Orbitz (OWW: Charts, News, Offers), the online travel agency best known for deeply discounted airline tickets and hotel rooms, saw its share plunge 18% last week when its long-time partner AMR-owned (AMR: Charts, News, Offers) American Airlines, the second largest airline in the world, threatened to end its seven-year agreement to sell tickets on the website by December 1. American Airlines stated that the current arrangement wasn’t cost effective to the company, and suggested that it was pushing customers towards the use of the company’s own website to book tickets. This is devastating news for Orbitz and its shareholders, and if other airlines follow suit to escape Orbitz’s discounted tickets and slice of the pie, other online services such as Expedia (EXPE: Charts, News, Offers) and Priceline (PCLN: Charts, News, Offers) could easily be next. What prompted this bitter conflict, and what can Orbitz do to stay relevant if it loses American Airlines?
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At the center of this fight are GDS (Global Distribution System) businesses, such as Travelport and Sabre Holdings, which act as middlemen between travel agents and airlines, charging airlines fees for its complex search engine functions that match passengers with flights. In a possible conflict of interest, Travelport also owns 48% of Orbitz. Companies such as Orbitz use GDS services liberally, causing extra charges to the airlines that American Airlines now believes can be eliminated altogether. Orbitz CEO Barney Hartford had harsh words for American Airlines, stating that the airline is attempting to “force agencies to connect directly to its system to access content as opposed to using global distribution systems.”
Cory Garner, the director of American Airlines’ distribution strategies, claims that the company is not attempting to bypass GDS systems, but that the prices that are charged by GDS services are no longer market competitive and have begun impacting their bottom line, which has already been under constant pressure. American Airlines and its industry peers have continually cut costs across the board, charging for food, beverage, priority seating and extra luggage fees. Many of these measures have been widely criticized by consumers and employees, and the airlines are now attempting to seek out other cost-cutting measures that will lessen the impact on its workforce and passengers.
The latest cost-cutting attempt by American is its Direct Connect program, which is a dedicated GDS system for its own airline. The company has been attempting to push this new software onto the old GDS providers, and has been met with widespread resistance, due to the fact that it increases prices for American tickets across the board with little to no variation and competition. American Airlines has stated that its decision to discontinue sales with Orbitz was a business decision not caused by anything Orbitz did, and that it intends to do the same with other online travel agents. This kind of worrisome buzz sank the stocks of both Orbitz and its industry peers across the board last week. GDS service and Orbitz shareholder Travelport has stated that it will seek to defend both Orbitz and its customers, but has yet to specify its strategy for dealing with American Airlines.
In other, more optimistic news regarding Orbitz, the company performed well last quarter, well above the Street consensus. Its 3Q profit of $15.3 million, or 15 cents per share, was double its earnings of $7 million, or 8 cents per share a year ago, and much higher than the Street estimate of 9 cents per share. Gross bookings increased 12%, flight bookings climbed 13% and hotel bookings rose 57%. Its total revenue increased 4% to $194.5 million over the previous quarter. Technically speaking, the company is healthy, and the company has announced that even with the potential loss of American Airlines, it expects a 1% to 2% increase in revenue this year over 2009′s numbers.
Other News About OWW
Orbitz shares dive 17% on American Air listing threat
In this article: (OWW: Charts, News, Offers), (AMR: Charts, News, Offers)
Orbitz Swoons; To Lose Right To Sell American Airlines Tickets
In this article: (OWW: Charts, News, Offers), (AMR: Charts, News, Offers)
Other Stocks in the News
Expedia Gathers Momentum – Will Expedia be next on American’s hit list?
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Hedge Fund Legend Robertson Weighs In On Apple – Hedge funds boosting their hefty investments in Apple.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
After logging in to American Airline to check ticket prices, there was an announcement that the airline is no longer offered on Orbitz, This is going to be hard for consumers, since we are used to searching airline tickets through Orbitz.Where will we find cheap rates?
The advantage of having a broker for ticket purchases is the availability of choices on hand. Being able to select the best accommodation and price from different carriers is what it is all about. American Airline’s move of pulling out from Orbitz is a step nearer to monopolization.
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