American and Orbitz Fight to the Death

Last Updated Nov 19, 2010 12:36 PM EST

Yesterday I looked at the why airlines and online travel agents fight. That prepares us for today's look at the latest fight, which has American (AMR) threatening to pull its flights out of Orbitz. I doubt this will actually happen, but if I were American, I'd be tempted to go through with it this time. And Orbitz seems to be up for a fight.

A fight between an airline and an online travel agent is nothing new, but the rationale for using online travel agents continues to shrink given the way they've failed to evolve. Airlines have become hooked on the drug of ancillary revenue, and that seems to be an issue in this fight. Every time a passenger books a flight at aa.com, she's given a lot of different options to buy including travel insurance, early boarding, and more. American makes money on all of those, but when Orbitz sells a ticket, American loses all those direct up-sell opportunities.

From American's side, selling through an online agent is just bad from most angles. It costs a lot more than selling directly because of distribution costs and back-end commissions for the larger players. In addition, it loses ancillary revenue opportunities that the online agent gets instead. So why keep selling through them?

One reason: it's where the travelers are. If travelers keep going to Orbitz, Expedia, and the like, the airlines want to be there. After all, if the airlines don't sell their seats, they go empty and the airlines will lose even more money than usual. So while it seems to be in the airlines' interest to sell seats via online agents, it's also a bit of a self-fulfilling prophecy.

What happens if American pulls out of Orbitz? The site becomes instantly less useful for fliers. You already can't find availability for Southwest in any online agent, and travelers know to check southwest.com separately. But what if one-by-one the airlines started walking away? Consumers are unlikely to keep checking that site as it becomes less useful.

That's why American's threat to pull out of Orbitz is a credible one. While American likes the bookings it receives from Orbitz, there is some confidence that it can still be just fine if it walks away. It will lose the opportunity to sell itineraries that mix and match airlines, but the greater damage would likely be to Orbitz. Of course, there's no guarantee that it will play out exactly this way, and that's why American hasn't pulled out yet.

But American can use its position to try to get the online agents like Orbitz to change their ways. What does Orbitz say about that? It's suing to block American from leaving.

It says that American is breaching its agreement, but my understanding is that American has the right to renegotiate at this point and is using that to make its threats credible. The legal route doesn't seem like the best way to solve this problem. Even if Orbitz succeeds, it will only delay the inevitable when the contract is up a couple years down the road.

And Orbitz is now taking things even further through its ownership. Orbitz is owned by Travelport which also owns the Galileo and Worldspan reservation systems. In what can only be considered a retaliatory move, those reservation systems have now raised the rates that American has to pay when flights are booked via those systems in countries outside the US.

Remember, it's not just online agents that use these systems. It's also the high dollar corporate travel agents. American certainly doesn't want to lose those, but if it doesn't play nice with Orbitz, it may very well by paying more for those high dollar travelers. I would assume that if American goes through with the threat to leave Orbitz, these higher fees will make their way onshore to the U.S., where the real pain would come.

This sort of brinkmanship isn't a huge surprise, but I do find myself wondering where it will end. If American decides to pull the trigger and leave Orbitz, it could be a watershed event in the way travel is sold online. I still assume that the two parties will come to an agreement, but if they don't, it will have major implications for the entire industry.

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