The issue before this committee today transcends the air travel industry. The current situation in this industry is part of the natural struggle between entrenched business models and the ongoing drive toward greater efficiencies and consumer benefits through innovation in the marketplace and on the Internet. The Association for Competitive Technology (ACT) has always supported the creation of innovative e-commerce technologies and business models such as the one developed by its member company Orbitz. In the online travel space, Orbitz has created a new, lower-cost technology platform that provides consumers with easy access to a broader selection of low fares in a guaranteed unbiased display. The fastest growing IT organization in Washington, ACT represents over 3,000 technology companies and professionals. The bulk of our membership is comprised of small and mid-size companies and their executives
Following a worldwide trend, Orbitz represents a move away from inefficient proprietary networks toward more open and cost effective, open, Internet-based networks. Orbitz uses superior server-based technology to provide consumers with more information about all available fares. Their technology is better than first generation search engines, thus it can search billions of flight-options to find more choices. Moreover, the server technology can handle the huge volume needed to search billions of airline routings at a much lower cost, allowing Orbitz to charge the airlines less to distribute their tickets.
Since the launch of Orbitz, consumers have been given a much larger set of choices when searching for fares. In addition, there has been significant distribution cost savings for airlines and other travel suppliers at a most critical time for them. Orbitz is providing the first real downward pressure on one element of distribution costs in particular; booking fees charged by the dominant Computer Reservation Systems (CRS), which average nearly $14.00 per ticket. These CRS’s have thus far refused to invest in Internet-based technologies that could help bring these costs down.
Beyond the Investigations
It is time to move past the seemingly interminable investigative process. By way of background, Orbitz has been scrutinized by more government agencies and congressional committees than any other online venture. Not one of these reviews has asked for any change in the Orbitz business model. Moreover, each review has noted the pro-competitive impact that Orbitz brings to travel consumers. The Department of Transportation report released last month found Orbitz implementation has been consistent with plans and that current evidence shows that no Orbitz charter associate airline has provided exclusive fares to Orbitz. The Department of Justice review has been “open” for more than two years. We are confident if there were any problems with Orbitz structure or joint ownership, the DOJ would have acted. Despite the results of the investigations, the chorus of Orbitz detractors continues the “Most Favored Nation (MFN) Indignation” refrain. Simply put, the MFN is a necessary part of the Orbitz business model that benefits consumers. James DeLong, senior fellow with the Competitive Enterprise Institute’s Project on Technology and Innovation, noted in a paper prepared for the CATO Institute, that:
“if good information
Despite this logic and without regard to the fact that Orbitz charter is consistent with the DOJ collaboration guidelines,2 some of Orbitz’s protectionist competitors continue to insist that the DOT and DOJ pursue investigations without demonstrating in any way that competition would be hindered or that consumers would not benefit. Indeed, these same competitors continue to complain about their lack of access to special deals and fares while making public announcements about airline fare deals they havle negotiated, including deals for web-only fares, and specially negotiated fares that give those two sites exclusive fares that Orbitz does not have.
State of Competition in the Online Travel Space
Despite the wild claims that Orbitz means the end of all other online travel services, the industry is healthy and competition alive and well. The travel market is $140 billion annually. Online travel bookings are on the rise. Online bookings comprise 13% of total bookings. Forrester Research estimates that online travel spending will grow to $60 billion in 2006. Currently, there are over 25 independent online travel sites vying for consumer dollars and eyeballs.
It is difficult to overestimate the challenges facing the travel market. Forrester estimates that 60% of consumers have no loyalty to any one travel site and often choose among several. Clearly it’s a case of “what have you done for me lately?” This fact means that the online travel space can, and does, support multiple competitors with varying business models and value propositions. Indeed, Neilsen/Net Ratings noted that the consumer’s ability to easily comparison shop for fares means that there can be several tiers of contenders.
Turning to the stories of these “contenders,” you can see the promise of the online travel market for producing consumer value. SideStep.com, a Santa Clara, California company has produced a web application that is devoid of graphics and rich content. The premise is that SideStep.com can deliver a consumer a list of fares faster than Orbitz or the individual airline web site. Consumers with dial-up Internet access would be particularly well served by this approach. SideStep.com was launched in 2000 and produced a profit in April of 2002. Following the natural evolution of e-commerce, Qixo, a San Francisco company, has developed an application that searches across numerous sites including online travel, carrier and specialty sites. This application takes advantage of the fact that the carriers time to send the data to sites like Orbitz from their servers. This data can be mined before it can be posted to Orbitz. The goal is to find the cheapest fare no matter where it may be hiding. Finally, AgentWare, based in Atlanta, provides travel agents with all fares from online and offline sties. AgentWare is a $40 per month alternative to Sabre. At a recent meeting of the National Commission to Ensure Consumer Information and Choice in the Airline Industry in San Francisco, Commissioner Patrick Murphy stated that government intervention, in the face of technological innovation, is “very challenging indeed.” Without question, this level of innovation and competition has produced manifold benefits for consumers.
The Consumer’s Endgame: Efficient Intermediation
The Orbitz machinations are part of a larger issue. This is what is to become of intermediaries or “middlemen” who provide little or no added value. The Progressive Policy Institute (PPI) has studied this issue and published the seminal paper in this field.3″ In the paper, PPI estimates that American consumers pay a minimum of $15 billion more annually for goods and services as a result of such e-commerce protectionism by middlemen. The CRS’s and many of the “brick and mortar” travel agents fall squarely into this category. Rather than adapting to a changing marketplace, they have mounted a campaign to stifle the growth of online travel services.
Without a doubt, traditional travel agents have provided consumers value by serving as a buffer between them and the airlines. However, as more and more consumers book their travel through online travel sites and directly through the carriers’ sites, travel agents fear the elimination of their business model. For online buyers, it’s not just about saving a few dollars per ticket. It’s more about the control, information, and convenience consumers get by online searches for schedules, routes, and fares, then buying an e-ticket—in the middle of the night, when all the travel agents are asleep.
Technology has repeatedly enabled new information distribution that takes market power away from existing middlemen. (e.g., real estate, books, stock brokers, and car dealers).
“Survival of the fittest” favors those travel agents who find ways to charge consumers for the value they provide in counseling consumers and booking their travel. And many travel agents are learning how to survive—even thrive. In 2001, travel agents accounted for $63 billion in sales an increase of 40%. These travel agents account for nearly 70% of all airfares, as compared to 2% for Orbitz. This does not take into account the fact that traditional travel agents still process 90% of cruises and 95% of tours. The American Society of Travel Agents has acknowledged that while consolidation has taken place, the total amount of business remains constant. Arguments of mass unemployment are specious indeed.
More important than the absence of erosion, travel agents who do embrace technological change can still add value to a consumers travel experience. For example, in areas underserved by the Internet, these agents could offer to search fares, research and build customized vacation packages, add some mark-up and hire a delivery person to bring a person their e-ticket print out (while including brochures on activities to do while on the trip). The possibilities are endless.
Traditional travel agents make baseless claims that the online distribution models are “anti-consumer” because they take away “truly independent choice.” This completely misses the point. The fact of the matter is that airlines pay between $22 and $32 per ticket in distribution fees to travel agents. In 2001, this totaled $380 million. This cost is passed through to consumers. Online distribution models can cut this cost to $6-$8 per ticket. A simple equation follows: A cheaper distribution model equals a cheaper ticket. The disruption of costly and inefficient distribution channels is part of the “creative destruction” process of technology-driven innovation and must be acknowledged. It is now being applied to the travel space. Traditional travel agents who do not incorporate Internet distribution models risk being held hostage by the CRS. The CRS distribution model supported biased display and kept information away consumer. In fact, a Consumer Federation of America paper from 1999 complained that: “Traffic is diverted to the dominant incumbents through a number of marketing mechanisms that extends market power over travelers: . . . deals with travel agents to divert traffic, . . . and manipulation of computerized reservation systems.”4 This era is over. It is irrefutable that consumers enjoy the control, information and convenience achieved through booking online. Travel agents should shed the CRS shackle or they will sit idly by while consumers move further and further toward the near perfect choice model provided by the Internet.
ACT vigorously supports any competitor that invests in information technology to serve consumers better, faster, and cheaper. ACT is just as vigorous in opposing the use of government regulation to prohibit competition on the merits of investment and innovation. As you contemplate the issue of Internet-based distribution, I urge you to focus on promoting robust competition and meeting the needs of consumers, not the protection of business models that are threatened by new technology and changing consumer preferences.
1 James V. DeLong,, “Online Travel Services: The Antitrust Assault on Orbitz – and on Consumers, CATO Policy Analysis, June 6, 2002 at p.10. The full paper is attached to this testimony as Appendix A.
2 Department of Justice, “Antitrust Guidelines for Collaborations Among Competitors.” April, 2000.
3 Robert D. Atkinson, “Revenge of the Disintermediated: How the Middleman is Fighting E-Commerce and Hurting Consumers.,” Progressive Policy Institute Policy Paper, January 2001. This paper is attached to this testimony as Appendix B.
4 Freeing Public Policy from the Deregulation Debate: The Airline Industry Comes of Age (and should be held accountable for its anticompetitive behavior), at p.7. Http://www.consumerfed.org/abaair1.pdf.