Airlines have been polishing their online ticket counters to a fine sheen, adding best-price guarantees and features like online check-in to their own Web sites in an effort to get travelers to buy direct. Yet for the most part, they're not ending their reliance on third-party Internet sellers, because they still want broad distribution in a market where many customers view air travel as a commodity and shop purely on price. "They need the agencies, but at the same time they want people to book direct," said Henry Harteveldt, an analyst at Forrester Research, a Cambridge, Mass., technology consulting company. "The airlines have little brand loyalty and little differentiation, so they rely on online and offline travel agencies." The airlines' strategy appears a bit less aggressive than that of large hotel chains, which have pushed hard to reduce their reliance on online travel agencies. (
Click here to see related story.) That said, airlines are getting picky about the costs of acquiring customers through third parties, and in at least one case, have ended relationships when the costs outweighed the added revenue. Cost control is particularly important for airlines right now. Revenue is under pressure from too much capacity and fierce price competition. Delta Air Lines' ( DAL) recent nationwide fare restructuring will likely only add to the pressure. Meanwhile, jet fuel remains costly, even after the recent decline in oil prices. Analysts have forecast huge losses for the industry in 2005. Continental ( CAL) offers a good example of major airlines' Internet efforts. Early last year, it unveiled a lowest-fare guarantee. A traveler who finds a Continental fare at another Web site that's more than $10 cheaper than at continental.com receives the difference plus a $100 credit toward another flight. The guarantee excludes tickets hotwire.com and Priceline.com ( PCLN) sell with the "opaque" method, whereby customers learn what airline they will fly only after committing to buy.
"We tried to give customers some security in their purchases," said John Slater, the airline's managing director of distribution and electronic commerce. "The Internet had created insecurity in terms of where the low prices were." The airline has been improving features on its Web site. Customers can print out boarding passes, change flights or seat assignments and check flight status. Those efforts come on top of its long-standing frequent-flier mileage bonus for direct Web site purchases. Northwest ( NWAC) has also tweaked its Web site, adding features like online check-in and French and Spanish language versions. "Even if the customer likes to buy another way, they may have an experience at our Web site that causes them to use our site for a future purchase," said Kurt Ebenhoch, a spokesman for the airline. Like Continental, Northwest has a lowest-fare guarantee. Allowing customers to do more on the Web site has a side benefit of reducing customer service phone calls, said Al Lenza, vice president of distribution and e-commerce at Northwest. Airlines save when customers book directly at their Web sites, because the airlines don't have to pay transaction fees to global distribution systems, which electronically connect travel suppliers' inventory to agencies, both online and off. (Online agency Orbitz, a unit of Cendant ( CD), has developed direct links with suppliers, allowing it to reduce its GDS transactions.) The GDSs charge by trip segment. With a cost of about $4 per segment, a round-trip with one transfer each way costs $16. At first blush, it may not seem like much, but it adds up. Northwest paid about $180 million in online and offline GDS fees in 2003. The efforts to woo direct customers are paying off. Continental's Slater said bookings at the airline's own Web site have grown by about 60% year over year. Its bookings through online agencies have grown at about half that pace. "Part of that is the online agencies' maturing audience," Slater said. "But part of it reflects the efforts we've made to bring customers directly to us."
Nevertheless, most airlines still recognize the importance of having a presence on agency sites such as IAC/InterActive's ( IACI) Expedia, Sabre Holdings' ( TSG) Travelocity and Orbitz. Notable exceptions include low-cost airlines Southwest ( LUV) and JetBlue ( JBLU), which sell tickets online only at their own Web sites. Continental's Slater said such agency sites can bring Continental non-loyal, price-hunting customers and corporate customers, who may want to view offerings from a variety of suppliers. But by having flights listed at online agencies, airlines may actually be helping their own direct sales, because many travelers are using agencies such as the Yellow Pages, according to industry watchers. A survey last October by the Connecticut travel research firm PhoCusWright found that 48% of respondents said they had shopped around via online travel agent sites but then booked directly at an airline's Web site, toll-free number or ticket counter. "Online shoppers tend to be least loyal to online travel agencies' sites for air travel compared to any other travel component and method," PhoCusWright said. Still, airlines are scrutinizing the cost of acquiring customers through third parties and have worked to negotiate terms with them. "They do attract the price-shopping traveler, and those customers generally pay fairly low ticket prices," Continental's Slater said. "Our only contention has been what is the cost of acquiring that customer. It hasn't come to the point of ending a relationship.
The agencies have been good at negotiating with us." Northwest, however, ended one third-party relationship. Last November it stopped offering retail tickets over Priceline.com and its Lowestfare.com subsidiary because of a disagreement over distribution terms. Northwest said a key factor was the cost it incurred for getting revenue on the sites. It could be a harbinger of things to come. "Northwest is saying there's one third-party intermediary where it's simply not profitable for them to do business with that firm," Forrester's Harteveldt said. "That is clearly a warning shot to other third-party intermediaries, that if they can't get a higher-yielding customer, or new customers, they'll reassess other distribution channels."