Online Travel — Still An E-Commerce Star?

There’s a strange paradox at work in the ecommerce sector:
It’s a great time to be in the online travel business, which continues its
run as an e-commerce darling.

But these days, the following statement is equally true: It’s a terrible time to be in the online travel business, what with increasing competition and all the difficulties with air travel since last Sept. 11.

On the upside, companies like Expedia.com are making
some real money — second-quarter net income of $19.1 million, or 29 cents a
share, compared with a loss of $4.4 million a year earlier. And Priceline just reported a profit.

Internet data and consulting firm comScore Networks says that its estimates
put total U.S. spending on travel products at about $14.8 billion for the
first six months of 2002, up 71 percent from the same period last year.

Travel spending is the No. 1 growth driver for e-commerce as a whole,
comScore’s Dan Hess, a vice president there, told internetnews.com.

And there are surveys like the one this week from Orlando-based marketing
services firm Yesawich, Pepperdine & Brown, which found that
nine out of 10 adults who planned a trip, either business or pleasure,
between now and the end of the year still intend to take those trips, despite
the stock market recession and the uncertainties of potential terrorism.

“Quite frankly, the travel industry has had more than its fair share of tough
breaks since last September, and this comes as very welcome news,” said Peter
Yesawich, president and CEO of the firm.

And it’s readily apparent that online ticket sales operations will get their
share of those travel dollars.

“As the Internet continues to evolve, and as online travel companies continue
to implement and refine best practices for providing products and services
that consumers want, more and more travel dollars will move to the Web,” said
Paul Ritter, head of Internet Business Strategies at Yankee Group.

“Growth in online travel spending will continue in the years ahead, despite
any downturns from past events,” he said. “People are still traveling and
they may be more choosy in their destinations or their modes of travel, but
many of those sales are merely transferred from one travel option to another
…”

On the downside: There’s a fierce business and
political battle raging between airline consortium site Orbitz and rivals like Expedia and The Sabre
Group’s Travelocity.com, supported by outfits
like the American Society of Travel Agents. The
detractors claim Orbitz has an unfair advantage because of its so-called
“Most Favored Nation” arrangements with the airlines. Orbitz says those other
sites just want to have the travel pie all to themselves.

Then you have the post 9-11 financial woes in the airline industry itself.

Consider: Vanguard Airlines this week filed for bankruptcy, following earlier
filings by Midway Airlines and Sun Country Airlines. The major U.S. carriers
collectively lost more than $1.4 billion in the second quarter, according to
an Associated Press report. Even an overseas carrier like Irish state airline
Aer Lingus blames its heavy losses on the “devastating impact” of the Sept.
11 attacks on the United States.

And travel spending has slowed a bit in general as the stock market declined
yet again. “We have seen a slowing in growth that corresponds pretty closely
with changes in the Dow Jones industrial average,” said comScore’s Hess.
“It’s to be expected … in uncertain times, lots of consumers suspend
decisions on expensive purchases.”

So then will online travel sites go the way of Webvan? Not likely. See Page 2.

One thing does seem to be evident, however, and that is that the Internet has
changed the travel business forever. Sock puppet e-commerce this is not.

A decade ago, travelers were forced to rely on information from travel agents
and airline reservations agents. Today, powerful data base search engines and
the rise of travel Web sites have leveled the playing field – and at the same
time have brought visibility to discount carriers that lack major airlines’
marketing budgets.

In fact, despite complaints from traditional travel agency organizations that
online sales operations can put them at a disadvantage, the Internet is
actually beginning to drive “significant business activity” for traditional,
off-line travel agencies, contends a
recent report.

These days the electronic world is so much a factor that paper tickets
are being phased out. United Airlines , following a
number of other carriers, said this week that it will start charging
passengers a $20 fee to use paper tickets for trips that could be booked
electronically and it plans to have all electronic ticketing by the end of
2003.

United and Delta Air Lines also agreed to an interline pact that allows
passengers on both carriers to change itineraries between the two through
their electronic tickets. Before, passengers needed paper tickets – which
carry surcharges – to travel on both airlines. That agreement goes into
effect Aug. 14.

Meanwhile, the major airlines have seen the light regarding Internet
technology and online ticket sales, hence the creation of Orbitz, which has
an IPO planned. Although it hasn’t made money yet, Orbitz’s parents clearly expect it to
save them/make them dollars in the long run.

According to its IPO filing, Orbitz, backed by American Airlines, United
Airlines, Continental, Delta and Northwest Airlines, lost $8.9 million for
the first quarter of this year on revenues of $32.2 million.

Expedia, whose majority owner USA Interactive has said it
would like to buy up the remaining Expedia stake it doesn’t already own, saw
second-quarter revenue climb to $145 million from $78 million a year ago.

Sabre said its travel bookings in the United States declined by about 15
percent in the second quarter and revenues from Travelocity fell 7.3 percent
to $76 million.

Name-your-price player Priceline this week
reported second- quarter GAAP and pro forma net income of $6.3 million, or 3
cents per diluted share on revenues of $304.5 million, down from $364.8
million a year earlier. The company said the lower revenue was due in part to
continued soft airline sales following the Sept. 11 attacks, and said the
soft economy has also hurt.

Source: comScore Media Metrix (July 2002)

Customerwise, the most visited travel-transaction site for June was Expedia,
according to data from comScore Media
Metrix, which reported an estimated 12.44 million unique visitors to the
site.

Second was Travelocity, with 10.695 million visitors followed by Cendant
Corp.’s Trip Network with 9 million; Orbitz with 8.64 million; Priceline at 5.03 million;
AA.com (the American Airlines site) at 4.95 million and Hotwire.com at 4.55
million.

Why so much Web traffic? People who currently book much of their air travel
online already are enthusiastic about the process. A recent BizRate.com survey found that more than
eight out of ten online shoppers cite the following as strengths of online
booking as opposed to off-line:
*Travel selection (number of flights, hotels, etc.).
*Ease of making arrangements.
*Destination information (activities at your destination).
*Deals.
*Prices.
*Ease of selecting the schedule.
*Timely information/updates.

However, lest travel sites and/or airlines get too greedy, more than four out
of five online buyers said in the survey that implementation of an online
booking fee would deter them from buying via the Internet, according to
BizRate.

Why has online travel been such an outstanding e-commerce sector?

“… the Internet is an excellent channel to sell “virtual assets” whose
value diminishes with time, the Yankee Group’s Ritter told internetnews.com.
“…rows of empty airline seats, empty hotel rooms, all have zero value when
the time has come and gone to sell them. The instantaneous nature of the
Internet makes selling such products online a very smart practice. That makes
online travel purchases a great strategy for consumers looking to save time
and money.”

However, “for the companies operating in the online travel space, it’s not
such an easy proposition,” Ritter said.

In fact, some companies, like Lowestfare.com, already have
fallen out — although apparently not for good, as Priceline is planning
to re-launch the site and plans to integrate priceline.com and Lowestfare.com
offerings. Priceline acquired the URL in June.

Said Ritter: “With the airlines operating their own Web sites … it is
unclear who the real winners will be, but in the end, you’ll be able to count
them on one hand.”