Airlines Withdraw Internet Commissions

Northwest Airlines and KLM Royal Dutch Airlines said Wednesday that effective March 1st, they will no longer pay commissions on Internet ticket sales in the United States and Canada.

In response, the online travel company Travelocity (Nasdaq: TVLY) said that it would begin charging $10 service fees on tickets for Northwest Airlines and KLM.

“We are surprised that Northwest and KLM would put themselves at acompetitive disadvantage by forcing us to charge a service fee that we mustnow pass on to consumers,” said Travelocity president and chiefexecutive officer Terrell B. Jones.

The airlines had been paying Web travel sites a 5 percent commission, with $10 cap per ticket, reports said.

Jones pointed out that the direct competitors of Northwest and KLM are going to continue paying commissions for online ticket sales.

Betting on Orbitz?

Because Northwest is a partner in travel mega-site Orbitz,which is scheduled to be launched this summer by a consortium of most of the major airlines, analysts are saying that the move to cut online commissions may be part of an industrywide trend to change the structure of the online travel business.

Orbitz — which is backed by airline giants American, Continental, Delta, Northwest and United — has drawn much criticism even though it has yet to launch.

Whether the online air travel reservations site poses an anti-competitive threat to online travel sites and offline travel agents is being reviewed by the U.S. Department of Transportation and U.S. Department of Justice.

When asked to comment on Northwest’s decision to cut Internet travel commissions, Orbitz spokeswoman Carol Jouzaitis told reporters: “We’re affected just like any other online travel agency. We’re as dependent on commissions for our revenue as anybody else, and we’ll have to figure out a way to replace that revenue.”

Taking Stock

Travelocity’s stock price was driven down US$6.48 to $15.77 in early morning trading Thursday, following reports of downgrades by analysts at Legg Mason Wood Walker and CIBC World Markets, who were reacting to the news.

At Legg Mason, analysts downgraded Travelocity to market perform from buy,and also lowered their rating on competitor Expedia (Nasdaq: EXPE) to marketperform, saying they expect Expedia to match Travelocity’s move or stop booking Northwest tickets. Expedia was down $3.25 at $12.38.

“It is very likely, in our opinion, that all of the major airlines willeither eliminate online commissions in the coming weeks or that Northwestwill reinstate its commission,” Legg Mason analysts wrote in a researchnote. “We have no opinion as to which result is more likely.”

One of Two Ways

Added Legg Mason: “Online travel sites must institute fees to be financially viable if theyare not paid commissions. We expect fees to become commonin the near term. The question begs, however, whether customers will pay afee or go directly to an airline’s site.”

Both Travelocity and Expedia “have value” even if airline commissions wereto be scrapped, since they offer maps, packages and other value-addedservices to consumers, wrote Legg Mason. “We’d be buyers” of either stock atprices below $10 a share, the analysts wrote.

For its part, Travelocity said it is still “competitive” even with the $10 fee, notingthat brick-and-mortar travel agencies sometimes charge fees of $20 or more for each ticket.

1 Comment

  • It seems that eventually the airlines will cut commissions to travel agents as well. Thatis why they are concentrating on strengthening their own reservation systems, The travel agency business is predominately run by women and they feel that women will never take a strong stand against the major airlines corporations. Why Because we are the weaker sex. If this business was predominately run by men men would resist until their voice was heard and negotiation would begin. But we as women dont stick together as a whole therefore anything that is handed to us is eventually accepted. Service fees donot make up the loss. Why? The customer does not have to pay them.They merely call the airline and if the airline agent makes a mistake it can be reparable. But if a travel agent makes a mistake,

    the whole neighborhood knows about it. If the airlines do go down to no commissions to the travel agents I will get a job that is predominately run by males.

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