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Ulterior E-motives: A Boon For The Consumer

(March 2000)

In January, several airlines reported a boost in their Internet sales. Southwest Airlines, for one, reported that more than 25% of its passenger revenue came via the Internet. Southwest officials are calling it a "milestone" in the airline's Internet bookings. Southwest officials stated the increase puts the airline on track to top $1 billion in Internet revenue this year. That compares with about $850 million and 19% of total revenue in 1999 and $336 million and 8% in 1998. Southwest, which began selling tickets over the Internet in 1996, offers Internet-only fares and double Rapid Rewards credit for on-line bookings. According to Internet web ratings, Southwest is believed to run the most popular airline website.

AirTran Airways reported that it booked 20% of its business on-line, up from only 5% the previous year. The airline said it expects to book over 50% of its business on-line in the next few years. Jetblue, the new start-up carrier out of New York's JFK, has already booked 20% of its sales on-line. Interestingly, they have only been booking on-line for 4 months.

The economics of web bookings is a no-brainer. On-line bookings streamline the process and offer huge financial savings for the airlines. For every on-line booking at an airline's website, the airline can save between ten and eighteen dollars in distribution costs. So, how are the other airlines doing? Not quite as well as Southwest and its low-cost counterparts. The big three, United , American , and Delta , are doing less than 10% of their bookings on-line. American, long considered the pioneer in Internet marketing, is only booking about 7% of its revenue on-line.

What’s going on? Clearly, the big airlines are finding themselves at a huge competitive disadvantage…again. Why are low-cost airlines beating them on-line? Clearly, the answer lies in how the airlines are selling their product. Southwest, AirTran, and Jetblue concentrate mainly on direct marketing through their websites. Furthermore, most of the start-ups and low-cost carriers have outsourced their website management to experienced high-tech and Internet-savvy developers. The larger, more established airlines have been doing most of their website maintenance in-house. Has this held them back? Yes.

To make up for the lack of bookings on their own websites, the majors have relied heavily upon third-party website vendors such as Travelocity, Expedia , and Preview Travel to distribute their product. In addition, the major airlines have also shifted a significant percentage of unsold tickets to Priceline and SkyAuction in hopes of filling empty seats. Furthermore, 27 airlines have joined in on an airline portal website to be launched later this spring, again in hopes of maximizing the Internet savings.

With Southwest's announcement, I am predicting a very competitive market in the coming year. We are already seeing airlines offering bonus miles and additional savings of 5%-10% off for booking on-line. However, I don't think we've really seen anything yet. With rising fuel costs, the airlines are looking at maximizing every penny. I think we are going to see even more and unprecedented savings and bonuses for on-line bookings in the coming months.

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