Airlines Will Rule Online Ticket Sales

More and more airline tickets are being sold online. Eventually, the lion's share will be sold not by third-party sites like Travelocity and Expedia but by the airlines themselves.

The airline business carries high costs and low margins, and air carriers are always trying to save a buck -- usually at someone else's expense. While employees and passengers also have felt the sting of cost cuts (just try getting a meal on a flight that is less than two hours long these days), travel agents have suffered the cruelest blow.

Commission Cuts

From February 1995 to August 2001, travel agents saw airline ticket commissions plunge from a straight 10 percent to 5 percent with a US$20 per-ticket cap.

Online travel agents have faced similar stinginess. So far, only two major airlines have eliminated online commissions completely, but it is only a matter of time before online commissions become a thing of the past.

In March, Northwest Airlines said it would stop paying commissions for online ticket purchases. Travelocity retaliated by slapping a $10 fee on all Northwest tickets. Last week, the two came to an undisclosed accommodation and Travelocity agreed to remove the fee.

Southwest's Example

But Northwest was not the pioneer in eliminating commissions; it was following the lead of Southwest Airlines, which has never paid online commissions. Not coincidentally, Southwest is the only U.S. airline with 29 consecutive years of profitability under its belt. No other airline comes close to that record.

Southwest's profitability is due in large part to its mastery of cost control. It realized more quickly than other major airlines that it could make a bundle by booking tickets not just online, but also on its own Web site.

After cutting off Travelocity and the airline-owned Orbitz last year, Southwest now makes all online sales -- which last year accounted for 40 percent of total bookings -- through its own site.

Cost Savings

Why the focus on Internet sales over travel agents, online or offline? It is the cheapest known way for an airline to sell tickets, and carriers need to save every penny.

Southwest, for example, pays $6 to $8 for each ticket sold through a travel agency but just $1 for each ticket sold on its site. Discount carrier AirTran has said bookings on its site cost just 30 cents apiece, compared with $7 for bookings made through third-party sites.

Other airlines have been doing all they can to encourage customers to book on their sites, offering frequent-flyer bonuses; interactive seat selection; virtual check-in, including the ability to print boarding passes; and the ability to book award travel at reduced rates.

Those efforts are beginning to pay off. In January, Delta sold 545,000 tickets on its site, raking in $145 million in revenue. That figure represented the airline's best month since it began selling tickets online in 1996.

No Great Loss

Travel sites hate to lose market share to anyone, but in the case of airline tickets, they may be crying all the way to the bank. Sales of other travel products like hotels, cruises and vacation packages carry a much higher margin than airline tickets.

Travelocity still depends on air ticket sales for 38 percent of its revenue, but the balance is shifting. Revenue from airline ticket sales was up 31 percent in 2001 and down 9 percent year-over-year in the fourth quarter. Non-air revenue was up 71 percent for the year and up 15 percent in the fourth quarter.

Expedia said its revenue from non-air sales was up 185 percent in the fourth quarter, while commissioned sales were up 75 percent. The company said it expects just 15 percent growth in air sales in 2002, compared with a 125 percent increase in non-air revenue.

When it comes down to it, online sales of airline tickets are more trouble than they're worth to everyone but the airlines.