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Has the Online Travel Sector Arrived?

A wave of consolidation is washing over the online travel sector, and when it recedes it seems likely that the business of selling airline tickets and hotel rooms over the Internet increasingly will be in the hands of a few big players.

Of the name brands in online travel, Expedia, Travelocity and Cheap Tickets have been or are being integrated into larger travel-focused operations. So far, at least, name-your-price outfit Priceline.com, airlines-backed Orbitz, and privately held Hotwire appear to be retaining their independence.

There's a good reason for the consolidation, of course - the stakes are getting higher. The online travel business has been one of the few e-commerce sectors to really shine, and its growth continues. Stock prices of $25 to $50 a share for some of the publicly traded travel outfits are no fluke.

"The business is actually making real money," said Legg Mason Analyst Tom Underwood. "They (the companies involved in consolidation) are all cash flow positive ... consolidation is a recognition of the importance of cost-effective distribution."

"The interest is two-fold," said Lisa Strand, director and chief analyst for e-commerce at NetRatings Inc. "These companies have proven that they can be profitable, and the nature of the industry is such that there is promise for these companies to do even better as time goes on - effectively changing the way Americans purchase travel."

Consumers love online travel sites. Traffic to the top sites, including some of the sites operated by the airlines themselves, spiked in January, posting double-digit growth following the events of last Sept. 11, according to Nielsen//NetRatings.

Millions of people visit travel sites and the Internet is ideally suited to the sort of database checking required to verify air schedules and hotel-room vacancies.

So what does this mean for the online travel business? Clearly any consolidation reduces competition, but it's a crowded business to begin with. Consolidations, like the proposed Sabre Holdings Corp. deal announced last week for Travelocity.com Inc. , are being sparked by the recognition on the part of traditional executives and traditional travel companies that online business not only is here to stay, it's going to be profitable.

The Sabre-Travelocity merger would create a giant travel company, offering reservation services to everyone from travel agents and corporate clients to Web-crawling bargain-hunters.

Cendant , of course, has been working to combine Trip.com and Cheap Tickets, at least on the back-end, Underwood said.

And why else would execs like USA Network's Barry Diller be acquiring companies like Expedia and Hotel Reservations Network ?

USA "was clearly looking at advantages through increased distribution efficiency," Underwood said, adding that both Hotwire and Priceline, at some future date, might be attractive, cash-flow positive targets for acquisition.

Synergy is the watchword. Cross marketing opportunities abound, as in, "hey, you need a rental car to go with that airline reservation and hotel reservation?" Priceline.com, for example, has expanded from airfares to hotel rooms to rental cars and just recently, ocean cruises.

Still, Strand said that despite the ongoing consolidation (she expects there will be more), it's likely that the online marketplace itself will change very little. "Many of the changes are on a corporate-ownership level; whereas the sites themselves are (simply) selling travel products in the most efficient way possible -- full-fares for peak travel times, heavy discounts on last-minute or low-demand routes."

For travel agents, though, it's all just a way to sell more tickets. Caleb Tiller at the American Society of Travel Agents (ASTA) says the industry association "makes no real distinction between brick and mortar and online travel agents -- they all are doing basically the same thing, which is selling tickets."

"At one point people thought the Internet was a threat to travel agents," said Richard M. Copland, president of the ASTA. "That's totally incorrect. It's a great informational tool."

"More and more clients are going online and ending up with information overload, and that's where the agent comes in," he said. "Consumers are asking agents for 'collaborative verification,' they want to know they are making the right choices."

Copland said that the Internet has become a money-maker for conventional travel agents, and he wouldn't be surprised if 2002 sees more than $20 billion in travel business online.

Still, there are ticket sales and then there are ticket sales.

"I would argue that for simple round-trip tickets, online travel agencies are actually a better consumer experience," Underwood said. "Right now, the consolidation in the industry is good news for the consumer. Online agencies are very effective in terms of negotiating rates that offer value to customers."

Not everyone agrees that online is better, however. The Consumer Reports travel newsletter did a study and concluded that "the Internet is an exciting new tool, but it's no more likely to garner you the best airfare than a low-tech telephone."

That was in October of 2000, but Sue Juliano, a senior editor at the newsletter, said that "we basically feel much of the situation is the same today, particularly that you shouldn't always assume you'll find the best prices on the Web, and that you should always shop around before you buy."

As to whether consolidation is good for the consumer, Juliano said it depends.

"If the larger sites are able to negotiate more favorable rates with their bulk purchasing power and pass those rates onto consumers, then that's good. On the other hand, choice is always good for the consumer, and the more consolidation in the industry, the less choice consumers may have."