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

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

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

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

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

“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.”

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