A traveler searching two of the four largest online travel services, Orbitz and Expedia, is not going to find any listings for American Airlines flights — at least for the moment.

Share story

A traveler searching two of the four largest online travel services, Orbitz and Expedia, is not going to find any listings for American Airlines flights — at least for the moment.

That is because American is in a standoff over the fees it must pay to list its flights with the online agencies. And while that is the immediate reason for the dispute, there is a broader issue at stake: how American’s tickets are displayed and marketed to travelers. American has developed a new Direct Connect distribution technology — which Orbitz and Expedia have refused to adopt — that could change the way it displays and sells tickets. Rather than displaying fare listings based primarily on schedules and prices, American’s technology eventually will customize offers to a traveler’s individual needs. So, during booking, the site will display fees charged for more legroom, priority seating or whatever else the passenger prefers, thus enabling American to promote options that could generate more revenue.

Industry analysts expect that American will resolve the dispute. In fact, Cory Garner, American’s director of distribution strategy, said Tuesday that “discussions are ongoing” and that he hoped the differences would be resolved since “it is in the best interest of all of us to continue to do business together.”

(However, on Wednesday the Sabre Holdings Corp., which runs the largest online airfare-listing network for travel agents, joined the fray and is downgrading how American’s fares are listed for travel agents and threatening other action. American Airlines responded with a news release that accused Sabre of actions that were “discriminatory and patently inconsistent with both its contractual obligations and its professed goal of ensuring full transparency for the benefit of consumers and travel agents.”)

Most Read Life Stories

Unlimited Digital Access. $1 for 4 weeks.

A long-term battle?

It is unclear if American’s direct connection system will succeed, especially if demand for air travel should fall again.

American’s battle with Orbitz and Expedia began in November when American told Orbitz, the smallest of the top three publicly traded online travel agencies, that it intended to end its contract with the agency on Dec. 1. Travelport, a global distribution system company that owns 48 percent of Orbitz, tried to block American’s move. But a circuit court judge in Cook County, Ill., late last month ruled that American could proceed. Meanwhile, Bellevue-based Expedia, the top online travel agency, chose not to renew its contract with American when it expired Dec. 31 because it, too, did not want to work with the airline’s technology.

Because both sites no longer list or sell American Airlines flights, travelers who want to buy a ticket on American online must now use sites like Priceline or Travelocity, or aa.com, the carrier’s site.

Until the 1990s, U.S. airlines generally relied on travel agents, who use what is known in the business as global distribution systems — databases that show airlines’ up-to-the-minute inventory. The airlines paid agents commissions for their sales. But, to reduce operating costs, carriers stopped paying commissions to many travel agents in the 1990s.

Kevin Crissey, who follows airlines and online travel agencies for UBS, said that commissions now paid to large travel agencies that booked significant amounts of leisure or business travel represented 3 percent to 4 percent of airlines’ operating costs. The airlines would like to reduce these costs further.

The carriers continue to pay fees to the global distribution systems for bookings, and the global distribution systems still give part of these fees back to the agencies. American wants to reduce or eliminate those payments. (Here’s a further paradox in American’s stance: American founded Sabre, a major global distribution system that, in turn, established Travelocity, another of the top four online travel agencies.)

Gerard Arpey, chief executive of American, and Richard Anderson, chief of Delta Air Lines — which, not coincidentally, also stopped working with three smaller online travel agencies last month — both said in early 2009 that they would ultimately like to have the intermediary services pay for access to their inventory, “rather than us paying them to distribute our product,” as Arpey put it.

As part of the standoff, American, as well as other older airlines, has questioned the value of bookings generated by the Web agencies, which tend to be low-priced tickets sold to leisure travelers. According to Crissey, online agencies generate about 17 percent of those airlines’ total revenue, compared with 25 percent of revenue generated by airlines’ own websites and 53 percent generated by offline travel agencies. Fares sold by online agencies are, on average, 45 percent cheaper than fares sold by offline agencies.

Furthermore, Crissey said, to sell an average, round-trip domestic ticket, American must pay online agencies $10 to $12, for global distribution and agency incentive fees, while it costs the carrier only $2 to $3 — for administrative and marketing expenses — to sell the same ticket on its own website. It is, therefore, much cheaper for American to sell a deeply discounted ticket, one that doesn’t generate significant revenue, on its own website.

In an analysis issued Tuesday, Douglas Quinby, senior director of research at PhocusWright, a travel industry research firm, suggested that “American chose Orbitz to send a message to its major shareholder and GDS Travelport about the cost of distribution.” (Travelport is a leader in the distribution systems.)

Quinby added: “American’s determination to show Travelport that it does not need those Orbitz segments — true or not — is a powerful stick to wield at the negotiating table.”

In the long run, he wrote, American wants travelers’ search queries “to be passed from the agency to its Direct Connect, and they would determine what flights and fares to display.”

“The significance of this cannot be understated,” he added. “This is nothing less than a battle for control of airfare search results.”

More searching for fares

Mike McCormick, executive director of the National Business Travel Association, a trade group for corporate travel managers, warned that if American’s direct connection technology bypassed existing distribution systems, it “could result in a significant increase in capital expenditure that business travel buyers will ultimately bear” because “travel management companies will need to build new systems to capture these ‘direct connect’ fares on behalf of their business travel clients, resulting in higher costs overall.”

For leisure travelers, American’s spat “punches a big hole in the value proposition” of the online agencies, which can no longer claim to be “one-stop shopping sites,” said Tim Winship, publisher of FrequentFlier.com.

Travelers will have to “pay more attention when they’re out there price shopping, since two of the largest online agencies aren’t selling flights of the third-largest airline,” he said.

Henry Harteveldt, travel analyst for Forrester Research, agreed. “Travelers will have to work harder and take more time to shop, change the sites they use, shop on Priceline, Travelocity and aa.com, or add a metasearch site like Kayak.com, Bing Travel or FareCompare,” he said.

Quinby said he expected the global distribution systems would “continue to adapt, and acquire as need be, to keep their seat at the table.”

He added, however, that “there’s nothing like a recession, geopolitical disaster or oil price surge to send the best intended distribution strategies into a tailspin.” In addition, Google’s proposed purchase of ITA, the provider of flight data, which federal regulators are reviewing, “could change everything for just about everybody.”

Material from Seattle Times travel staff is included in this report.