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Can the Online Agencies Survive with No Fees?

A quick word about online agencies:  Following Orbitz announced last week that it was (basically forced into) eliminating fees on airline ticket bookings, it joined the other major online agencies in dropping the $5-10 charge from their airline ticket sales.  Priceline dropped fees a while ago and saw a nice gain in market share, as their competitors kept their fees (while enjoying the cash they generated).

One Expedia and Travelocity dropped the fees (albeit temporarily), Orbitz had no choice.  And that’s rough for them, since reportedly about 60% of their cash flow (EBITDA) comes from these fees.  Uh oh.  

You may have heard the old theory that if every competitor in a market offers a low price guarantee, you’ll actually end up with higher prices since there is no incentive to drop prices.  A simlilar situation has occurred here:  Priceline was making up (at least part) of the fees by generating market share from the move.  Once competitors joined in, every company ends up taking a haircut.  The end result is no shift in market share with lower profits.  Not a good situation.

Perhaps the OTAs could shift from share from people who were previously booking directly with the airlines, but I see that as a very small piece of the pie.  And the math still doesn’t work:  if OTAs were making, let’s say, $9 from each airline ticket and $6 from each additional fee, they would have to shift a helluva lot of share to make up that missing $6.  

I could see Expedia and Travelocity eliminating the fee as a means of putting the screws to Orbitz, but Orbitz may just have to go and put the fee back in and hope that, eventually, Expedia and Travelocity decide they can’t live without the additional revenue.  Either way, Orbitz is in a rough spot.

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  1. > Either way, Orbitz is in a rough spot.

    Aren’t Expedia and Travelocity in the same rough spot? Or do they have revenue sources that Orbitz doesn’t have? To me the three have always looked pretty much interchangable.

  2. Orbitz is far more dependent on selling airline tickets than Expedia or Travelocity – Orbitz was started by a group of airlines and has held true to that legacy. They’ve certainly made strides toward doing a better job of merchandising their more profitable hotel product, but they’ve always been more airfare focused than the others.

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