IP: Washington Post: The E-Travel Revolution is Over

[Dave Farber <farber () cis upenn edu>]

Approved-By: mendicott () IGC APC ORG
Date:         Mon, 16 Nov 1998 15:14:06 -0500

From: "Marcus L. Endicott" <mendicott () IGC APC ORG>


_________________________________________________________________

http://www.washingtonpost.com/wp-srv/travel/front.htm

http://www.washingtonpost.com/wp-srv/travel/online/phocus111598.htm

                  The E-Travel Revolution is Over

                  By Craig Stoltz
                  Washington Post Staff Writer
                  Sunday, November 15, 1998; Page E01


  Remember the dream about how the Internet will change the world for
  travelers?

  It went something like this: In the near future, Internet-based travel agents
  would harness the awesome power of new information technologies to
  scour the wired universe for the travel products that match your precise
  needs--airline tickets, hotel rooms, rental cars and more--at the lowest
  possible price. You'd be liberated from the tyranny of predatory airline
  pricing, of any one travel agent's limitations or self-interests, even maybe
  of the "hold" recordings played on airline, hotel and others' 800 numbers.
  Want a week at a beachfront cottage on the southern coast of France,
  including round-trip air, a seaside cafe and a skilled masseuse? How much
  you want to spend? $900? Wait one second . . . page loading . . . Click
  here to reserve, brother!

  Well, wake up and smell the airline breakfast entree. That dream will not
  become a reality any time soon.

  At least that's what struck me after spending three days in Phoenix at
  PhoCusWright '98, the online travel industry's biggest annual
  honchopalooza, now in its third year. The chiefs of the major online travel
  agencies--Preview Travel, Internet Travel Network, Travelocity and
  Microsoft Expedia--along with about 500 leaders from airlines, lodging
  companies, niche competitors, business partners and technology suppliers,
  gathered to preen, perform and ponder their futures. The place was scary
  with brainpower: Stanford and Harvard MBAs, Silicon Valley CEOs and
  plenty of folks with expensive eyewear and corporate-logoed polo shirts.
  Like a lot of people in the travel business, they looked as if they could
  stand to get out a little more often. (Interest revealed: Your correspondent
  was a speaker at the conference.)

  The reason the online dream is dead, I discovered, is that the airlines want
  it dead. If online travel agencies were to succeed at finding customers the
  tickets they want at the lowest prices, they would quickly dominate the
  retail travel business--and squeeze much of the profit out of the passenger
  airline industry. The airlines are not standing by and letting this happen.

  While airline reps at PhoCus Wright denied trying to put online travel
  agencies out of business, their actions make it difficult to infer otherwise.
  In one of those episodes of brow-raising coincidence that give anti-trust
  lawyers reasons to keep on living, most major airlines recently decided to
  cap the commissions they pay online travel agencies at 5 percent, or $10
  maximum per ticket. The online agencies say this is less than it costs them
  to sell the average ticket (reportedly around $21). And they also point out
  that this $10 cap is even less than the airlines pay "real" ("face-to-face")
  travel agents, who themselves are squealing that the airlines' 8 percent/$50
  commission caps on most round-trip domestic tickets are killing them.

  Meantime, we learned, many major airlines are doing plenty to encourage
  their best customers to book online--but at their own Web sites, not the
  online agencies'. United has announced a bonus of 20,000 frequent-flier
  miles (nearly enough for a round-trip ticket!) to customers who use its
  Web site to book 10 trips in the next year. Northwest is luring frequent
  fliers to its Web site by making frequent-flier award travel bookable
  online. Delta has floated the idea of Net-only discounts for certain trips
  booked exclusively at its Web site.

  So: Airlines are offering incentives for customers to book directly on their
  Web sites. And they are lowering commissions they pay to independent
  online agencies. You don't need a Stanford MBA, or even a Silicon
  Valley polo shirt, to connect these dots. Airlines want to sell tickets 
online
  to their most lucrative customers themselves--not via independent agents
  who may steer their best customers to a better deal.

  So where does this leave companies like Expedia, Travelocity, Preview
  Travel and Internet Travel Network? Scrambling to figure out new ways
  to make money. (They are also contemplating legal and legislative action
  against the airlines, but trust me, you don't want to know the details.)

  Most have decided to sell travel products that have higher commissions,
  just as "face-to-face" agents have, including package vacations and
  cruises. In this model, being adopted most aggressively by Preview Travel
  and Expedia, online agencies will create tools that help people purchase
  these more "complex" products electronically. Many people at
  PhoCusWright seemed invested in the idea that people will buy a cruise to
  Bermuda or a seven-day, six-night Hawaii package online, but so far there
  are few numbers to support this hope. Preview is the first service to permit
  online booking of cruises, and others say they'll soon be there.

  Expedia has redesigned its page to highlight "special offers from our
  suppliers"--deals the fine print identifies as "advertisements" for which
  Expedia takes no responsibility. For now, this seems strictly a forum for
  "distressed inventory"--stuff suppliers can't unload at retail prices. Debut
  offers included cabins on the Disney Magic cruise ship, which are some of
  the most visibly distressed, and widely discounted, merchandise in the
  travel market right now, and "family" trips to Acapulco, a destination
  about 40 years past its peak and a hard sell to U.S. vacationers any time
  of year.

  Expedia has also decided to declare itself MSN Expedia, as part of an
  effort to attract customers of Microsoft's many Web-based commerce
  sites. The assumption is that people who use other MSN Web sites to
  conduct online tasks--say, purchase a car, manage their bank accounts or
  collect news--might easily be persuaded to book their vacations on the
  one-click-away, in-the-family MSN Expedia. Interesting idea. The
  problem is, like most institutions in Late Empire phase, Microsoft appears
  to have become utterly unaware of its imperial excesses and vanities. Rich
  Barton, general manager of Expedia, gave a boosty presentation in which
  he referred to the network of disparate Microsoft Web sites as
  "city-states" being connected by "arterial roads" and "highways to the
  capital city" under the MSN brand name--a breathtaking metaphor for
  territorial domination, especially for a company under investigation by the
  Justice Department for illegal ter- ritorial domination. To his great credit,
  Barton did not extend the city-state metaphor by referring to Web
  customers as "serfs."

  According to new research cited at PhoCusWright, only 18 percent of
  wired travelers actually buy travel products online--they tend to look on
  line but book via 800 number or conventional agent, creating what's called
  a low "look-to-book" ratio. As Microsoft executives spun it, this is
  evidence that online agents influence a huge amount of travel--and another
  good reason for travel suppliers to advertise on Expedia. But the other
  online agencies seemed more determined to urge consumers to "cross the
  chasm" into online booking. Most are working to educate people about
  how little risk it is to send their credit card information over the Web.
  Travelocity and Expedia are making marquee space available on their
  home pages to attack this problem.

  But they also have to smooth the process of booking. (Fun fact: A typical
  non-productive session on an online travel service--querying various fares
  but not purchasing any of them--costs the agency around $4 in fees it pays
  to the (airline-owned!) computerized reservation services. This more than
  anything explains why all the big online agencies are losing money, despite
  increasing revenues.) The most aggressive move toward easier booking is
  from Travelocity, which made the startling claim that its new purchasing
  system will place just three (3!) screens between a flight request and
  purchase confirmation. Like most electronic products that sound too good
  to be true, the new version was described as being "in final testing."
  Meantime, Travelocity has streamlined its entire site for easier navigation.

  Preview Travel announced that it will, in an attempt to draw customers to
  its site from the scattered provinces of electroland, allow any Web site
  operator to post Preview's best-of-breed low-fare ticker (and its middling
  travel news wire service) for free. Preview also announced plans to
  encourage regular site users who don't book at the Preview site with
  unnamed incentives to make an initial online purchase. Internet Travel
  Network, meanwhile, announced several new partnerships to sell or lease
  its booking tools. United recently took a big (though not a majority) stake
  in ITN, making it the second online agency (along with Travelocity) to lie
  down formally with an airline.

  If I were in a position to advise your basic PC-owning householder about
  what to expect from online booking sites in the future, I'd say to expect
  airline sites to offer harder-to-resist incentives to book there. I'd say to
  expect online agencies to push more packages and cruises, even as your
  priorities remain a cheap airline ticket and clean hotel room. I'd say to
  expect airlines or big travel agencies eventually to absorb the independent
  online agents.

  But I'd tell folks to hold out some hope for, of all things, the upcoming
  recession. Nobody said any of this on the record or even onstage at
  PhoCusWright, but many talked about it in the sunny courtyards just
  outside the conference hall. The thinking goes like this: Right now, with the
  economy still running well and planes flying nearly full, airlines can afford
  to dictate the terms to its agents. But when a downturn comes, travel is
  one of the first industries to suffer. How will airlines fill all those empty
  seats, especially with recession-pinched consumers trying to save every
  dollar?

  "Sometime next year," one hopeful entrepreneur told me with a knowing
  smile, "the airlines may decide that they really do need us after all."


  c Copyright 1998 The Washington Post Company

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_____________________________________________________________________
David Farber         
The Alfred Fitler Moore Professor of Telecommunication Systems
University of Pennsylvania 
Home Page: http://www.cis.upenn.edu/~farber