This study is funded by the ASTA! Of course it will be biased. This is a good article that lays it out-from both sides:

Orbitz causing dogfight in the friendly skies http://www.airlinebiz.com/wire/
by Matt Berger
March 26, 2001

A dogfight is brewing between the airlines and online ticket sellers that threatens to send debris careening down on consumers and investors.

At the center of the battle is a budding Internet startup called Orbitz, which plans to sell the broadest range of airline tickets, hotel reservations and car rentals at the lowest prices available.

It's not an earth-shattering concept to consumers who are used to similar claims from Travelocity.com (TVLY) and Expedia.com (EXPE). It is, however, a concern to those competitors.

In this case, Orbitz's claims may be true, and that has piqued the interest of federal regulators. Industry watchers worry the Chicago-based company, which is financed by five major airlines that control roughly 80 percent of all U.S. domestic air travel sales, could potentially use the site to stomp out competition from third-party ticket sellers.

Now two years in the making, Orbitz's scheduled June debut has been overshadowed by tangled tales of consolidation among the major airlines, allegations of predatory pricing and a reduction of paid commissions to online travel agents. With its beta site up and running, showing just how nonpartisan and inexpensive the site promises to be, Orbitz may finally be ready to get the company off the ground and enjoy its day in the sun.

In need of cash

Forget for a moment the concerns about price-fixing and market dominance. Orbitz's long-anticipated liftoff faces turbulence from a much greater force than government and industry regulators. It's headed straight for the stormy capital market.

In the two years that the Orbitz site has been under development, the company has raised $100 million from its partner airlines, which include AMR's (AMR) American Airlines, Continental Airlines (CAL), Delta Airlines (DAL), Northwest (NWAC) and United Airlines (UAL).

It plans to burn through nearly all of that cash within the next few months marketing the site to consumers. Orbitz has already spent more than $50 million building its state-of-the-art Web-based reservation system, and will surely need more cash to stay in business.

"We are in the market looking for financing," said Jeffrey Katz, chairman, president and chief executive of Orbitz, who left his post as CEO of SAirGroup's Swissair to head up the company. "We consider ourselves the 'clicks' in the brick-and-mortar airline industry. That's very appealing to investors."

Funding is a key issue for Orbitz, considering Katz says it will not reach profitability until early 2003. It could also prove to be its most difficult task, as the online retailing sector has fallen out of favor with Wall Street.

Not the best timing

"The timing is not great in terms of tapping the capital markets," said Robert Milmore, a travel industry analyst with Arnhold & S. Bleichroeder. "[Orbitz] is going to need more money and spend pretty aggressively to build its brand."

Orbitz has been going door-to-door in search of as much as $100 million in additional funding, as well as enlisting the help of Morgan Stanley Dean Witter, although Orbitz concedes it could manage with $50 million.

"In the current climate we're trying to be realistic," a spokesperson for Orbitz said. That realistic mindset has led the company to delay money-raising efforts until the site launches and brings in revenue.

Where the next round of funding comes from may be even more important than how Orbitz will compete against the established market leaders -- Travelocity and Expedia -- and how it will deal with the regulators attempting to ground its service.

"If the company were able to launch successfully and have significant monopoly power due to its contracts with the airlines -- if all that were able to pass the scrutiny of the regulators -- I think it's possible it could have outside financing from private players," said Legg Mason analyst Thomas Underwood.

When it comes to possible investors, Katz is approaching anyone who will listen. Those showing the most promise, Katz says, are other Internet and travel industry verticals and technology developers, not venture capitalists. "Those guys are all much more cautious and skeptical about investing," he said.

Gaining investment partners other than the airlines will also help quell concerns over Orbitz turning into a monopoly. "That's one of the things that we're doing to appease some of the concerns regulators have," Katz said.

Throwing out the old

Orbitz was formed in 1999, a glowing year for the airlines. It was the airlines' answer to new competition from both online travel agents and the computer reservation systems (CRS), such as Sabre (TSG), which have traditionally controlled the reservation system with costly services.

"The late 1990s were pretty good years for the airlines," Milmore said, noting that many airlines managed to hoard hefty piles of cash. "They didn't want to buy more planes, so instead they were buying back stock and paying off debt.

"When the Orbitz idea came up they said 'sure we'll throw some money at it.'"

The airlines have always felt disdain for the legacy computer reservation systems that connects the airlines with third-party ticket sellers. Most of the friction has to do with the surcharge fees the airlines have to pay to the four major CRS companies: Saber (a spin-off of AMR), Worldspan (a joint venture between Delta, Northwest and TWA), Galileo International (GLC) and Amadeus Global Travel Distribution (owned by Air France, Iberia and Lufthansa). Orbitz seemed to be a perfect way for the airlines to bypass those growing costs.

Besides identifying a market segment that was in desperate need of an upgrade, Orbitz may have struck gold with its Web-based reservation system, as its business model allows the company to cut one-third of the cost airlines eat when selling a ticket through other third-party vendors.

Sabre, which owns 70 percent of Travelocity, and Worldspan, which supplies tickets for Expedia, charge the airlines on average $15 per ticket sold through their system. Add on a 5 percent commission fee, or about $10, that most airlines pay to the travel agents and websites, and the airlines end up paying more than $1.7 billion a year in hidden fees.

Cheaper, faster, unbiased

Because of a contractual obligation between Orbitz and the 35 charter airlines that signed on with the company, Orbitz is able to commit to its low-priced deals by bypassing other CRS vendors and connecting each airlines' reservation system directly to its advanced search engine housed in two data centers in the Chicago region.

Besides offering a less expensive distribution outlet, the system -- developed by a team of engineers from Massachusetts Institute of Technology's Artificial Intelligence Lab, who later licensed the technology to Orbitz through their company, ITA Software -- is also faster and more expansive than the legacy mainframe systems in use by other CRS vendors.

Most important, Orbitz is obligated to act as an unbiased listing service for fares and schedules. Unlike its current competitors, there is no "favored nation status" for airlines willing to pay for placement, and more than 450 airlines are represented, including Southwest Airlines (LUV), which doesn't sell its tickets through any other third-party website.

If all goes as planned, and the Orbitz launch goes off without a hitch, the company has a good chance at success. For one, the online travel retailing market is ripe for the picking, analysts say. Online ticket buying accounted for $1.2 billion, or one-third of all e-commerce sales in January, according to Nielsen//NetRatings.

Also, websites now sell 58 percent of the airline tickets purchased in the U.S., according to research firm PhoCusWright.

"There is definitely room for Orbitz in the market," said Legg Mason's Underwood.

A lot to overcome

But internal problems, a looming regulatory inquiry and power plays by a range of airlines and travel websites threaten to complicate Orbitz's launch.

First, there is the continuing effort to get Orbitz's back-end technology up and running. Technology glitches originally forced the company to delay its launch last summer. While those problems have been worked out for the current beta run, Orbitz says it has yet to connect all of the 35 charter airlines to its Web-based reservation system. Until it does so, Orbitz will rely on the very CRS competitors that are trying to stop it from booking reservations on certain airlines.

There is also a possibility that a portion of its expected revenue stream will be dismantled before the company launches. Northwest Airlines and its partner, KLM Royal Dutch Airlines, decided to stop paying commissions to online ticket sellers, including Travelocity, Expedia and -- when it launches -- Orbitz.

Many suspect the reason Northwest and KLM stopped paying these commissions is because airlines run the risk of losing money by selling tickets online. Amid a bankruptcy buyout by AMR, Trans World Airlines (TWA) revealed that its deal with low-cost ticket distributor Lowestfare.com, which purchased tickets for 55 percent of their face value, caused the airline to lose as much as $100 million. Given declining corporate travel budgets and the slowing economy, the airlines are watching every penny they spend.

Travelocity and Lowestfare.com responded to the loss of the airlines' commissions by charging consumers a $10 service fee on tickets from Northwest and KLM. If this becomes commonplace for online ticket sellers, it could reduce consumers' incentive to buy online. Meanwhile, Expedia has entered into closed-door discussions with a number of the airlines to find an alternative solution.

Possible show stopper

Finally, there are the pending investigations by Congressional committees, the Department of Transportation, industry trade groups and 20 of the nation's state attorneys general, which threaten to stand in the way of Orbitz's business model.

While Orbitz says it will provide consumers with every low fare available in an unbiased manner, some fear the airlines may eventually use Orbitz to dismantle the third-party online travel market altogether. It is hard to look past the fact that the airlines financing Orbitz are poised to gain with its success -- the more tickets sold on Orbitz, the more money the airlines make in the long run.

And even if Orbitz is a success, Milmore notes, "The long-term concern is, how committed will the airlines be to funding the company if it continues pulling business from their own websites?"