The decision by American Airlines and its merger partner US Airways to drop Orbitz is based on one word: power. They have it as a result of the consolidation that's taken place over the past several years in the airline industry.
We are now down to four major carriers controlling 85 percent of all domestic air travel. That has left little competition in certain markets where these carriers have their hubs or a major presence.
Take a consumer based in Southern New Jersey or Eastern Pennsylvania. If they can't see fares from US Airways on Orbitz, and believe me they are looking for them, they will have to turn to other outlets to shop. American and US Airways are betting that it will be their own website and that it will effectively lower their distribution costs. They feel that they are in a position to pull out and not suffer any negative consequences. I'd beg to differ.
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The carriers are negatively affecting the buying process by not participating in a platform that makes it easy for consumers to shop and compare prices. The alternative is to force the consumer to dance from one open browser to the next in the hopes of truly comparing the costs.
Or, sending them to an advertising powered site like Kayak or Google, that will do the comparison for them and direct them to the airline site to book. It's adding additional steps to the process of buying travel. One of the benefactors of this move could be traditional travel agents as they have access to all inventory via the Global Distribution Systems they use to search and book air travel.
Let's contrast the airline situation with Orbitz with the hotel market. Where the airline market is consolidated and controlled by a select few, the hotel industry is incredibly fragmented. It's harder for the hotels to gain leverage over the online travel sites when there are literally hundreds of choices in markets like New York or destinations like Mexico. More competition among hotels leads to less leverage with the OTAs. That's one of the reasons why the vast majority of OTA profit is derived from hotel bookings.
RELATED: What Will American-Orbitz Battle Mean For Other Airlines?
Despite the competitive market, hotels were actually the first ones to make this kind of brazen move toward dropping the OTAs. In 2004, InterContinental Hotel Group (IHG) pulled its inventory from Expedia in a dispute over how Expedia was failing to meet their standards for reselling hotel rooms: In part, IHG accused Expedia of adding hidden fees, inaccurately listing sold-out properties and using "bait and switch" tactics to lure customers.
But what was really at the core of the issue was IHG felt that their pricing was being undermined and wanted to drive parity across all channels. Ultimately the two sides found a way to split the incredibly profitable pie without the other feeling taken advantage of.
For the hotels, they are beholden to the OTAs as a channel that can move serious numbers of room nights for them, or their competitor, when the need arises. The major points of contention, regarding pricing, were sorted out years ago with the hotels and the OTAs so now it's simply a matter of negotiating the best possible deal with any given property or chain. Don't bet on seeing hotels drop out of Orbitz or other online travel sites. Hotels don't want to give consumers reasons to choose their competition and they definitely don't want to have those perishable rooms go unsold, if possible. They want to work with all outlets to drive as many room nights as possible.
Indeed, most travel suppliers have become "channel agnostic", something that is great for the traveler. They will take your business regardless of how you want to book it. And in the end, isn't that how it should be? Put the customer first?
As this unfolds with Orbitz consumers need to understand that we are seeing a negotiating ploy by the airlines that will bring Orbitz back to the table. I wouldn't be surprised to see a deal cut that keeps both airlines on the site, or brings them back after a brief hiatus. But there will be a domino effect here. Every airline is going to want the same deal, and why shouldn't they? Orbitz and other OTAs will likely feel the financial burn from this line in the sand. But remember that the vast majority of their profit comes from hotels, with very little, if any, coming from airlines.
And on that front, it's a bit ironic. When Delta started with commission cuts and caps in 1995, traditional travel agents took the first hit and many, many more subsequent hits. Orbitz is feeling something similar today from one of the founding partners for the site; American. For anyone that doesn't remember, Orbitz got it's start as an airline backed, and owned, online travel agency-designed, in part, to draw business away from traditional travel agents.
Now, Orbitz is going to feel that squeeze from one of its original bedfellows.
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