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American to Orbitz: No More Flights For You

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The only time I pay attention to Chicago-based Orbitz (s OWW) is when I get their email touting ultra-low ticket prices to places I really don’t want to go. Today, however, I was paying attention to Orbitz for different reasons. On its earnings call with analysts to discuss its third quarter earnings, Orbitz executives said American Airlines (s AMR) is not going to be participating in Orbitz, starting Dec. 1. AA said that they will look to negotiate a better deal. Which means a smaller cut to Orbitz. The news ravaged Orbitz shares — down 18 percent so far for the day.

Now, if American Airlines gets its way, there’s a good chance other airlines are going to follow suit and start negotiating for better prices with all online travel agencies. Given that these OTAs are already working on razor-thin margins, their fiscal health could take turn for the worse pretty fast. Orbitz gets about 25 percent of its revenues from domestic sales, and with American representing about 14 percent of the U.S. market, the loss of AA would be felt deeply by Orbitz. J.P. Morgan, an investment bank, estimates about 3.5 percent decline in annual revenues.

In a research note, J.P. Morgan Airlines analyst, Jamie Baker, pointed out that “the loss of ticket sales from major distributors like Orbitz could be greater than the cost savings AA is hoping for.” In other words, if Orbitz plays hardball and decides to forego AA inventory and none of the other airlines follow, the company can breathe easy. However if the company re-negotiates with American, others are likely to follow and their revenues could slip 12.4 percent on an annual basis. This shake-up in the industry is likely to impact Expedia (s EXPE) and other online travel services as well, J.P. Morgan notes.

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4 Responses to “American to Orbitz: No More Flights For You”

  1. I don’t think you really understand the travel industry, specifically the role played by the various major GDS providers. Perhaps you should research this a little more before writing any more posts similar to this one.

    • KeepingITreal

      Wow, Allan, quite a harsh reply and, in fact, off point. Bailey’s comments are largely accurate and relate to the article. As I work for a major GDS, I’m not sure what your point is or how it relates here.

  2. Interesting news. Om, American Airlines was one of the founders of Orbitz. Somewhat ironically, if I recall correctly, Orbitz was started to preserve margin for major airlines by allowing them to create their own service that would compete against the major third party booking services. I don’t know if AA still owns any share of the company at this time.