Travel Paves Path to Online Profits

November 7, 1996

Wendy Brown wants to plan a summer vacation or a Friday night out for you -- but she wants your data and a small fee in return. Brown runs America Online Inc.'s burgeoning travel business. Since May, AOL has sold $12 million in airline tickets -- each of which generates a commission of roughly 10 percent -- to many of its almost 7 million subscribers. But her fast-growing business faces sharp competition from nume

Brown runs America Online Inc.'s burgeoning travel business. Since May, AOL has sold $12 million in airline tickets -- each of which generates a commission of roughly 10 percent -- to many of its almost 7 million subscribers. Neither Brown nor Herst would provide any details on projections for future revenue.

Wendy Brown wants to plan a summer vacation or a Friday night out for you -- but she wants your data and a small fee in return.

But her fast-growing business faces sharp competition from numerous other companies operating on the World Wide Web -- including software giant Microsoft Corp., which debuted its travel site Oct. 22 -- and some sharp criticism over plans to exploit data about travelers' spending habits.

By 2000, these online businesses could grab a $3 billion slice of the $360 billion spent on travel each year in the United States for work and pleasure and set the stage for a wholesale transformation of the travel business. By 2000, online travel and ticketing services will make more money than any other online sector, according to a recent study by Jupiter Communications, New York.

"There are huge dollars to be gained by hooking up people who arrive [at vacation destinations] and people who sell .... You've got a recipe for changing the industry," said Brown.

Online travel purchases will grow from about $600 million annually now to $3 billion by 2000, according to the Jupiter study, "The 1996 Home Shopping Report." "We will be able to capture a healthy slice of that pie," said Microsoft's Josh Herst. "We think it's a big opportunity."

By 2000, travel purchases over the Internet and online services will make up nearly 50 percent of online revenue, which Jupiter estimates will be $7 billion. For 1996, travel has twice the revenue as the next largest category -- entertainment -- which earned only $332 million to travel's $600 million, the study said.

The online travel industry's revenue is almost completely earned from commissions on airline tickets purchased via online sites, said Ken Orton, president of Preview Travel Inc., a 150-person travel company based in San Francisco. Total U.S. airline ticket sales in 1995 were roughly $70 billion.

There's much room for expansion if the online industry can grab a larger share of the airline ticketing business and begin to sell tickets for tours and ocean cruises, said Brown.

Other infotech companies, such as IBM Corp., Armonk, N.Y., and Electronic Data Systems Corp., Plano, Texas, stand to gain as the travel industry upgrades and expands its computerized reservation systems. For example, IBM has identified travel-related infotech as one of its 12 areas for expansion, while EDS is upgrading the networks operated by its subsidiary, System One Amadeus, based in Houston.

However, the online industry has a critical advantage -- subscribers. "You can't make money in this if you don't have [subscribers'] eyeballs" staring at your computerized travel service, said Brown. For example, the online travel business will gain an increasing share of its revenue from advertising and carefully targeted online marketing to its subscribers, said Brown.

This change may come as early as 1998, Preview's Orton said. Preview now "communicates with [its 500,000 customers] based on what their interests are," he said. Preview is partly owned by AOL, which hosts two of its four online travel sites. The company has two additional sites on the Web and produces travel shows for television.

According to Brown, AOL could help its subscribers buy air tickets to Florida, select a hotel, rent a car, book a fly-fishing trip, pick restaurants, find some blues music and choose a local baby sitter, she said. It could even help subscribers plan their weekend entertainment, whether it consists of a trip to another city or an evening on the town, she said.

To accomplish this, AOL is trying to beef up its data about cities' entertainment opportunities, and is trying to expand its advertising. For example, those restaurants, music halls and baby-sitting businesses will buy online advertisements on AOL and pay for focused direct marketing to likely customers, such as fly-fishing enthusiasts, she said.

"I control that relationship" between advertisers and subscribers, giving AOL a central role in the travel business, she said.

Moreover, AOL may use its networking clout to identify new customers for an airline's valuable frequent flier program and to help fill the 25 percent of airline seats and hotel beds that remain empty, said Brown. "If I can nudge one customer to them, that's going to be worth big bucks."

Microsoft also wants to use its travel data. Its new Expedia service will gradually collect information, building profiles of customer spending that will let Microsoft market additional services directly to those customers, said Herst, product manager for Expedia at Microsoft. "If you like to travel every winter to someplace warm, we might let you know about a trip to the Bahamas," he said.

However, many people are uncomfortable giving out data about themselves unless they know exactly how it is being used, said Lori Fena, executive director of the San Francisco-based Electronic Frontier Foundation. To be fair to customers, every site should make clear what data it is collecting, why it is being collected and who else will see the information, she said.

To allay privacy concerns and also guard its own data, Preview won't sell data on the travel habits of its customers, said Orton. "We are not going to sell it outside the company, but we will definitely use it."

Challenges facing the online industry include upgrading the tangled networks of decades-old airline computer reservation systems, said Brown.

Also, online companies must grapple with the confusing pricing systems adopted by the airlines, she said. Airline ticket prices change constantly as the airlines' computers juggle supply and demand -- making the task of selecting an air ticket confusing for a consumer, she said. Stabilizing prices is "one of the great challenges we have in the travel industry," she said.

Microsoft's arrival in the business will sharpen competition faced by smaller players, said Orton. However, Microsoft's travel business will boost the online travel business in the near-term, he said. "They will educate consumers about a better way to buy travel services," he said.

Also, business-related travel will change slower than personal travel, said Orton. Large infotech companies and their many allied travel agencies can provide travel packages to corporate travel officers, while executives collecting frequent-flier miles will use the airlines' proprietary Web pages, said Brown.

To win business travel revenue, Microsoft has formed an alliance with American Express. The service, to be rolled out in the first half of 1997, will help corporate travel officers track expenses and find available business discounts. Corporations in the United States spend about $145 billion a year on travel, according to Microsoft.

Traveling the World Wide Web: Selected Sites

Netscape Travel: www.netscape.com/escapes/travel/index.html

Sabre Interactive's Travelocity: www.travelocity.com

Microsoft's Expedia: www.expedia.com

Fodor's: www.fodors.com

Let's Go Travel: www.letsgo.com

Lonely Planet: www.lonelyplanet.com

Rough Guides: www.roughguides.com

American Airlines: www.americanair.com

Continental: www.flycontinental.com

Delta Airlines: www.delta-air.com

Southwest Airlines: www.iflyswa.com