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Tensions Rise Between Airlines and Online Travel Agencies
Sparks flew recently when American Airlines (AMR) terminated its relationship with major online travel agency (OTA) Orbitz Worldwide (OWW), sending the travel industry into a frenzy. The airline claims the use of global distribution systems, now employed by online travel websites to provide flight information, is resulting in unnecessary costs. When Orbitz refused to adjust its business model, American Airlines jumped ship. The argument over the use of an intermediary to channel information to consumers has been brewing between airlines and OTA’s since the Internet began to take the place of conventional travel agents.
Now, American Airlines has developed its own system called DirectConnect and is insisting that websites selling tickets on American Airline’s flights use this new platform, cutting out such go betweens. However, online travel agencies have remained unwilling to modify the way they conduct business, leading to a standoff between the airlines and the rest of the online travel industry.
Indeed, since the split between Orbitz and American Airlines, several other players in the industry have joined the fray. Expedia (EXPE) pulled American Airline’s tickets from its website, and Sabre Holdings, a major global distribution system, is now blocking the company’s offerings, as well. In addition, several other airlines are threatening to sever their relationships with online travel agencies if changes aren’t made to the way information is directed toward consumers.
The recent battle is raising questions about the future of airline ticket distribution. Should American Airlines’ new model prove successful, many other airlines are likely to follow suit, leaving online travel agencies out in the cold. This would lead to many changes for consumers, including possibly higher prices and fewer choices in the market.
Although the airlines are standing their ground, severing all ties with online travel websites is not the ideal situation for them either. In fact, American Airlines’ split with Orbitz was intended to force the travel website into negotiations. However, Orbitz and other online travel agencies remain unfazed, seemingly confident that their services are vital to the travel industry and the airlines will eventually come back to the fold.
It seems as though investors are siding with the airlines on this one—online travel stocks slipped following the turmoil. Shares of both Orbitz and Expedia are down since their fallout with American Airlines, signaling the online travel industry may be wise to reconsider its position.
If the two parties cannot reconcile, the impact on consumers could be detrimental, making it difficult to make good comparisons, and nearly impossible to ensure the lowest prices are found. Neither side can afford to alienate consumers in such a price-sensitive industry, which makes some sort of agreement down the line more likely than not. However, for now the issue remains at a standstill, and the industry is left to wonder what will happen down the line as this battle escalates.
In the meantime, metasearch (i.e., a metasearch engine is a search tool that sends user requests to several other search engines and/or databases and puts the results into a single list) websites, such as Kayak, seem to be benefiting from the chaos. These websites do not sell travel offerings, but rather compile a list of options from various different websites and put it in front of the consumer. Essentially, these companies are merely directing traffic to other websites, which include both online travel agencies and airlines, leaving metasearch websites able to profit regardless of where consumers are actually purchasing tickets.
All told, change is on the horizon for online travel, and the market remains highly volatile. Though this issue will likely be resolved soon, the outcome is entirely up in the air, leaving the implications for the industry unclear. Investors looking to invest in this market may be wise to consider metasearch websites, such as Kayak, which will likely continue to thrive regardless of the outcome.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.