Travel Agency Outlook

Reuters
Online travel agencies being put to the test
Wednesday February 1, 12:16 pm ET
By Kyle Peterson

CHICAGO (Reuters) - U.S. online travel agencies are facing new competition for contracts with cash-strapped airlines as nearly all agreements between the airlines and ticket distributors are up for renewal this year.
 
The online market, which is gaining in popularity with consumers and has shed some government restrictions, faces tough times ahead and industry experts say it's a brand new playing field for distributors such as Expedia Inc. (NasdaqNM:EXPE - News), Saber Holdings' (NYSE:TSG - News) Travelocity and Cendant Corp.'s (NYSE:CD - News) Orbitz.

Those companies represent the end points for global distribution systems (GDS), which are the traditional means by which travel suppliers -- hotels, airlines and car rental companies -- send bookings information to travel agencies.

Initially created by airlines, GDSs had operated under the government regulations that prevented airlines from using ticket distribution as a competitive tool against each other. But in recent years airlines have retreated from those investments and restrictions on contracts have evaporated.

Meanwhile, traditional GDSs -- Amadeus Global Travel Distribution, Galileo International, Saber and Worldspan -- face competition from a new generation of GDSs.

"What I expect to happen is that there is going to be a certain amount of leakage away from the GDS," said Norm Rose, president of Travel Tech Consulting Inc. and an analyst with PhocusWright, a travel research company.

He said that as travel agencies renew key contracts, they will have to prove their worth to airlines, which are under pressure to cut costs in a competitive industry.

Top airlines have been walloped in recent years by soaring fuel costs and low-fare competition that makes it difficult for airlines to raise ticket prices enough to cover costs.

Consequently, carriers are scrutinizing their books for places to trim expenses. For some airlines, ticket distribution is a significant expense and may well fall into that category.

"All of our contracts with the big four players come due this year," said James Beer, chief financial officer at AMR Corp.'s (NYSE:AMR - News) American Airlines, the No. 1 U.S. carrier.

"Much is changing here in the landscape of distribution," he said. "We are very focused on all of those new avenues in an effort to broaden out our choice. All of these new avenues are very competitively priced from our perspective."

Continental Airlines Inc. (NYSE:CAL - News) executives also said recently that they are aiming to squeeze lower rates out of their GDSs.

Experts say the new entrants to the GDS field may sap market share if they can underbid their rivals. Companies like ITA Software, which just won $100 million in private funding, G2 Switchworks and FareLogix claim they can do just that.

So far, however, GDS talks have yielded promising results.

Saber last week announced it had scored a five-year, full-content deal with Northwest Airlines (Other OTC:NWACQ.PK - News), the first network carrier to renew its contract with Saber.

Previous contracts had lasted for only three years, and some analysts said the longer deal bodes well for the online travel industry in general.

"This new contract for five years is a positive indication that the GDS business, while mature, is taking positive steps to ensure its longevity," Stifel Nicolaus analyst Scott Devitt wrote in a research note. "We view the deal positively and believe that other carriers may follow suit."

Hugh Jones, chief operating officer at Saber, said other deals with major carriers are in the works and that he expects airlines to continue embracing online travel agencies.

"I don't think it's difficult to get them to participate in the GDS," Jones said. "I think airlines want to have their travel product on the shelf."

PhocusWright's Norm Rose said it is not that simple. Airlines, trying to ascertain whether they get enough additional bookings through GDS channels to justify the higher cost, want to know that their distributors can enhance the booking process and bolster ticket sales.

"If GDS can move their technology to add more value to distribution, then the airlines will pay," Rose said. "If they don't see the value, and it's just a cost perspective, there's going to be continued pressure to get (prices) as low as possible."

(Additional reporting by Christian Plumb in New York)