Airlines Take to the Internet to Compete with Priceline

Strategic Insights -

The nation's top airlines are launching a new Internet strategy to compete with Priceline.com and other travel portal sites. A consortium of airlines, including Northwest Airlines, is building a version of Priceline's ticket auction platform, called Hotwire.com. Travelers will be able to name their price for seats at the new site, while airlines will be able to unload seats at a lower cost than Priceline charges. The new auction site is expected to be launched this fall, preceded by Orbitz, the airlines' answer to Travelocity and Expedia.

Key Takeaways:

  • The airlines are launching a new Internet strategy to compete with Priceline.com and other travel portal sites, including Travelocity and Expedia.
  • The new strategy includes the creation of two new sites: Orbitz and Hotwire.com, which will allow travelers to name their price for seats and airlines to unload seats at a lower cost.
  • Northwest Airlines has invested millions of dollars in Orbitz and Hotwire.com, and will use these sites to sell seats without paying a commission to travel agents.
  • The airlines aim to sell more of their seats through distribution channels they control, and to cut their costs and boost revenue at the same time.
  • Airline operating margins are small, averaging around 5 percent, and the Internet strategy is intended to help the airlines increase revenue and cut costs.
  • Northwest has already slashed travel agent commissions to 5 percent, and selling tickets online costs an average of $6 per ticket, making it the cheapest way to move seats.

Statistics:

  • Online travel sales are currently less than 5 percent of the overall travel industry, but could double to $30 billion, or 10 percent of bookings, by 2003.
  • Airline operating margins are small, averaging around 5 percent.
  • Northwest Airlines has invested millions of dollars in Orbitz and Hotwire.com.
  • Priceline's stock plummeted 16 percent at one point on the news that the airlines were launching their own ticket auction sites.

Sources:

  • Saint Paul Pioneer Press (St. Paul, Minn.)
  • Bear Stearns analysts' report
  • Northwest Airlines' press release
  • Priceline.com's website