings based primarily on schedules and prices, American’s technology eventually will customize offers to a traveler’s individual needs. So, during booking, the site will display fees charged for more legroom, priority seating or whatever else the passenger prefers, thus enabling American to promote options that could generate more revenue.

Industry analysts expect that American will resolve the disputes. In fact, Cory Garner, American’s director of distribution strategy, said Tuesday that “discussions are ongoing” and that he hoped the differences would be resolved since “it is in the best interest of all of us to continue to do business together.”

In the longer term, however, it is unclear if American’s direct connection system will succeed, especially if demand for air travel should fall again.

American’s battle with Orbitz and Expedia began in November, when American told Orbitz, the smallest of the top three publicly traded online travel agencies, that it intended to end its contract with the agency on Dec. 1. Travelport, a global distribution system company that owns 48 percent of Orbitz, tried to block American’s move. But a circuit court judge in Cook County, Ill., late last month ruled that American could proceed.

Meanwhile, Expedia, the top online travel agency, chose not to renew its contract with American when it expired on Dec. 31, because it, too, did not want to use the airline’s new technology.

Because both sites no longer list or sell American flights, travelers who want to buy a ticket on American online must now use sites like Priceline or Travelocity, or aa.com, the carrier’s site.

Until the 1990s, United States airlines generally relied on travel agents, who use what is known in the business as global distribution systems — databases that show airlines’ up-to-the-minute inventory — to sell tickets. The airlines paid agents commissions for their sales. But, to reduce operating costs, carriers stopped paying commissions to many travel agents in the 1990s.

Kevin Crissey, who follows airlines and online travel agencies for UBS, said that commissions now paid to large travel agencies that book significant amounts of leisure or business travel represented 3 to 4 percent of airlines’ operating costs. The airlines would like to reduce these costs further.

The carriers continue to pay fees to the global distribution systems for bookings, and the global distribution systems still give part of these fees back to the agencies. American wants to reduce or eliminate those payments. (Here’s a further paradox in American’s stance: American founded Sabre, a major global distribution system, that, in turn, established Travelocity, another of the top four online travel agencies.)

Gerard Arpey, chief executive of American, and Richard Anderson, chief of Delta Air Lines — which, not coincidentally, also stopped working with three smaller online travel agencies last month — said in early 2009 that they would ultimately like to have the intermediaries between them and their customers pay for access to their inventory, “rather than us paying them to distribute our product,” as Mr. Arpey put it.

As part of the standoff, American, as well as other older airlines, has questioned the value of bookings generated by the Web agencies, which tend to be low-priced tickets sold to leisure travelers. According to Mr. Crissey, online agencies generate about 17 percent of those airlines’ total revenue, compared with 25 percent of revenue generated by the airlines’ own Web sites and 53 percent generated by offline travel agencies. Fares sold by online agencies are, on average, 45 percent cheaper than fares sold by offline agencies.

A 'battle for control of air fare search results."

Furthermore, Mr. Crissey said, to sell an average, round-trip domestic ticket, American must pay $10 to $12, for global distribution and agency incentive fees, on online agency bookings, while it costs the carrier only $2 to $3 — for administrative and marketing expenses — to sell the same ticket on its own Web site. It is, therefore, much cheaper for American to sell a deeply discounted ticket, one that doesn’t generate significant revenue, on its own Web site.

In an analysis issued Tuesday, Douglas Quinby, senior director of research at PhocusWright, a travel industry research firm, suggested that “American chose Orbitz to send a message to its major shareholder and GDS Travelport about the cost of distribution.”

Mr. Quinby added, “American’s determination to show Travelport that it does not need those Orbitz segments — true or not — is a powerful stick to wield at the negotiating table.”

In the long run, he wrote, American wants travelers’ search queries “to be passed from the agency to its Direct Connect, and they would determine what flights and fares to display.”

The significance cannot be overstated, he added. “This is nothing less than a battle for control of air fare search results.”

Mike McCormick, executive director of the National Business Travel Association, a trade group for corporate travel managers, warned that if American’s direct connection technology bypassed existing distribution systems, it “could result in a significant increase in capital expenditure that business travel buyers will ultimately bear” because “travel management companies will need to build new systems to capture these ‘direct connect’ fares on behalf of their business travel clients, resulting in higher costs over all.”

For leisure travelers, American’s spat “punches a big hole in the value proposition” of the online agencies, which can no longer claim to be “one-stop shopping sites,” said Tim Winship, publisher of FrequentFlier.com.

Travelers will have to “pay more attention when they’re out there price shopping, since two of the largest online agencies aren’t selling flights of the third-largest airline,” he said.

Henry Harteveldt, travel analyst for Forrester Research, agreed. “Travelers will have to work harder and take more time to shop, change the sites they use, shop on Priceline, Travelocity and aa.com, or add a metasearch site like Kayak.com, Bing Travel or FareCompare,” he said.

Mr. Quinby said he expected the global distribution systems would “continue to adapt, and acquire as need be, to keep their seat at the table.”

He added, however, that “there’s nothing like a recession, geopolitical disaster or oil price surge to send the best intended distribution strategies into a tailspin.” In addition, he said Google’s proposed purchase of I.T.A., the provider of flight data, which federal regulators are reviewing, “could change everything for just about everybody.”

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