Orbitz and Travel Distribution Strategy – 2001

The pro-Orbitz report, “The History and Outlook for Travel Distribution in the PC-Based Environment,” was prepared by on behalf of Orbitz by Global Aviation Associates, Ltd., in Washington, DC, (hereinafter “Global”) together with outside researchers not associated specifically with that group. Its 88 pages lead the reader through an extensive review of travel distribution technology and practice toward four major conclusions.

In large measure these conclusions focus upon the same areas as the anti-Orbitz paper, prepared by Jerry A. Hausman, Professor, Department of Economics at the Massachusetts Institute of Technology since 1979 (hereinafter “Hausman).” The professor’s scholarly 41 pages discuss more economic and competitive theory than does Global. several of the key points made in the pro-Orbitz report. While his responses are frequently insightful, he argues in favor of equally unsustainable premises.

Let’s consider the main arguments made by the reports individually:

  • The Global report asserts that: “GDS vendors are extracting oligopoly rents from airlines in the form of excessively high booking fees.”

On its face, such a comment strikes one as a bit disingenuous, when you consider that the companies said to participate in this “oligopoly” were set-up and put in business by some of the same airlines now participating in Orbitz. Moreover, Northwest and Delta (two Orbitz players) still retain their ownership in Worldspan.

On a deeper level, consider how this “oligopoly” is supposed to operate. An oligopoly is a state of limited competition, in a market having a small number of producers or sellers. There are but four U.S.-based CRS (more if worldwide conditions are factored it), but at most levels they compete intensely. One may not like the unique positions each occupies as a result of infrastructure and enfranchisement investments made over a long period of time, but of itself this does not constitute an “oligopoly,” nor even if that were the case does the simple existence of an “oligopoly” demand that any person or group is thereby disadvantaged.

The market power they exercise results from the value of their underling subscriber bases, and this intrinsic value is not a function of size or competition. As long as suppliers believe there is a need to access a specific distribution channel, they will be susceptible to charges respecting access to that channel that they may find objectionable. The question of an “oligopoly” is irrelevant.

Finally, we must recognize that Orbitz does nothing to change this dynamic. Because The Internet provides more potential access to distribution channels and consumers of all types, it is sometimes argued that Orbitz and other Internet-based intermediaries circumvent the market power of the CRS, but such statements simply ignore the fact that, in this role, Orbitz and similar companies are simply a CRS by another name.

One can argue that Orbitz may be more efficient in this role, more benign in its behavior, or otherwise cost suppliers less, but it still performs the same intermediary function and is subject to the same criticisms as its competitors.

Which brings us to the question of the CRS fees. It should come as no surprise that the computer services industry is more profitable and more predictable than is running an airline, for instance. There is no credible evidence offered to support a claim that the fees the CRS charge are inconsistent with computer services fees in other industries, for transactions of similar complexity. Moreover, there is no reason to believe that any theoretical savings in CRS fees would benefit the consumer directly–such benefits would be small respecting a given trip in any case.

The study’s authors overlook the fact that revenue from CRS fees is used in many ways that materially benefit the consumer and that diminishing such fees would undeniably be offset by increased user fees in other areas. Sophisticated corporate travel purchasers have understood this principle for a long time.

The economic argument is itself not well developed. There are several possible ways to examine the question, some of which are explored in professor Hausman’s paper, but the simplest is to evaluate the changes in the Consumer Price Index (CPI) from the advent of CRS booking fees until the present.

Hausman correctly points out that CRS fees since 1993 have risen less than have airfares, but a still simpler analysis is to consider the relative value of today’s $3.54 average CRS fee (according to this study). An equivalent amount in 1980 dollars, using the CPI as a measure, shows far less variance with today’s charges than is routinely assumed.

Moreover, the systems themselves are far different than they were 20 years ago. Usage patterns, application capabilities, functional demands, and geographic penetration have all changed, resulting in a far different “product” delivered to airline and other consumers alike. Depending upon the value ascribed to these changes, one could argue that the airline CRS of today is a far better value than at any prior time.

  • The Global report continues by asserting that: “Many existing Internet-based travel agencies, GDSs and some traditional travel agencies, fearful of ‘disintermediation,’ are trying to block Orbitz’s entry into the marketplace by creating legislative and regulatory hurdles to the Orbitz joint venture. These competitors, if successful in their efforts, will cost U.S. consumers tens of millions of dollars in increased airfares.”

The first part of this statement is true, and Orbitz’s competitors are incorrectly focusing their energy. Years ago in these pages we observed that The Internet would not be the competitive windfall for travel agencies that experts predicted at the time, but that most agents would be big-time losers on The Internet, as they are unable to compete with entities that are prepared to sustain millions in operating losses with no clear path to profitability.

The other side of the argument, however, is that the claim that Orbitz will, of itself, generate millions in consumer savings is over-stated. Orbitz will be no more or less effective in so doing than any other distributor, unless its owners choose to offer pricing advantages that are not freely available in the marketplace. The point is that there is no intrinsic efficiency that will make such savings possible.

  • According to Global, “The Internet is transforming the purchasing of travel from a supplier-controlled to a consumer-driven paradigm.”

Travel purchasing has never been anything but consumer-driven. It is among the most price-conscious, competitive, cutthroat, and unforgiving of businesses. This environment exists independent of any specific technology and is probably hindered, rather than helped, by the information explosion the report’s authors reference.

The report goes on the say, “… next generation sites such as Orbitz are providing the consumer with near-perfect choices through the availability of near-perfect information.”

Such a claim is over-stated on a good day. The Orbitz interface is cumbersome and annoying at best, and the results the product delivers did not appear to me to be materially different, better, or certainly more usable than similar results available elsewhere. Further, such statements improperly diminish the value of the CRS infrastructure upon which Orbitz and its competitors rely–and which the report is attempting to discredit.

Surveys also suggest,” the report continues, “that the consumer is becoming increasingly price driven …” To which I would counter: when was the consumer anything else? The current wave of Internet-based purchasing technology attempts to promote pricing advantages over all the other elements of customer service that are valued equally with, in some cases more than, price. What this proves is simply that, if you offer cheap things for sale, people will buy them.

This has nothing whatever to do with Internet-based distribution, fare search technology, or next generation software. Moreover, the constant striving for “agent-in-a-box” solutions rather than the range of customer service elements that the customer truly wants is among the key reasons almost none of the online travel sellers make any money.

  • Professor Hausman counter argument asserts: “The Orbitz joint venture among dominant horizontal airline competitors likely will have an overall anticompetitive effect.”

Hausman argues that the terms and conditions of the Orbitz participation agreement are such that the number of “secret price cuts” will diminish. Stay with me, this gets clearer shortly. He says, “Economists generally agree that secret price cuts are a very important means of increased competition in an oligopoly situation. The result of decreased secret price cuts will be decreased competition and increased fares to consumers.”

The “oligopoly” Hausman refers to is the concentration of airline capacity among a small group of powerful entities. That discussion is beyond the scope of these remarks, but I do agree with him that it is an unhealthy situation. One is hard-pressed, however, to describe a practical alternative. Even so, the competition between airlines remains intense at all levels–including several such as safety, maintenance, and scheduling that are almost invisible to the public. Describing the environment as an “oligopoly” conveys a somewhat inaccurate picture.

Hausman’s argument is a complicated way of saying that the specific terms of the Orbitz participation agreement are anti-competitive, which is an overall sense is probably true. However, the argument ignores the fact that much of what defines airline price competition takes place in a world untouched by Orbitz. In many cases this competition is more important than the public Internet-based offerings.

The largest travel purchasers operate within the complex world of corporate travel procurement, which is an environment of volume-based negotiated fares, net fares, and production quotas. It is intensely competitive and not subject to the same behaviors found in the consumer travel arena. There are always exceptions, but in general business travel purchasers have not and will not be likely to find a service such as Orbitz more than marginally useful. It is also decidedly not in an airline’s interest to bring its corporate negotiated fares agreements into alignment with an Orbitz pricing model.

In summary, therefore, although there are elements of truth in Hausman’s thesis, the business model he implies does not today exist and is highly unlikely to exist anytime soon. This is aptly illustrated by his further comments:

In the antitrust literature, the term ‘cartel ringmaster’ is sometimes used. Here, Orbitz can be viewed as the ‘market power ringmaster’ in the sense that the airlines could not reach agreement individually on a ‘Most Favored Nation’ exclusivity, or no-advertising policy, but Orbitz allows them to agree jointly on provisions that will reduce competition.”

This assumes that Orbitz will assume a position of dominance and influence within the travel distribution marketplace that no other single entity has ever occupied and that there is no sound reason for believing Orbitz is capable of occupying. After decades of development and investment, which have resulted in billions of dollars of consolidated travel purchasing, the largest travel distributors in existence are unable to exercise even a fraction of such influence, even though it would clearly be in their economic interest to do so and despite the existence of many of the contractural conditions Hausman views as so onerous.

For Orbitz to occupy that position, contracturally-based covenants notwithstanding, its products and services would need to adapt to travel purchasing realities in ways they are not, and customers would need to behave in ways they have yet to demonstrate any inclination to do. “All things are possible to him that believeth,” but a far safer bet in this instance is that these things are undergoing a radical redirection anytime soon and the “ringmaster” model exists, at least respecting Orbitz, only in theory.

Please refer to my article, “The Unknown On-line Travel Client,” for an overview of what customer behaviors are at issue and how these are ignored as on-line business models and delivery systems are developed.

  • The claim that Orbitz airline-owners need to join together to counteract the market power of independent multiple airline Internet ticket distributors is absurd,” according to Hausman.

The professor hits the mark here, but in my view he could well have taken the argument further and focused upon more essential issues.

The essence of the “dominance” argument, which professor Hausman aptly refutes, is that Expedia and Travelocity are “dominant on-line travel agencies,” and that this positions them to exercise unacceptable “market power” over the on-line travel sales industry (or that they will somehow be able to do so in the future).

Professor Hausman aptly demonstrates that this claim is not based upon much credible evidence, and that neither company engages in anti-competitive pricing. He could have extended the point to assert that any “dominance” held by the companies is illusionary. Neither company, using realistic measures, is profitable (a fact he does note), nor anywhere close to being so. If one strips away revenues from sources other than travel operations (such as advertising), the defecit is still more pronounced.

While it is theoretically possible for entities that can’t seem to break even in their core businesses to “dominate” a marketplace, assuming someone is willing to subsidize their losses indefinitely, a far safer bet is that, over time, capitalism will prevail and therefore their business and operational models will change. Some sort of economic stability must take place before any “dominance” argument becomes relevant.

The pro-Orbitz Global report commits the logical error of hasty generalization, in that they observe two companies that are larger and more visible than their competitors (under an unacceptably narrow definition of what travel distribution is and who their competitors are) and therefore they assume that this exceptional situation somehow describes or defines how travel will be bought and sole in coming years. There is no reason for believing this is true.

On the other side of the argument, Hausman suggests that on-line travel sales is a highly competitive environment with few barriers to entry. This is a hasty generalization itself, in that real on-line competition is far more focused and limited. Most travel distributors, regardless of their size, cannot compete with the existing players who are prepared to lose incredible sums in order to build market share. It is premature (at best) to describe the major existing online travel sellers as “dominant,” but it is too optimistic (and without credible evidence) to maintain that meaningful competitors can arise without significant changes to the business model.

  • Hausman asserts, “The Claim that Orbitz airline-owners need to join together to respond to enormous CRS market power is incorrect.”

In forming his argument, Hausman misunderstands the complex mechanics and relationships of retail travel distribution and the ability of a CRS to influence distribution practices. It should be observed that these relationships are not, on their face, necessarily contrary to the consumer’s interest.

Hausman remarks, “… this claim is largely irrelevant in any case, because Orbitz proposes to compete primarily against on-line travel agencies rather than CRSs, and, as shown above, robust competiton exists in the on-line distribution channel.”

As I have suggested, I believe a few moments thought demonstrate that at best that “robust competition” is limited to a very few, well-funded players. It is a serious strategic mistake to believe that The Internet is somehow the great competitive enabler that allows sellers of any size of description to compete freely and openly regardless of location or other constraints. Although that Valhalla is spoken of less frequently in recent years, it is still a common assumption.

When toll-free telephone numbers were first introduced, people often spoke of them as competitive enablers in a similar spirit. That didn’t happen for the same reason The Internet has not and will not, of itself, cause competition to exist contrary to the principles of finance, economics, advertising, and promotion.

Orbitz can legitimately claim to be an alternative to CRS-based distribution, in the same way so-called “direct” (meaning message traffic taking place outside a CRS) communications between other distribution systems constitute such alternatives. This is far from a novel concept and is being pursued with varying degrees of enthusiasm by a number of groups.

The CRS, in this context, must be viewed as much as a distribution system as a router of message traffic and platform for delivery of value-added services such as tariffs and pricing. (although none of these is insignificant). The CRS partly uses its financial resources (obtained through airline and other supplier user fees) to subsidize technology costs for subscribers, thus providing both functional and financial incentives for subscribers to become system users and remain so. Although suppliers frequently maintain that they are reluctant to pay fees for these purposes, both distributors and their customers receive clear benefit from the relationship that would otherwise have to be provided and funded in some other way.

Stripped of whatever business rationale are contrived to justify non-CRS messaging systems and supporting technologies, the fact remains that lower booking and support costs are what is at issue. Orbitz, viewed as a CRS alternative is so to the degree its participants can actually realize lower fees. In every other meaningful way it has the same business characteristics from the vendor’s point of view as a CRS, albeit a cut-rate one owned by its users.

Thus, contrary to professor Hausman’s assertions, Orbitz finds itself competing not simply against online travel agencies, but against all types of retail travel distribution as sustained by the CRS model, and specifically against the CRS themselves. Orbitz hopes to create a sustainable alternative business model that will benefit its owners and do so at a lower cost. This is far from an irrelevant argument, but it is impractical.

The value of the CRS infrastructure is routinely underrated by observers either too distant from the reality of travel distribution or too enamoured by the promises of e-commerce. That infrastructure cannot easily be replaced. Despite its high-tech product claims, Orbitz does not fundamentally attempt to do so nor does it postulate a business case as to why CRS-driven services will diminish in value over time. It proposes to lower CRS costs to its owners and participants, but it offers no reason for believing it can deliver equivalent functionality at a lower cost.

The pro-Orbitz report, “The History and Outlook for Travel Distribution in the PC-Based Environment,” was prepared by on behalf of Orbitz by Global Aviation Associates, Ltd., in Washington, DC, (hereinafter “Global”) together with outside researchers not associated specifically with that group. Its 88 pages lead the reader through an extensive review of travel distribution technology and practice toward four major conclusions.

In large measure these conclusions focus upon the same areas as the anti-Orbitz paper, prepared by Jerry A. Hausman, Professor, Department of Economics at the Massachusetts Institute of Technology since 1979 (hereinafter “Hausman).” The professor’s scholarly 41 pages discuss more economic and competitive theory than does Global. several of the key points made in the pro-Orbitz report. While his responses are frequently insightful, he argues in favor of equally unsustainable premises.

Let’s consider the main arguments made by the reports individually:

  • The Global report asserts that: “GDS vendors are extracting oligopoly rents from airlines in the form of excessively high booking fees.”

On its face, such a comment strikes one as a bit disingenuous, when you consider that the companies said to participate in this “oligopoly” were set-up and put in business by some of the same airlines now participating in Orbitz. Moreover, Northwest and Delta (two Orbitz players) still retain their ownership in Worldspan.

On a deeper level, consider how this “oligopoly” is supposed to operate. An oligopoly is a state of limited competition, in a market having a small number of producers or sellers. There are but four U.S.-based CRS (more if worldwide conditions are factored it), but at most levels they compete intensely. One may not like the unique positions each occupies as a result of infrastructure and enfranchisement investments made over a long period of time, but of itself this does not constitute an “oligopoly,” nor even if that were the case does the simple existence of an “oligopoly” demand that any person or group is thereby disadvantaged.

The market power they exercise results from the value of their underling subscriber bases, and this intrinsic value is not a function of size or competition. As long as suppliers believe there is a need to access a specific distribution channel, they will be susceptible to charges respecting access to that channel that they may find objectionable. The question of an “oligopoly” is irrelevant.

Finally, we must recognize that Orbitz does nothing to change this dynamic. Because The Internet provides more potential access to distribution channels and consumers of all types, it is sometimes argued that Orbitz and other Internet-based intermediaries circumvent the market power of the CRS, but such statements simply ignore the fact that, in this role, Orbitz and similar companies are simply a CRS by another name.

One can argue that Orbitz may be more efficient in this role, more benign in its behavior, or otherwise cost suppliers less, but it still performs the same intermediary function and is subject to the same criticisms as its competitors.

Which brings us to the question of the CRS fees. It should come as no surprise that the computer services industry is more profitable and more predictable than is running an airline, for instance. There is no credible evidence offered to support a claim that the fees the CRS charge are inconsistent with computer services fees in other industries, for transactions of similar complexity. Moreover, there is no reason to believe that any theoretical savings in CRS fees would benefit the consumer directly–such benefits would be small respecting a given trip in any case.

The study’s authors overlook the fact that revenue from CRS fees is used in many ways that materially benefit the consumer and that diminishing such fees would undeniably be offset by increased user fees in other areas. Sophisticated corporate travel purchasers have understood this principle for a long time.

The economic argument is itself not well developed. There are several possible ways to examine the question, some of which are explored in professor Hausman’s paper, but the simplest is to evaluate the changes in the Consumer Price Index (CPI) from the advent of CRS booking fees until the present.

Hausman correctly points out that CRS fees since 1993 have risen less than have airfares, but a still simpler analysis is to consider the relative value of today’s $3.54 average CRS fee (according to this study). An equivalent amount in 1980 dollars, using the CPI as a measure, shows far less variance with today’s charges than is routinely assumed.

Moreover, the systems themselves are far different than they were 20 years ago. Usage patterns, application capabilities, functional demands, and geographic penetration have all changed, resulting in a far different “product” delivered to airline and other consumers alike. Depending upon the value ascribed to these changes, one could argue that the airline CRS of today is a far better value than at any prior time.

  • The Global report continues by asserting that: “Many existing Internet-based travel agencies, GDSs and some traditional travel agencies, fearful of ‘disintermediation,’ are trying to block Orbitz’s entry into the marketplace by creating legislative and regulatory hurdles to the Orbitz joint venture. These competitors, if successful in their efforts, will cost U.S. consumers tens of millions of dollars in increased airfares.”

The first part of this statement is true, and Orbitz’s competitors are incorrectly focusing their energy. Years ago in these pages we observed that The Internet would not be the competitive windfall for travel agencies that experts predicted at the time, but that most agents would be big-time losers on The Internet, as they are unable to compete with entities that are prepared to sustain millions in operating losses with no clear path to profitability.

The other side of the argument, however, is that the claim that Orbitz will, of itself, generate millions in consumer savings is over-stated. Orbitz will be no more or less effective in so doing than any other distributor, unless its owners choose to offer pricing advantages that are not freely available in the marketplace. The point is that there is no intrinsic efficiency that will make such savings possible.

  • According to Global, “The Internet is transforming the purchasing of travel from a supplier-controlled to a consumer-driven paradigm.”

Travel purchasing has never been anything but consumer-driven. It is among the most price-conscious, competitive, cutthroat, and unforgiving of businesses. This environment exists independent of any specific technology and is probably hindered, rather than helped, by the information explosion the report’s authors reference.

The report goes on the say, “… next generation sites such as Orbitz are providing the consumer with near-perfect choices through the availability of near-perfect information.”

Such a claim is over-stated on a good day. The Orbitz interface is cumbersome and annoying at best, and the results the product delivers did not appear to me to be materially different, better, or certainly more usable than similar results available elsewhere. Further, such statements improperly diminish the value of the CRS infrastructure upon which Orbitz and its competitors rely–and which the report is attempting to discredit.

Surveys also suggest,” the report continues, “that the consumer is becoming increasingly price driven …” To which I would counter: when was the consumer anything else? The current wave of Internet-based purchasing technology attempts to promote pricing advantages over all the other elements of customer service that are valued equally with, in some cases more than, price. What this proves is simply that, if you offer cheap things for sale, people will buy them.

This has nothing whatever to do with Internet-based distribution, fare search technology, or next generation software. Moreover, the constant striving for “agent-in-a-box” solutions rather than the range of customer service elements that the customer truly wants is among the key reasons almost none of the online travel sellers make any money.

  • Professor Hausman counter argument asserts: “The Orbitz joint venture among dominant horizontal airline competitors likely will have an overall anticompetitive effect.”

Hausman argues that the terms and conditions of the Orbitz participation agreement are such that the number of “secret price cuts” will diminish. Stay with me, this gets clearer shortly. He says, “Economists generally agree that secret price cuts are a very important means of increased competition in an oligopoly situation. The result of decreased secret price cuts will be decreased competition and increased fares to consumers.”

The “oligopoly” Hausman refers to is the concentration of airline capacity among a small group of powerful entities. That discussion is beyond the scope of these remarks, but I do agree with him that it is an unhealthy situation. One is hard-pressed, however, to describe a practical alternative. Even so, the competition between airlines remains intense at all levels–including several such as safety, maintenance, and scheduling that are almost invisible to the public. Describing the environment as an “oligopoly” conveys a somewhat inaccurate picture.

Hausman’s argument is a complicated way of saying that the specific terms of the Orbitz participation agreement are anti-competitive, which is an overall sense is probably true. However, the argument ignores the fact that much of what defines airline price competition takes place in a world untouched by Orbitz. In many cases this competition is more important than the public Internet-based offerings.

The largest travel purchasers operate within the complex world of corporate travel procurement, which is an environment of volume-based negotiated fares, net fares, and production quotas. It is intensely competitive and not subject to the same behaviors found in the consumer travel arena. There are always exceptions, but in general business travel purchasers have not and will not be likely to find a service such as Orbitz more than marginally useful. It is also decidedly not in an airline’s interest to bring its corporate negotiated fares agreements into alignment with an Orbitz pricing model.

In summary, therefore, although there are elements of truth in Hausman’s thesis, the business model he implies does not today exist and is highly unlikely to exist anytime soon. This is aptly illustrated by his further comments:

In the antitrust literature, the term ‘cartel ringmaster’ is sometimes used. Here, Orbitz can be viewed as the ‘market power ringmaster’ in the sense that the airlines could not reach agreement individually on a ‘Most Favored Nation’ exclusivity, or no-advertising policy, but Orbitz allows them to agree jointly on provisions that will reduce competition.”

This assumes that Orbitz will assume a position of dominance and influence within the travel distribution marketplace that no other single entity has ever occupied and that there is no sound reason for believing Orbitz is capable of occupying. After decades of development and investment, which have resulted in billions of dollars of consolidated travel purchasing, the largest travel distributors in existence are unable to exercise even a fraction of such influence, even though it would clearly be in their economic interest to do so and despite the existence of many of the contractural conditions Hausman views as so onerous.

For Orbitz to occupy that position, contracturally-based covenants notwithstanding, its products and services would need to adapt to travel purchasing realities in ways they are not, and customers would need to behave in ways they have yet to demonstrate any inclination to do. “All things are possible to him that believeth,” but a far safer bet in this instance is that these things are undergoing a radical redirection anytime soon and the “ringmaster” model exists, at least respecting Orbitz, only in theory.

Please refer to my article, “The Unknown On-line Travel Client,” for an overview of what customer behaviors are at issue and how these are ignored as on-line business models and delivery systems are developed.

  • The claim that Orbitz airline-owners need to join together to counteract the market power of independent multiple airline Internet ticket distributors is absurd,” according to Hausman.

The professor hits the mark here, but in my view he could well have taken the argument further and focused upon more essential issues.

The essence of the “dominance” argument, which professor Hausman aptly refutes, is that Expedia and Travelocity are “dominant on-line travel agencies,” and that this positions them to exercise unacceptable “market power” over the on-line travel sales industry (or that they will somehow be able to do so in the future).

Professor Hausman aptly demonstrates that this claim is not based upon much credible evidence, and that neither company engages in anti-competitive pricing. He could have extended the point to assert that any “dominance” held by the companies is illusionary. Neither company, using realistic measures, is profitable (a fact he does note), nor anywhere close to being so. If one strips away revenues from sources other than travel operations (such as advertising), the defecit is still more pronounced.

While it is theoretically possible for entities that can’t seem to break even in their core businesses to “dominate” a marketplace, assuming someone is willing to subsidize their losses indefinitely, a far safer bet is that, over time, capitalism will prevail and therefore their business and operational models will change. Some sort of economic stability must take place before any “dominance” argument becomes relevant.

The pro-Orbitz Global report commits the logical error of hasty generalization, in that they observe two companies that are larger and more visible than their competitors (under an unacceptably narrow definition of what travel distribution is and who their competitors are) and therefore they assume that this exceptional situation somehow describes or defines how travel will be bought and sole in coming years. There is no reason for believing this is true.

On the other side of the argument, Hausman suggests that on-line travel sales is a highly competitive environment with few barriers to entry. This is a hasty generalization itself, in that real on-line competition is far more focused and limited. Most travel distributors, regardless of their size, cannot compete with the existing players who are prepared to lose incredible sums in order to build market share. It is premature (at best) to describe the major existing online travel sellers as “dominant,” but it is too optimistic (and without credible evidence) to maintain that meaningful competitors can arise without significant changes to the business model.

  • Hausman asserts, “The Claim that Orbitz airline-owners need to join together to respond to enormous CRS market power is incorrect.”

In forming his argument, Hausman misunderstands the complex mechanics and relationships of retail travel distribution and the ability of a CRS to influence distribution practices. It should be observed that these relationships are not, on their face, necessarily contrary to the consumer’s interest.

Hausman remarks, “… this claim is largely irrelevant in any case, because Orbitz proposes to compete primarily against on-line travel agencies rather than CRSs, and, as shown above, robust competiton exists in the on-line distribution channel.”

As I have suggested, I believe a few moments thought demonstrate that at best that “robust competition” is limited to a very few, well-funded players. It is a serious strategic mistake to believe that The Internet is somehow the great competitive enabler that allows sellers of any size of description to compete freely and openly regardless of location or other constraints. Although that Valhalla is spoken of less frequently in recent years, it is still a common assumption.

When toll-free telephone numbers were first introduced, people often spoke of them as competitive enablers in a similar spirit. That didn’t happen for the same reason The Internet has not and will not, of itself, cause competition to exist contrary to the principles of finance, economics, advertising, and promotion.

Orbitz can legitimately claim to be an alternative to CRS-based distribution, in the same way so-called “direct” (meaning message traffic taking place outside a CRS) communications between other distribution systems constitute such alternatives. This is far from a novel concept and is being pursued with varying degrees of enthusiasm by a number of groups.

The CRS, in this context, must be viewed as much as a distribution system as a router of message traffic and platform for delivery of value-added services such as tariffs and pricing. (although none of these is insignificant). The CRS partly uses its financial resources (obtained through airline and other supplier user fees) to subsidize technology costs for subscribers, thus providing both functional and financial incentives for subscribers to become system users and remain so. Although suppliers frequently maintain that they are reluctant to pay fees for these purposes, both distributors and their customers receive clear benefit from the relationship that would otherwise have to be provided and funded in some other way.

Stripped of whatever business rationale are contrived to justify non-CRS messaging systems and supporting technologies, the fact remains that lower booking and support costs are what is at issue. Orbitz, viewed as a CRS alternative is so to the degree its participants can actually realize lower fees. In every other meaningful way it has the same business characteristics from the vendor’s point of view as a CRS, albeit a cut-rate one owned by its users.

Thus, contrary to professor Hausman’s assertions, Orbitz finds itself competing not simply against online travel agencies, but against all types of retail travel distribution as sustained by the CRS model, and specifically against the CRS themselves. Orbitz hopes to create a sustainable alternative business model that will benefit its owners and do so at a lower cost. This is far from an irrelevant argument, but it is impractical.

The value of the CRS infrastructure is routinely underrated by observers either too distant from the reality of travel distribution or too enamoured by the promises of e-commerce. That infrastructure cannot easily be replaced. Despite its high-tech product claims, Orbitz does not fundamentally attempt to do so nor does it postulate a business case as to why CRS-driven services will diminish in value over time. It proposes to lower CRS costs to its owners and participants, but it offers no reason for believing it can deliver equivalent functionality at a lower cost.

 

© 2001 by: David J. Wardell