104-Punch and Counterpunch in the Online Airline Industry
Orbitz Worldwide, the online travel booking agency, competes with the likes of Travelocity and Expedia. Of the three, Orbitz is the most dependent on airline booking fee revenue for its profits. Travelocity and Expedia both reduced fees for their booking of airline tickets before Orbitz. Orbitz held on to protect its margins. Orbitz began losing market share and reversed course. It announced that it would waive booking fees on most flights booked through May. This brings its pricing in line with its competition.
Then Orbitz did the industry one better. In an effort to grab market share and punish its discounting competition, the company announced a new promotion called “Dare to Compare.” This program brings with it a reduction in service fees on hotel rooms booked on its web site through July 15th. Orbitz is hoping to gain enough market share to offset the reduction in its fees.
Normally, an industry with only three major players is able to protect its pricing structure. Usually, the three players decide there is little to gain in price competition with one another. Apparently, this industry thinks differently. Orbitz most recent reporting found revenue off by 14%, as travelers cut back in the tough economy.
These industry discounts are a waste of margin. The entire industry is likely to copy any leading competitor’s price discounts. After all, the industry lives with the airline industry, where minute-by-minute price matching has become an iron-clad rule. These discounts don’t mean much to consumers so they are unlikely to energize demand.
Orbitz also took another step recently that is far more promising. It launched a price-assurance program that automatically refunds customers when a hotel rate below the rate they paid appears on its web site and is purchased by another customer. This innovation improves the company’s Reliability in customer eyes (see the Perspective, “Discovering Hidden Pricing Power” on StrategyStreet.com).
For many ideas to improve market share and profits by a judicious use of pricing, see www.StrategyStreet.com/Improve/Pricing/Brainstorming. Then follow the choices
The online travel agency business has changed a great deal since 2009. It is no longer as competitive as it once was. Over the years, Expedia has purchased both Orbitz and Travelocity. In 2021 the combination of Expedia and Booking (formerly Priceline) controlled a large percentage of the market.
The sources of revenue have also changed drastically. Airlines are no longer so important. They generated only 3% of Expedia’s revenues in 2021. 75% of its revenue came from lodging. Expedia typically charges commissions of 15 to 30% of the revenues it produces. About 53% of this revenue comes using a merchant model where Expedia purchases hotel rooms in bulk and then resells them to the market. The other 47% comes from an agency model, where Expedia does not own the hotel rooms but simply brings traffic to the hotel company in return for its commissions.
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