In the spring, Orbitz
released a study that found airlines allegedly spend 37% less
distributing tickets through Orbitz than through Sabre travel
agencies, even without using the new, direct "supplier links." Does
the math behind the study hold up under scrutiny?
A: The study's conclusions are highly
questionable. Orbitz, which is staffed by smart people at the top,
should have known better than to publish those conclusions. They
put one over on the airlines, which, not surprisingly, probably
don't know any better.
The key difference between Orbitz's economics and those of
travel agencies is that Orbitz rebates about 20% of its GDS bonuses
to airlines.
In return for this rebate, the owning airlines have had to pay
for Orbitz's startup costs, subsidize its losses, buy those puppets
and even pay a commission to Orbitz, which Orbitz euphemistically
calls a transaction fee.
The fact that the GDS rebate is less than the commission alone
pretty much says it all. However, let us dig deeper.
The airlines' cost for an Orbitz ticket allegedly is $16.43.
This comprises $13.64 in Worldspan booking fees, minus a rebate of
$2.79 thereof plus Orbitz's own transaction fee (commission) of
$5.58.
According to the study, these are the airlines' only costs.
However, there obviously are additional expenses related to the
funding of Orbitz's startup costs and loss subsidies.
To deny these reminds me of the French government's statements
that Concorde operations turned a profit, even though the billions
in research, development and manufacturing were never taken into
account.
Orbitz conversely inflates the cost of distribution through
travel agencies.
It cites Sabre booking fees of $15.39 per ticket, based on an
alleged average fee of $4.96 per booking for 3.1 bookings per
ticket.
This overstates Sabre's fees per booking, and the 3.1 average
almost certainly overstates the number of bookings per reservation
for the point-to-point kind of ticket typically done on Orbitz.
In addition, the study alleges that airlines still pay an
average of 3% commissions to agencies.
Who gets such commissions? Not travel agencies handling simple
domestic tickets like Orbitz typically does.
In short, Orbitz is comparing apples to oranges and still is
coming up short.
After my last column on Orbitz, its general counsel, Gary
Doernhoefer, wrote a letter to the editor of Travel Weekly stating
that I did not understand Orbitz's business model.
Since I am again criticizing Orbitz's voodoo economics, I invite
rebuttal and offer the opportunity to stand corrected.
Mark Pestronk is a Fairfax, Va.-based attorney specializing
in travel law. He answers your questions in the TravelWeekly.com
Legal Ease forum. To contact Mark directly, e-mail him at [email protected].