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Can These Two Companies Fly Higher?

The CEOs of Travelocity.com and Expedia face off on questions about commissions, travel during the downturn, and the looming threat of Orbitz.

It’s just common sense. When an economic downturn hits, even the most gainfully employed become edgy. They stop browsing new-car lots, they recycle last year’s swimsuit, and they swap dream vacations for weekend road trips to the shore.

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And then there are the not-so-gainful employers. According to a recent travel report, 60% of U.S. companies are responding to the slowdown by cutting corporate-travel costs.

Still, even as travelers’ purse strings tighten this spring and summer, the two biggest online travel agencies claim not to be worried: They have cash in the bank, millions of customers, and plans to be profitable within a year or less. But how comfortable should Travelocity.com and Expedia really be right now, especially with the airline-endorsed Orbitz launching soon? How solid should they feel in this fluctuating market? And what are they doing to differentiate their services and to entice Americans to ditch their travel agents once and for all?

We posed those questions and more to Rich Barton, CEO of Expedia, and Terry Jones, CEO of Travelocity, in separate interviews. Compare and contrast their responses below, and decide for yourself whether these dotcoms have what it takes to survive.

More than 90% of all travelers still book trips offline. What can offline agents do that you’ll never be able to do?

Barton: A travel agent can know me extremely well, can know a destination extremely well, and can handle a tremendous amount of ad hoc complexity that a PC cannot. We can offer great service over the telephone, but that service ultimately supports a rich Internet-based travel experience.

Jones: Most travelers prefer to book travel the same way they shop — online sometimes and offline others. Still, some people will always want to trade stocks with a broker who can offer trusted advice. At the same time, my kids will never purchase airline tickets offline. That’s who they are.

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What do you wish you could do online now? What compelling Internet innovation is still three to five years away?

Barton: There’s already a lot of things we can do that offline agents can’t. PCs can synthesize price changes in millions of markets every day and can track those prices the way an individual customer wants them tracked. Human agents can’t take the time to do that. We’re investing in software that will monitor particular markets and customers’ past purchasing behaviors, and then will make smart suggestions at the appropriate time. Even the best offline agents are limited by their bandwidth, which is always finite.

Jones: Right now, the 3-D model at Landsend.com is neat, but it’s not as satisfying as trying on clothes yourself. As more people get broadband Internet access, however, online travel shopping will offer more services than an offline agent ever could. Travel agents can give you brochures; we’ll be able to engage you in interactive videos.

Within a year or two of your site launches, the airlines cut your commissions. Today, your commissions are often a fraction of what offline agencies get for booking the same ticket. Make the case that you deserve a bigger commission than offline agencies do, not a smaller one.

Barton: Many people browse our site and then visit an airline site or an offline agent to buy a ticket. Don’t you suppose the customers’ purchasing decisions are influenced by what they see on Expedia? We sold $1.8 billion in travel in 2000, but we influenced at least 10 times that. There is no question that more people looked at Expedia and then booked through American Airlines’s 800-number than browsed with an offline travel agent and then called the airline. Our influence is not being monetized today.

Still, it doesn’t serve our interest to receive a greater commission than offline agencies. Expedia is an incredibly efficient distribution channel, and we want vendors to push more business through our site.

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Jones: What do offline agents do? They write tickets. Okay, we do that. They get a higher commission because they explain the product well, sell a lot of it, and move share to one airline’s product. Okay, we do that too.

There’s an emerging consensus in the industry that high-revenue business travelers stick with the online booking engines run by particular airlines and hotel vendors. If that’s the case, then who is your customer?

Barton: Initially, I would have described our customers as adventurous, control-oriented people who resembled customers of Charles Schwab. But now the appeal has widened so much that it’s difficult to distinguish our travelers from the overall base. Fifty-nine million Americans used the Internet to research travel last year — that’s fast approaching the number of people who actually took trips.

Jones: We serve leisure travelers who take approximately two and a half trips each year. They make between $60,000 and $70,000 each year, and they’re concerned about value.

What have you learned in the past six months?

Barton: Discounted vacation packages have been a tough sell online — most likely because they don’t offer any advantage from a usability perspective. We launched a product recently that we think really changes the game. The components are totally flexible, so you can build the air, car, and hotel pieces of the package one bit at a time. We’re in a better position now to offer a customer fries and a Coke with that burger; we can do the Happy Meal thing. So far, the results have exceeded our expectations.

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Jones: We experienced nearly 30% growth in our advertising from the third to the fourth quarter last year, and we expect similar growth this year. Vendors are beginning to understand that point-of-sale advertising does work on the Web. Convention bureaus spend money on print, TV, radio, and brochure advertising. But most people don’t look for travel advice in any of those media today; they turn to the Web. Our targeting capability is 100 times better than any magazine, and we’re doing a better job of integrating those offerings for advertisers.

What do you still not know how to do that frustrates you?

Barton: I want to use the Internet to reach every travel supplier on Earth. There are probably 20 million of them. The question is, How do we bring those suppliers to our marketplace in an effective, personalized manner? That solution is still a long way off.

Jones: Surveys show that privacy and security still play heavily into the decision consumers make not to shop online. Considering the safety of Web shopping today, that statistic has become one of those great mysteries of life for me.

Also, I saw how much money my wife and daughter spent before departing on an Italian vacation recently. I’d like Travelocity to get a piece of that ancillary market.

Is a weakening economy good or bad for online agencies?

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Barton: On the negative side, people certainly spend less on travel if they have less money — or even if they think that they have less money. However, some people might argue that during a recession, people want more diversions from the gloom and doom. On the positive side, we’re doing a lot of wholesaling on our own now, taking empty seats or rooms and selling them at a low price that’s exclusive to our site. We’re more likely to have more of those offerings in an economy that is going sour.

Jones: We’re still at a 4.3% unemployment rate, and the people who are working will still go on vacation. Maybe the people who went to Paris last year will go to Vegas this year, and the people who went to Vegas will drive to the lake. But if people are looking for bargains, they’re going to come to us.

What’s your biggest competitive threat right now? Airlines that are trying to drop commissions to zero? Orbitz, the long-delayed online booking engine being launched by the airlines?

Barton: The greatest threats are always the ones that don’t exist yet, and Orbitz falls into that category. We think about those threats quite a bit. But because we’re not just in the business of booking airline tickets and because we have a pretty good track record, we feel that we’re prepared to withstand those threats. The government can and will do a good job keeping the playing field level so that we’re all well equipped to compete.

Jones: I hope that the Internet remains a popular shopping channel. As the irrational dotcom exuberance wore off, so many good things about online shopping were suddenly labeled as “bad.” Our competition is the telephone. Still, we’re going to be profitable in the second quarter of this year. So what does that say about our upside potential? It says that the potential is huge. We’re running an exceptionally large store that is full of shoppers.