Technology

Nightmare at 20,000 Feet

Will online sellers like Expedia, Travelocity, and Orbitz put an end to the outrageous premiums corporations pay for last-minute travel?
Esther SheinJune 15, 2001

Corporate travelers have many stories to share about the exorbitant premiums they’ve paid when making a reservation fewer than seven business days before departure. One example: Last June, a reporter for eCFO booked a round-trip flight from New York to Los Angeles — hardly wilderness outposts. The ticket was purchased three days before the departure date. With 21 days notice and a Saturday stay, such a ticket would have cost the customer around $400. The last-minute price? $2,100. As a bonus, the traveler was charged $4 to watch the in-flight movie.

Gayla O’Neal knows all about it. O’Neal, the travel coordinator at CEI Engineering Associates, says that the Bentonville, Arkansas-based company booked flights through the same local travel agency for years. There were, she says, few alternatives. But with the coming of the Internet, O’Neal recounts, “we started going to online travel sites to match what the agent was coming up with.” O’Neal was not pleased with what she found: “We discovered we weren’t getting quoted the lowest fares.”

So, almost two years ago, the 120-employee CEI signed on with a members-only Web site specializing in corporate travel. That site, iTravel, recently ceased operations and has since transferred its customers to a traditional travel agency that has an online presence. Even after the closure of iTravel, however, O’Neal says she’s sticking with virtual booking of airline tickets. Before the advent of the Internet and Web travel sites, CEI typically paid about $1,200 for a ticket purchased within seven days of travel. “Now,” notes O’Neal, “the average price for a last-minute ticket is around $450, depending on where you’re going.”

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Where many corporate managers are going these days is into cyberspace. Web-enabled purchasing of airline tickets — once seen strictly as a consumer pursuit — is now beginning to attract the attention of corporate buyers. Currently, only about 6 percent of all business travel plans are arranged over the Net. But research firm Jupiter Communications predicts the figure will jump to 9 percent next year. By 2005, Jupiter analysts believe fully a quarter of all company travel will be booked online.

Jam Figures

This blossoming corporate interest in virtual trip management is not surprising. As company earnings shrivel, CFOs have issued department heads strict marching orders: Slash T&E budgets. Mostly, the slashing will come from policies that require employees to purchase tickets from authorized vendors. Web-enabled booking engines make it a whole lot easier for employees to follow — and for employers to oversee — such policies. In fact, Forrester Research predicts that by 2004, corporate travel policies will be the driving force behind 77 percent of all business travel booked online.

In addition, online agencies offer some appealing perks — things like volume discounts and round-the-clock service. “The nice thing about working with an online agency is they’re all built around technology, and using technology to its fullest advantage,” notes Henry Harteveldt, a senior analyst at Forrester. “They’ll be pushing the technology envelope more than an offline agency ever will because it’s their core differentiator.”

Part of that envelope pushing involves making sizable investments in customer relationship software. These programs enable travel site operators to create detailed client profiles, making it easier for them to tailor services for specific users. Some online bookers, such as companytrip.com, notify individual corporate clients if a cheaper fare for a flight becomes available. “These are things that, typically, a travel agent wouldn’t do for you,” asserts Lorraine Sileo, an analyst at PhoCusWright, a research and strategy company for the online travel industry. And why not? “Because,” she says, “it’s time- consuming and wouldn’t be profitable for them.”

During the past few years, the major carriers have made their unsold seats available to Web consolidators such as Lowestfare.com, Hotwire, and Priceline.com, as well as to travel sites such as Travelocity and Expedia. But many of the airlines prohibit consolidators from selling these cut-rate tickets to anyone other than leisure travelers. Says Harteveldt: “These seats are not being sold to the business traveler, because that’s the airlines’ bread and butter.”

If the economy continues to slide, however, airline heads could find themselves in a jam. The number of passengers on domestic flights dropped in February — the first nonstrike-related decrease in the United States in eight years. Furthermore, some airlines are already witnessing a decline in last-minute bookings by corporate travelers. Officials at US Airways, for one, reportedly noted that the “decline in close-in business bookings” was one reason the airline lost more money in the first quarter than analysts had predicted.

With shrinking corporate T&E budgets, and with improvements in virtual conferencing, the major carriers may have little choice but to offer reduced fares on last-minute business bookings. In addition, the five largest U.S. airlines (United, American, Delta, Northwest, and Continental) have launched a consortium Web site of their own, dubbed Orbitz. Whether Orbitz caters to business travelers remains to be seen.

Ticket Masters

In the meantime, consumer-oriented travel sites continue to expand their corporate offerings. Last winter, industry giant Expedia rolled out a “Business Tools” tab on its home page. The section has two new services. “Travel Arranger” allows small businesses without a travel department to delegate shopping for a flight, hotel, and rental car to a designated worker. “Repeat a Trip” targets corporate travelers who take the same business trip on a regular basis. “Rather than going through a full search each time you need to rebook,” explains Mitch Robinson, product manager at Expedia, “you can go back to a past My Books page and hit the Repeat Trip icon and update the date.”

Currently, about 30 percent of Expedia’s revenues come from business travelers. Managers at the site, which is majority owned by Microsoft, say they will unveil new features for corporate users this year. At the moment, however, the search engine for business travel returns matches only for direct flights with no advance-purchase restrictions. Robinson acknowledges that business fliers won’t find any super-savers on tickets for last-minute travel at Expedia. “I’d love to say we’re always the cheapest,” he grants, “but sometimes we’re not.”

Likewise, executives at rival Travelocity concede that business customers tend to use the site more for convenience than cost. The online operator, which is backed by computer reservation giant Sabre Holdings, recently rolled out its own business center. The service enables clients to manage T&E expenditures and book multiple trips for employees.

Still, Michael Stacy, senior vice president of consumer marketing at Travelocity, claims corporate customers can save some money on last-minute tickets at the site. “If there’s a lower fare [on a flight leaving] from a neighboring airport,” explains Stacy, “you’ll get notification of that. Is that something your travel agent would do? Some do, most don’t.”

One thing that most traditional travel agents will do: Levy membership or transaction fees on purchases. By contrast, many online sites do not tack on these extra charges. For smaller companies, transaction fees can add up.

This may help explain why the bulk of corporate spending at Expedia and Travelocity comes from small-to-midsize businesses. Many of those companies simply don’t have sufficient personnel to monitor T&E spending adequately. “Big corporations tend to have managed travel and follow travel policies,” says Travelocity’s Stacy. “Smaller companies don’t have the wherewithal to manage all the complexity of travel.”

Debbie Christian can attest to that. Christian, an executive assistant at RC Cement, books about 10 trips a month for 25 employees at the Bethlehem, Pennsylvania, manufacturer. More than a year ago, RC Cement switched from a travel agency to Travelocity. “We started using Travelocity because the travel company we were using was charging us a fee for issuing each ticket,” she explains.

After signing on with Travelocity, Christian set up a business travel page for the company using programs available on the site. That way, she says, all bills are charged to RC Cement’s corporate card. One feature Travelocity doesn’t currently offer — and one that Christian would use — is a report generator showing how much a corporate customer spends on airfares. Many other sites, including biztravel.com, MYOBTravel, and Yatra, as well as American Express, do provide reporting tools.

Nevertheless, Christian says that booking reservations at Travelocity has simplified her job. That’s a big plus, given that she has other responsibilities besides making travel arrangements. “For the amount of time I was spending on the phone with the local travel agent,” she explains, “it was easier for me to just go on the site and book trips myself.” Cheaper, too. “We’ve saved over $8,000 in processing fees,” Christian says.

Arrivals/Departures

If the Internet is proving to be a boon for buyers of travel services, it may turn out to be a calamity for the traditional sellers of those services. To date, the operators of old-line travel agencies have been hard pressed to fend off online upstarts. The numbers are startling, if not downright bleak. According to a report by Bear, Stearns, 1,800 offline travel agencies went out of business in 1999.

Expect the bust-up to continue. And while Net travel companies are headed for a nasty shakeout as well — Bear, Stearns predicts 80 percent will go poof by 2006 — such a consolidation will still leave around 200 sites in operation. Traditional travel agencies that don’t offer some virtual services could be headed for that great ticket counter in the sky.

Indeed, some corporate travel heads say virtual travel booking can be downright liberating. Take the case of National Envelope. A few years back, managers at the Lenexa, Kansas-based manufacturer switched from one land-based travel agency to another, believing the change would help the company save money. Executive assistant Lynda LeVan remembers the experience vividly. Grimacing, she says: “It was a complete disaster.”

The new agency, LeVan notes, made repeated mistakes. Sometimes a purchased ticket arrived after the flight departure date or got lost in delivery. Worse, service reps at the offending travel agency generally offered no explanation for the foul-ups. On top of that, executives at National Envelope quickly discovered that they weren’t saving any money using the real-world agency.

After a year, National Envelope ditched the agency, and LeVan began purchasing airline tickets online. Although the company hasn’t netted substantial savings by making flight reservations over the Net, LeVan says virtual booking provides greater financial oversight. “We can print out monthly reports that show us the lowest fare offered and what we chose and how much we’ve saved,” she says. LeVan estimates she’s cut the time she used to spend booking travel arrangements in half.

Purchasing E-tickets adds to the convenience. Electronic tickets don’t get lost in the mail, and travelers with virtual tickets often avoid long lines at check-in counters. Further, officials at American Airlines recently announced plans to impose a $10 surcharge on paper tickets. Executives at other airlines are reportedly considering following suit.

In fact, the only disadvantage of online travel booking, LeVan says, is making arrangements for events that are still a ways off. In those cases she prefers not to get ticketed immediately — particularly if dates for meetings might change. But online, she says, “you can only book if you’re willing to be ticketed right away.”

Given the red-hot competition in the virtual travel sector, the restrictions will likely be jettisoned. So, too, will the practice of not offering discounts on last-minute seats for business travelers. At CEI, for instance, O’Neal says the now-defunct iTravel was matching or beating any fare listed on rival Web sites. “Sometimes it was only by $2,” she claims. “But sometimes it was by $40.”

Chump change? Not for companies that book a lot of flights. O’Neal notes that iTravel also had 14 types of reports that recorded every travel purchase CEI made. All she had to do to access the info was bring up a personalized page on the site, then type in her company code.

Such easy access to detailed data is a real departure. “The travel agency I was previously using,” says O’Neal bluntly, “couldn’t pull up more than a month’s worth of historical information.” For travel managers, assessing trends on 30 days of data hardly qualifies as rigorous oversight. It does, however, sound a whole lot like flying blind.

Esther Shein is a freelance writer specializing in finance and technology.

Bucket Seats

As a rule, buying tickets for flights at the last minute is a real bad business decision. Sometimes those tickets are five times the cost of advance-purchase fares. Of course, business travelers usually have little choice but to pony up. “If you have to go to a meeting to close a $1 million deal,” says Lorraine Sileo, an analyst at PhoCusWright, a research firm for the online travel industry, “you’re not going to renege because the airfare is tripled.”

It seems pretty likely that airline executives know this. They also know where their bread is buttered. A $199 special for consumers may increase load factors, but airlines really mop up on higher-priced coach sections, or buckets. Mostly, those buckets are filled with business travelers — travelers who will pay almost any price to get to a destination. “History tells [the airlines] typically how many seats they can sell at certain times,” says Diana Cronan, spokeswoman for the Air Transport Association, the trade association for the 12 major U.S. airlines. “There is a demand for that last-minute ticket, so the value is higher.”

Cronan also points out that by holding tickets until a day or two before a flight, the airlines are taking a chance that they’ll get stuck with empty seats. In addition, some industry observers note that last-minute tickets are usually changeable and refundable, while advance-purchase tickets typically are not. The implication here: Business travelers pay for flexibility.

Not everyone buys these arguments, though. The sky-high fares that airlines charge for walkup tickets have some critics and business travel groups howling. A few even claim that the charging of outrageous sums for last-minute airline tickets constitutes price gouging.

Actually, it doesn’t. According to federal law, gouging applies only to unfair pricing practices that occur during a state of emergency. Indeed, if airline executives are guilty of anything, it’s knowing their market. The computer reservation system used by major carriers gives each airline almost instantaneous information about what competitors are charging on routes. Thus, fares charged by airlines — particularly last-minute fares — tend to move in lockstep.

That’s not likely to change anytime soon. Industry consolidation during the past 15 years has put the remaining airline operators in the left seat. “They’re engaging in [these pricing practices] because they can,” asserts Kevin Mitchell, chairman of the Business Travel Coalition, a group representing major corporations. Mitchell points out that in some locales a single carrier owns a 60 percent market share. “That enables them to charge fares that are above competitive levels,” he insists.

A white paper recently released by the Department of Transportation appears to support this contention. According to the study, prices based on demand characteristics such as last-minute departures, rather than on the cost of providing the product, are “characteristic of a market in which the seller has a degree of market power.” Adds Mitchell: “If you don’t have new low-fare entrants, you won’t have any chance of fixing the market power problem.”

Reward programs only add to the clout wielded by major carriers, observers say. “Frequent-flier programs are like heroin,” notes Henry Harteveldt, an analyst at Forrester Research. “Smaller airlines would probably see greater business, but people [are addicted] to the benefits of major frequent-flier programs.”

Industry watchers remain divided on whether Orbitz, the online travel reservation site launched by the major airlines, will drive ticket prices down. In its beta incarnation, Orbitz didn’t seem geared toward business travelers searching for bargains on last-minute flights. eCFO searched the site to come up with close-in booking for a trip from New York to LA. Orbitz did turn up a $465 ticket — but it’s doubtful many business travelers will be jumping on that fare. According to the itinerary, the return trip from LA to New York takes 13 hours. Dogsleds go faster.

Of course, some business travelers say they wouldn’t mind paying such steep prices for last-minute tickets — if they just got a little better service. “What an airline delivers today to an economy class traveler who is paying a business fare is nothing short of embarrassing,” insists Harteveldt. “The in-flight experience is miserable, and you’ve got indifferent flight attendants, food served in Styrofoam boxes, and cramped seating.” Ah, the friendly skies. —E.S.