Orbitz Filing Raises Ire: Airline Incentive Agreements Baffling, If Not Significant

Arrangements in which Continental, Delta and Northwest airlines can earn incentives for referring corporate accounts to Orbitz For Business initially generated consternation in the travel management community, but sources said those airlines subsequently indicated that such programs were merely fodder for Orbitz's pre-IPO hype.

In the weeks leading up to its mid-December initial public offering, Orbitz filed documents with the Securities and Exchange Commission that detailed preferred services agreements in which participating carriers earn a one-time fee for referring corporate customers that designate Orbitz For Business as their agency of record in airline agreements. Further, the carriers would earn from Orbitz a fee for each of their tickets booked on Orbitz by their corporate accounts.

Although Delta has been participating since March 1, 2003, Northwest since July 31 and Continental since Sept. 12, Orbitz wrote, "as of Sept. 30, 2003, no referral fees had been paid under the terms of these agreements." The deals have two-year terms.

Some industry executives and buyers viewed the agreements as unprecedented and potentially significant. For the most part, so did Orbitz. Asked this month to put the deals into historical context, Orbitz chairman, president and CEO Jeffrey Katz said, "It's age-old. The way Sabre got built was American Airlines incentivized agencies to use it. This is not the same sort of magnitude nor process, but the idea is the same—that an airline will often, if it's in their interest, market a preferred channel. They also have to make sure they're not violating other agreements they have."

The former Sabre president could not say whether any accounts have been referred as part of the agreements.

According to a Continental Airlines spokesperson, "Currently, Continental has not referred any customers to Orbitz For Business. Orbitz continues to be an innovator in lowering distribution expenses for the airline, and we will continue to work closely with all agencies that help us to lower distribution costs."

"This is a brand new program, which offers Delta favorable economics," said a spokesperson for the Atlanta-based carrier. "We would not recommend this program for any account currently working with an agency." It remained unclear whether that applies to corporate accounts that are out to bid for agency services. A Northwest spokesperson was even less informative, saying, "I've spoken with our folks in sales, and we have nothing to add. The information contained in the SEC document speaks for itself."

On its face, that information is "fundamentally and profoundly important," said Carlson Wagonlit North America president Robin Schleien. "Clearly, there are relationships between airlines and travel management companies to drive more value to the airline, but those are typically around marketshare and growth. This is turned around the other way, creating an unprecedented relationship. But it only becomes so critical if the airlines take action on this and align with a particular agency, which presents, at minimum, an interesting and, more than likely, very risky, proposition for any supplier in its relationships with other travel agencies and their customers. At maximum, this is intent, but we'll see if it turns into action." He said some of his competitors had "made a delineation between that statement and action on that statement."

One of those is WorldTravel BTI, which acknowledged the agreements' novelty if not their practical application. "We did some phoning around to find out what the airlines are saying because it's not like the airlines to do something that so blatantly flies in the face of big chunks of their other corporate business," said WorldTravel BTI executive vice president Dee Runyan. "The airlines are saying this is a misinterpretation or an inaccurate assessment of the kind of financial relationship that exists between them and Orbitz. They have put a stake in the ground and said, 'We are not preferring Orbitz over our travel management company partners,' so I have to respect that. They also know the TMCs will hold their feet to the fire on this issue."

Runyan said she was told the fees that would be paid on each booking are designed to recoup the cost of airlines filing corporate negotiated fares through the Airline Tariff Publishing Co. "That makes a lot of sense to me," she said, noting also that the preferred services agreements with Orbitz were signed before airlines and GDS firms had completed their shakeout on Web fares.

Other TMC executives also said they were not worried about the agreements. "I have not encountered any example where these airlines have gone in this way," said Total Travel Management president Linda Garback. She added that if such deals were to happen, they would represent but one of the many competitive challenges already facing TMCs. "This was a way for the airline owners to support the IPO," said TQ3 Travel Solutions president Jack O'Neill.

Travel buyers showed a range of interest and concern, or lack thereof.

"It seems unfair or biased," said Marianne Goodman, global travel services manager of Keene Inc.

"If it's true, I find it very disturbing," ChevronTexaco global travel manager Nancy Godfrey said.

"It is unusual, but I don't have a sense of how important it might be," said ON Semiconductor global travel manager Colleen Guhin.

Assuming they do not prompt airlines to break any nondisclosure clauses of existing corporate agreements, Macromedia travel manager Yasuo Sonoda saw no problem with the arrangements. "I'm indifferent because I've already been solicited by Expedia and Orbitz, and they do not fit our business model."

It remains to be seen whether and how the airlines provide their sales people with an incentive to sell Orbitz, which many said would be the only way such a program could work.

"If that alignment takes place, which will be demonstrated by some event, the proverbial line in the sand will be drawn," Schleien warned. "Then you're declaring sides and by doing so, you're also declaring loyalties and preferences and that you understand the expectations and implications with respect to your former partners. You cannot proceed without understanding there will be repercussions and you'd have to believe the airlines are imminently aware of those implications."

In other developments, Orbitz has decided it will not become an agency booking system. "We don't have a plan to go market Orbitz to travel agents," Katz said. "That's always an idea, but I'm not sure how good an idea it is for us. It may be a good idea for somebody else, but what I can tell you now is we don't have a plan to do that." Navigant International subsidiary Aqua Software Products, meanwhile, still has a partnership with Orbitz to access the site's inventory.

Meanwhile, Orbitz last week said it will provide negotiated discounts on Avis, Budget and Hertz to business customers. The company also enhanced its car rental display to provide more information.

Orbitz's shares on Dec. 18 opened at $26, but since have lingered at about $24.