American Airlines was allowed to cancel its contracts with Orbitz by a Chicago based judge 3 days ago.  Orbitz and AA have had a dispute going on for several months now.  American Airlines wants to supply a direct connection to travel agencies and travel agencies want to use global distribution systems such as SABRE and Travelport’s Worldspan.  American says that their direct connection is cheaper and faster.

Both travel agencies and airlines will be watching how this dispute plays out.  American has tried before to be a leader in air fares with big consequences.  They attempted to rationalize fares in the early 1990’s with disastrous results that lead to AA returning to fare structures like its competitors again.

If AA is successful, count on other airlines following its lead.  However, success isn’t just winning in a courtroom and denying fares to Orbitz.  Success comes from AA not suffering a revenue drop from pulling its fares from Orbitz.  It’s quite possible that consumers won’t notice that AA’s fares are missing on Orbitz and they’ll book with other airlines.  If AA can’t maintain its sales, it may be forced to work with Orbitz again. 

If American is able to maintain its revenue and execute this plan against other online travel agencies such as Expedia and Travelocity, we’ll likely see other airlines folllow in AA’s footsteps.  My own take is that this is a risky move for AA since air fares are largely a commodity in the marketplace that are bought on price primarily.  This may give other airlines an opportunity to game the situation and raise air fares and benefit more from those air fare increases than AA can.

In a move that certainly surprised me, Expedia decided to “de-preference” American in a show of support of Orbitz.  Expedia has adjusted its system to show AA at the end of list of available airlines and no longer will show its fares.  This move was done to support Orbitz and out of concern of what AA will do when its contract with AA comes to an end in several weeks. 

“American Airlines has shown it only intends to do business with travel agencies through a new model that is anti-consumer and anti-choice.

“We believe American Airlines’ proposed direct connect model will result in higher costs and reduced transparency for consumers, making it difficult to compare AA ticket prices and options with offerings by other airlines.

“American Airlines’ direct connect model is of questionable, if any, benefit to travelers, costly to build and maintain and would compromise travel agents’ ability to provide travelers with the best selection.”

That’s going to hurt AA but I also think that AA may engage Expedia legally to stop that behaviour in the near term while it concludes its fight with Orbitz.  There is a signal here:  Airlines aren’t the only ones who have figured out how to work together to sustain their business models.

I think that AA is throwing its weight around like it continues to be the big dog among airlines.  In actual fact, they are the #3 airline by revenues in the US and they are the least profitable of the legacy and SuperLegacy airlines.  This isn’t a position of strength particularly when you consider the pressure AA is feeling to improve its profitability.

Filed under: Airline News by ajax
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