InformationWeek

The airline industry is in the midst of an overhaul-and the Internet has a lot to do with it. Doing business in the travel industry ultimately comes down to recording a reservation number in an airline or hotel-inventory system. It makes little difference to a traveler if that number is recorded on paper in a file cabinet or electronically in a database, as long as the airplane seat or hotel room is available.

But it does make a difference to the travel industry. The Internet, information technology, and E-commerce tools can substantially cut costs, speed transactions, and improve efficiencies. That's why travel has been a hotbed for experiments in online distribution, electronic marketplaces, and direct connections with business buyers. "Travel is an information-based business, and the Internet is a perfect medium to compare and price trips," says William Hannigan, chairman, president, and CEO of Sabre Holdings Corp., which runs the world's largest airline computer reservation system.

The Internet is changing all the rules in the airline business, where distribution has traditionally meant paying travel agents 10% to talk to customers and book their orders. Individual consumers and business-to-business buyers now can enter their own orders-and the savings add up quickly. For instance, British Airways plc has virtually eliminated tickets for one business customer, letting passengers book seats online, then pick up boarding passes and pay for their seats (see story).

There's more to the travel industry's transformation. Airlines are moving aggressively to implement technologies that provide customers with more capabilities and better customer service. Some are starting to let customers book and change tickets via wireless devices, while others are providing high-speed Internet access in passenger lounges.

As airlines find new ways to deal directly with customers, travel agencies and agents are adapting to a new environment in which customers can bypass them, check ticket prices, and order tickets via dozens of Web sites. Some agencies are evolving into E-commerce and technology consultants; other online agencies are becoming application service providers and offering customer-relationship management applications to brick-and-mortar travel agency partners and affiliates (see story).

The travel industry has been among the leaders in providing Web-based services. A recent InformationWeek E-business survey shows that widespread use of E-business by retail and travel companies jumped from 40% in December to two-thirds today. Among the initiatives have been experiments with marketplaces and auctions. For example, American Airlines Inc. has been a leader in using marketplaces for purchasing, and Sabre is teaming with Ariba Inc. to build a marketplace for airlines and travel agencies to buy goods.

But the real action has been on Priceline.com Inc., which sold 3.2 million airline tickets between Jan. 1, 1999, and March 31, 2000, making it one of the largest travel agencies in the world. Priceline.com lets consumers make below-market offers for airline tickets, which may be accepted or rejected. "We're giving the airline revenue-management systems a new mechanism to capture incremental traffic that's fallen through the regular distribution channels," says a Priceline.com spokesman.

Airlines allow Priceline.com to query their inventory in a private section of an airline ticket computer reservation system, where the system searches for a fare below that offered by a customer. If it finds one, "we buy the seat, resell it, and keep the spread," the spokesman says. When it first started, Priceline.com subsidized the price of airline tickets to attract customers. Its margin now averages 15%-all from selling tickets for airline seats that otherwise might have gone empty.

That's important for airlines, since airplane tickets are just as perishable as a head of lettuce-a ticket is worthless once a plane takes off. And 600,000 airline seats go empty each day.

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