Orbitz shares tank on threat from American

By Reuters
Posted Nov. 4, 2010 at 2:21 p.m.

Shares of online travel agency Orbitz Worldwide Inc. tumbled 18 percent on news that American Airlines has threatened to stop selling tickets on Orbitz sites.

Orbitz said American, the fourth-largest U.S. airline, was threatening to pull its content if the travel agency did not use a direct link to the carrier’s inventory instead of a global distribution service, which negotiates prices.

The threat overshadowed Orbitz’s report of higher-than-expected quarterly profit. Orbitz shares were down $1.27 to $5.55 in afternoon trading on the New York Stock Exchange.

“Given Orbitz has significantly higher exposure to air and domestic bookings than the other OTAs (online travel agencies), it will face the biggest headwind from this change, followed by Expedia, with Priceline impacted the least,” Michael Olson, senior analyst at Piper Jaffray, said in a research note.

American, a unit of AMR Corp, said it would stop selling tickets on Orbitz starting Dec. 1 if Orbitz did not use a direct link to the airline’s inventory.

The move would end American’s contract with Orbitz three years early and erode revenue the company earns from air travel bookings.

Orbitz declined to say how much it earns from American’s bookings. Airline bookings represent about 38 percent of Orbitz’s business.

“We believe the current GDS model is the right solution for consumers to ensure that travel agents have access to full content and consumers are able to get access to all of an airline’s publicly available fares,” Orbitz Chief Executive Barney Harford told Reuters in an interview. He said Orbitz was still negotiating with American.

“This is very much a fight that American is taking to the industry,” Harford said, noting that airlines renegotiate terms with third-party bookers every few years.

American has long argued that it needs to cut its distribution costs and says the GDS model prevents it from offering the lowest possible fares. Rival Southwest Airlines has relatively low distribution costs because it avoids selling tickets through online travel agencies.

“It is important that our distribution channels be cost-effective and efficient,” said AMR spokeswoman Mary Sanderson.

“Customers benefit when inefficiencies in the travel distribution marketplace are addressed,” she said.

Orbitz, which owns travel sites Orbitz.com and Cheaptickets.com, said third-quarter net profit more than doubled to $15.3 million, or 15 cents a share, from $7.0 million, or 8 cents a share, a year earlier.

Analysts on average were expecting 9 cents a share, according to Thomson Reuters I/B/E/S.

The company said revenue rose 4 percent to $194.5 million, below forecasts for $196.1 million.

Orbitz said it expected a 1 percent to 2 percent increase in revenue for the full year.

The travel industry has been battered in recent years by an economic downturn that drained demand for airline tickets and hotel rooms.

“Last year was certainly a weak year for travel demand, and I think we’ve certainly seen business travel come back over the course of 2010,” Harford said.

The company’s third-quarter gross bookings rose 12 percent to $2.81 billion, helped by higher air fares and increased transaction volume, Orbitz said in a statement.

The results follow news last week of a strong third quarter at rival Expedia Inc and suggest that travel demand is picking up after the recent recession.

Expedia, the largest online travel agency, said last week that the total value of its bookings rose 17 percent in the third quarter.

The other publicly traded online travel agency, Priceline.com Inc, is due to report earnings on Monday.

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One comment:

  1. PJL Nov. 4, 2010 at 8:08 pm

    Frankly the rise and proliferance of companies like Orbitz and Expedia are because of the arrogance of the carriers (and hotel chains) who would’t discount their prices. Expedia in particular (only because I’ve used them on and off) – is easy to work with (and actually has a foreign call center that is VERY competent).

    I see the Southwest model side of this – and I also see what Orbitz and Expedia have done for the consumer in bringing us options and better prices (e.g. combining multiple airline carriers in one trip to save money). American wouldn’t do it on their own.