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Why Airlines and Online Travel Agents Fight

It seems like every few years, the issue of reservation-system costs flares up and causes a fight between airlines and outfits that use the systems to book travel. The latest scuffle involves American (AMR) and Orbitz, with the former threatening to pull its inventory out from the latter. Let's look at the history of selling an airline ticket to better understand where this is coming from.

In the past, direct booking through airlines was not the most common thing around. Sure, you could call an airline directly to book, but people often used travel agents for that. And travel agents were able to see what flights were available via these reservation systems. The airlines were fine with it until the Internet came around and things changed dramatically.

With the Internet, the airlines realized that they could eliminate the middle man and save a lot of the cost of selling a ticket. See, while the reservation systems do a good job of aggregating open seats across all airlines and pushing them out to agents to sell, the systems also come with a price, and that can be several dollars per flight. With the Internet, the airlines could sell directly and eliminate that reservation system cost, not to mention the commission that they used to pay travel agents.

Some reservation system users found new ways to justify their existence. Leisure travel agents began charging fees for customers, but they really didn't even want to bother with airfare any more, since the real money for them lies in packages and cruises. Corporate travel agents were OK because they serve high-dollar frequent fliers, which airlines want any way they can get. But this also created a new class of travel agent -- the non-human kind.

Along with the Internet came the online travel agents. These sites -- like Expedia and Travelocity -- took the flights that travel agents saw in their reservation systems and put them into a user-friendly interface where customers could compare and book flights on their own. It made a lot of sense in the early days, but that started to go downhill quickly.

The real value of the online agent when it came to booking air travel was that it aggregated prices and gave the traveler a single place to log in and book tickets. But things changed in the online world. First, the airlines got together to form Orbitz as a low cost alternative for selling airline tickets. Eventually Orbitz was spun off and ended up being just another online agent. Then a bigger change happened.

Metasearch sites -- like Kayak -- now aggregate flight options but then send customers directly to the airline (or online agent) site to book. This was a breakthrough for the airlines, because it gave travelers a place to compare flights but then handed them off directly to the airlines. That saved money and helped airlines with up-selling the customer.

At the same time, the online agents lost some of their relevance as low cost carriers started to grow in prominence. Southwest (LUV), the airline that carries more passengers within the US than anyone else, doesn't allow its flights to be listed on any online agent site. It figured if it put enough marketing behind the brand, people would know where to find the airline and save the cost of participation in those agent sites. That wasn't such a big deal when it was a small airline, but it's now enormous and that means people always need to consider multiple sites.

With the rise of metasearch sites and growth of low cost airlines, the importance of the online agents started to diminish. Sure, people went to them out of habit, but the only real benefit (besides having a single log-in) was if people wanted to mix and match airlines. For most regular airline tickets, there isn't much of a reason to go with an online agent anymore.

So every few years, a fight breaks out between an airline and an online agent over the cost of selling tickets. The airline says it costs too much while the online agents still act as if they're necessary so cost shouldn't be an object. They fight, they negotiate, and then they settle. The latest is between American and Orbitz with American threatening to pull out. Could American actually mean business this time? We'll look at that tomorrow.