All products featured on WIRED are independently selected by our editors. However, we may receive compensation from retailers and/or from purchases of products through these links.
Lots of travelers love 'em, but online ticket sellers are still facing a pretty bumpy ride to profitability.
They boast of rising revenues - Travelocity is selling US$4 million in tickets a week, and Expedia is only slightly behind - but the travel services are being squeezed a bit thin. Catering to consumers, who do loads of price-comparison shopping but rarely buy, and airlines which are squeezing the commissions for online sellers down - to nothing in some cases - the services are in a tight spot.
Last week, American Airlines decided to cut the commissions it pays to online travel services from $15 to $10 a ticket. That's still $10 more than Southwest Airlines pays.
"We don't offer any commission," says Southwest spokeswoman Beth Harbin. "Our own Web site is a direct link to us that customers can use, just like the telephone."
That view - that the airlines can enhance their own profitability by selling tickets through their own Web sites - seems to be spreading slowly to other carriers. Already, they pay less to online travel agencies than traditional brick-and-mortar outlets: 5 percent or 6 percent, compared to 8 percent for off-line agents, who are faced with similar commission-cutting pressures from airlines.
"Airlines are actively looking to cut costs out of their distribution structure," says Mark Hardie, an analyst with Forrester Research who follows online travel.
But the sites don't intend to give up their commissions without a fight.
On 2 April representatives from 10 online travel companies - which sought and received approval earlier this year from the US Department of Justice to form a trade association - will meet in Los Angeles.
Dubbed the Interactive Travel Services Association (ITSA), the group must abide by antitrust laws. That means it can't share information about customers or pricing - but the airlines� commission-slashing will be a hot topic of conversation at the group's first meeting.
"One of the catalysts for the formation of ITSA is that online travel services were being discriminated against by suppliers," says Brian Thompson, the vice president for sales and marketing at TheTrip.com. "Airlines said, 'Since you're online, your business is inherently more efficient, so we'll give you less commission.'"
While one issue is the disparity in the commission paid to online services vs. traditional travel agents, the online services also feel under-appreciated.
"Moving to $10 per ticket shows a lack of recognition of the cost and investment we and the other online travel services put into building this business," says Josh Herst at Microsoft's Expedia, one of the founding ITSA members. "We have people answering the phones and mailing tickets - Expedia is not run by a robot."
And the services aren't bad. Expedia will send you a free email listing the lowest fares on routes you fly often. American Express' live seating charts help you avoid being wedged into a center seat. Biztravel.com will send you a page an hour before your flight leaves with the gate information, weather, and updates on any delays.
With such generous offerings, the online services are doing their best to encourage more travel, but many feel underappreciated.
Even Terry Jones, the executive who runs Travelocity, which is majority-owned by American Airlines' parent company, is short on kind words for the major carriers: "Suppliers are squeezing the channel hard, and it's a bit early in the growth of this medium to be doing that." (He won't be joining ITSA, though: "We already have a very active Washington presence.")
Airlines are hard-pressed to defend their policies on commissions, because they can't really say much at all. The Department of Justice has long been vigilant about prohibiting one airline from signaling anything related to its fare structure to another airline.
But Southwest Airlines spokeswoman Harbin did contend that the Web "is a channel of distribution that was meant for the customer directly, and that's why we don't offer the added incentive of a commission." (Southwest does pay real-world travel agents a 10 percent commission on all bookings.)
John Samuel, the director of interactive marketing at American Airlines, says that while he "can't comment very much" on commissions, "the Internet has taken cost out of the distribution channels."
"Are there tensions about who gets the biggest share of those cost savings? Of course," Samuel says. But he adds that it would be a "mistake" for American to "discourage anybody from selling our products."
Look-to-book ratios
Though ticket sales are expected to continue growing, from $400 million in 1997 to $8 billion by 2001, according to Forrester, last year less than half of 1 percent of all travel spending took place on the Web.
"A lot of people are still using the Web as an informational tool, but are terrified to buy a ticket over the Internet," says Thompson at TheTrip.com. "They'll go to a travel agent or call the airline after checking prices on the Web."
The result is low "look-to-book" and "book-to-ticket" ratios. Travelers check prices a lot more than they actually book tickets, and even then, cancellations are common. That's expensive for online travel services, which pay for access to central reservation systems like SABRE and GDS.
To boost its booking rate, Travelocity sends emails to ritual window-shoppers informing them that if they're concerned about sending a credit card number over the Web, they can call an 800 number.
"In any store, if you have someone who's standing at the display case, you go up to them and ask if you can help," says Travelocity's Jones, who points out that it's not cheap to connect Web users with the mainframes that house the seven-terabyte SABRE fare database.
Jones also says he might consider charging a fee for the "just-looking" types, or even shutting down an account if the holder never makes a purchase - something Microsoft's Expedia has gotten some negative press for.
Travel writer Carol Sottili wrote that her Expedia account had been shut down for excessive looking and no booking in an article, "Busted by Microsoft," in The Washington Post last July. A message had informed her that her "account was 'rendered inactive' because [of] excessive shopping via the application without purchasing travel via Expedia." After unblocking her account, Microsoft told her that she would "need to actually purchase a ticket via Expedia in order to assure continued accessibility to the application."
Herst at Expedia said that while his site will "temporarily shut off accounts when we see what we consider to be suspicious behavior," 99.9 percent of users will never encounter a blocked account. An algorithm built into the system looks for a heavy amount of page requests from a single source within a short time period. The goals of account blocking, according to Herst, are "security, insuring the best possible server performance for legitimate customers, and reinforcing that this is a serious shopping environment."
"The cost of making requests to a CRS (central reservation system) is one that Microsoft and others want to cut down," says Hardie at Forrester. "But shutting out potential buyers is shooting themselves in the foot. They'll have to either swallow the cost or figure out ways to sell ads targeted to window shoppers."
A Future of Hybridization
As consumers grow more comfortable with online ticketing, they're still likely to use human agents for many transactions, according to analysts. "What the customer really wants is a well-established and trusted relationship with a travel agent, but to be able to use the Internet for cost savings," says Chris Stevens of the Aberdeen Group, a Boston research firm.
That kind of hybrid model is being pursued by companies like American Express, Microsoft, and Travelocity, which allow travelers to make plans online and then either pay for them or alter them over the phone with an agent. And some travel agencies are partnering with online travel services to allow their customers to do some online booking.
"Agencies are looking at us as a facilitator to their business rather than a threat," says Ken Swanton, CEO of Internet Travel Network.
But the economics don't look rosy for the real-world travel agents or their digital counterparts. Hybridization means that online travel services have to employ armies of customer service personnel to take phone calls - a financially daunting prospect given the plummeting commissions. And brick-and-mortar agencies, already faltering in a world where 8 percent commissions are prevalent (down from 10 percent just a few years ago), are confronting turbulence, too.
"Their problem is that people will move online for the flights that are easier to book," says Hardie at Forrester. "So travel agents wind up being saddled with the more complicated transactions, which take more time. Their margins get squeezed because they're doing the tough stuff."
But at least the online travel services feel that consumers' buying habits are shifting in their favor. The services are feverishly launching new features and conducting high-profile promotions designed to lure consumers online. Can they find profit, though, despite the steadily falling commissions?
"It's very premature to talk about where this channel is headed," says John Williams, CEO of Biztravel.com. Nonetheless, he is optimistic. "This is like the year after ATMs were invented. People can stay with an old way of doing things, or they can move to a new way. I think we're at the beginning of an S curve."
