FlyerTalk Forums - changes in store for online travel agencies

Travel sites sputter on loss of fees
March 01, 2001 12:32 PM ET
by Matt Berger

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Two major airlines clipped the wings of online airplane ticket retailers Wednesday, announcing they would stop paying commissions to websites selling their tickets.

The fees, which constitute a significant portion of low-margin revenues for companies including Travelocity (TVLY), Expedia (EXPE) and yet-to-be-launched Orbitz, sent shares of those travel industry e-tailers into a tailspin.

Shares of Microsoft's (MSFT) Expedia and rival Travelocity plummeted more than 30 percent in early trading today. Expedia's share price hovered around the $12 mark, while Travelocity's dipped as low as $15.

Airlines cut commissions

Northwest Airlines (NWAC) and its alliance partner KLM Royal Dutch Airlines both said Wednesday they would stop paying commissions to U.S. and Canadian websites selling their tickets.

The typical going rate for commissions paid is 5 percent, or a maximum of $10 per ticket. While the dotcom travel agents will no longer receive the fee, both airlines said they would continue paying commission to traditional travel agents.

As two of the leading travel Internet sites deal with the loss of a revenue stream, competitor Priceline.com (PCLN) has remained unaffected. Priceline.com's business model is set up so it does not make commissions on ticket sales. Rather, it pays 100 percent of the ticket price when it buys a ticket from a carrier and makes its money on the price difference from what a customer offers to pay for that ticket.

Meanwhile, Travelocity responded to the news by adding a $10 service fee on all Northwest and KLM tickets, effective today. Executives from the Net travel retailers warned the added fees would put those two airlines at a disadvantage to other featured carriers.

"We are surprised that Northwest and KLM would put themselves at a competitive disadvantage by forcing us to charge a service fee that we must now pass on to consumers," Terrell B. Jones, president and chief executive officer of Travelocity, said in a statement.

No other carriers have followed the airlines' lead, but analysts fear such an action could spell disaster for online travel sites.

Analysts divided

Analysts from Legg Mason and CIBC World Markets downgraded both Expedia and Travelocity today. Legg Mason's Thomas Underwood cut his rating on Travelocity to "market perform" from "buy," and Expedia to "market perform" from "strong buy."

CBIC's Paul Keung lowered his rating on both companies to "buy" from "strong buy."

Mark Rowen, an analyst for Prudential Securities, took a different position today, noting in a research report that the trouble could be for the airlines, not the ticket sellers. While maintaining his "strong buy" ratings on both Expedia and Travelocity, Rowen speculated the move to cut commissions could be a test by Northwest and KLM to see if other airlines will follow.

"If competitors do not follow their lead," Rowen wrote, "we believe Northwest and KLM will quickly retreat from the zero-commission stance, rather than risk losing market share in the online consumer area."