Analyst: Internet Sales Unprofitable

Airlines discovering they are losing more in average fares than they save in distribution

The U.S. airlines’ reliance on Internet bookings may end up costing them more in revenue than it saves them in distribution costs, an airline financial analyst said in a recent report.

“Unfortunately, the Internet is quickly moving from positive to negative status,” J.P. Morgan analyst Jamie Baker told investors. “We believe the industry is fast approaching the point where the pricing transparency inherent to the Internet will cost carriers more in lost average fare than it otherwise saves in distribution expense.”

Baker made the comments in a report in which he estimated U.S. airline Internet revenue likely surpassed 20% in the third quarter, which, he added, is “not necessarily a good thing.”

“Combined with a growing discount sector, the Internet is expected to significantly retard any improvement in industry pricing that would otherwise accompany a strong economy or a gradual relaxation of corporate travel restraint,” Baker said. “For anyone anticipating a return to the yield levels of 1999 and 2000, we would suggest you’ve underestimated the role of the Internet.”

Meanwhile, a New York Times article last week cited the success of the major airlines’ online travel agency, Orbitz, as compounding the beleagured airline industry’s biggest problem: falling revenue.

“By disseminating their Web fares so widely on Orbitz, the airlines have created another way to rachet fares even lower when they can least afford it,” the newspaper reported.

The Times quoted Edward P. Gilligan, president of American Express Global Corporate Services: “The airlines are shooting themselves in the foot. Web fares are so low that more business travelers want them, even with the restrictions. The airlines are cutting their fares by 50% or 60% to save 2% in distribution costs.”