The Orbitz Blitz

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Hurricane season is back, and not just in the tropics. as business travel slumps with the economy, airlines are slashing fares to get more vacationers on board. One of the few industry bright spots is online travel. Consumers spend more than $1 billion a month at travel sites, a third of all the money spent online, according to research firm Nielsen/NetRatings. Top sites Expedia and Travelocity reported their first operating profits this spring. Even beleaguered Priceline says it's finally in the black.

Now the big boys want in. In June, American, United, Continental, Delta and Northwest launched Orbitz, a site that promises the lowest fares on the Web. Combined, the five airlines book more than 75% of domestic traffic. Just a month after its debut, Orbitz is already the sixth most popular travel site on the Web. Nearly 4 million people visited the site in June.

This smooth takeoff and ascent could be followed by turbulence. Orbitz is stirring up a storm by cutting deals it makes sure no one can beat. "Anticompetitive!" its rivals are screaming, and somebody is listening. Two dozen state attorneys general have voiced concerns that the site may engage in price fixing, stifle competition and put others out of business. The Department of Justice is investigating.

Orbitz picked a great time to take flight. Travel sites, once bastions of do-it-yourselfers willing to spend hours ferreting out a bargain, have finally become easy enough for the rest of us to use. And unlike many other Web ventures, selling tickets online makes sense. With pricing and availability constantly changing, instant updates are essential. What's more, airlines save up to $20 a ticket in commissions, fees and mailing costs. "You're not shipping 40 lbs. of dog food across the country," says Internet analyst Henry Harteveldt of Forrester Research.

Most people who shop online still buy off-line--Web sales are just 5% of the $217 billion domestic-travel market--but now sites are getting enough paying customers to turn a profit. Southwest Airlines sells more than a third of its tickets on southwest.com and rewards Web shoppers with double miles. With airlines beginning to draw customers to their own sites, online agents like Expedia are selling more vacation packages and cruises with fat profit margins of 15% to 20%--a far cry from the $10 commissions that airlines pay.

Unless the DOJ clips Orbitz's wings, the site is likely to put the squeeze on independent agents like Expedia. "Orbitz isn't going to put Travelocity or Expedia out of business, but it's going to stir up the pot," says Harteveldt, who expects Web travel sales to top $29 billion by 2004.

Its rivals say Orbitz is a Trojan horse that will initially offer low prices, pound competitors out of business and then raise prices. They cite the "most-favored-nation" clause, which requires member airlines to offer Orbitz every low fare they negotiate with others. Expedia vice president Eric Blachford says that clause gives Orbitz an unfair advantage. CEO Jeffrey Katz insists that Orbitz, which is a separate corporation, won those stipulations fair and square through arm's-length negotiations and technology that reduces booking costs. "Orbitz is operating completely within the law," he says.

Southwest has sued Orbitz for allegedly publishing inaccurate fare and flight data that make the nation's most successful discount airline look expensive and inconvenient. Katz denies the charges. "Orbitz should not exist at all," says Debby Ackerman, general counsel for Southwest.

But it does exist, and for the near term, that signals more intense competition and better prices for Web flyers.