While Expedia’s decision last week to eliminate all phone-booking fees is likely to have an effect on rival online agencies, the longer-term effects may weigh greater on airlines that charge as much as $25 a ticket for phone reservations.
By becoming the first online agency to drop fees for making airline reservations by phone, Expedia may force Orbitz and Travelocity to follow suit, potentially shifting even more business away from airline call centers as well as from offline agencies, according to Henry Harteveldt of Forrester Research. (Priceline.com takes phone bookings only for published rates on hotels, car rentals, cruises and vacation packages and does not charge a fee.)
Orbitz and Travelocity matched Expedia’s decision earlier this year to cut online-booking fees for airline tickets, while Expedia also dropped change and cancellation fees on car rental, hotel and cruise bookings.
Expedia’s fee reductions helped boost transactions rapidly enough to narrow its year-over-year domestic revenue decline to 2% in the third quarter; revenue declined 6% in the second quarter.
Meanwhile, Wall Street analysts were already expecting Expedia’s fourth-quarter revenue to jump about 11% from a year earlier before the company cut its phone-reservation fees. Expedia's move is likely to stave off competition at least until the other OTAs follow, according to Citigroup analyst Mark Mahaney.
"We believe that large-scale, low-price/monetization business models build competitive moats," wrote Mahaney.
Mahaney kept his "buy" rating on Expedia in an Oct. 29 note to clients while having a "hold" rating on Orbitz.
While phone reservations account for just 10% of Expedia’s business, another potential jump in transactions may help offset the effects of this year’s elimination of fees, which had been a high-margin source of revenue, said Harteveldt.