American to Orbitz: No More Flights For You

American-Airlines

The only time I pay attention to Chicago-based Orbitz 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 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 and other online travel services as well, J.P. Morgan notes.

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