World Class Faculty & Research / September 13, 2016

Southwest Fights Off Online Travel Agencies

SMITH BRAIN TRUST — Southwest Airlines has long swiped left on online travel agencies. But now a trio of matchmakers is pushing the airline into a forced marriage of sorts in the name of consumer protection. Sens. Richard Blumenthal, D-Conn., Edward Markey, D-Mass., and Elizabeth Warren, D-Mass., recently issued a news release urging pressure on airlines to share fares and fees with online travel agencies to reduce "potentially anti-competitive and anti-consumer behavior that may be suppressing consumer ability to make informed flight decisions." 

The senators didn't name names, but Southwest would be the largest U.S. culprit. Allegiant, which serves smaller U.S. markets and alternative airports, is another holdout. Examples from Europe include Icelandair and Ranair.

Martin Dresner, professor and chair of the Logistics, Business and Public Policy Department at the University of Maryland’s Robert H. Smith School of Business, says these airlines have good reasons for their strategy. For starters, he says, they avoid online travel agencies so they can tailor their pricing and fee structures to individual customers through their own websites. "Frequent fliers for example often are exempted from baggage fees," Dresner says. "The airlines have this information and their website pricing will reflect this fee structure."

Frequent fliers also may be given priority seat assignments. "These assignments can be handled through the carriers' own websites," Dresner says. "Although, conceivably, this information can be passed to the online travel agencies, it is not clear whether the airlines wish to do so and whether the online travel agency websites have the capabilities to differentiate fees among passengers."

Smith School marketing professor P.K. Kannan has been tracking clickstream data in the travel and hospitality industries and says online travel agencies "are making big inroads in customer visits." Such a trend might further prompt airlines to avoid online travel agencies, he says.

"The convenience of the one-stop shopping experience is increasingly making online travel agencies the first go-to source for consumers and translating to higher commissions to the agencies,” Kannan says. Airlines, in effect, are increasingly "sharing their profits with the online middlemen."  

This creates a disincentive for airlines to provide real-time prices to the online intermediaries, he says. "Airlines have seen how these online travel agencies have wreaked havoc on the hotel industry, where hotel chains increasingly are suffering from a net transfer of profits to the online travel agencies," he says.

Airlines want to be as price transparent as possible on their websites to best-inform prospective customers in the context of healthy competition, Kannan says. "This does prompt comparison shopping — like shoe shopping both offline and online — which in effect increases the consumer’s search cost. The online travel agency, as the intermediary, makes this process easier.”

Ultimately, Kannan says, regulators cannot force the likes of Southwest to operate through a third party. "It's up to the airline to do so, taking into account the costs and benefits," he says. “Online travel agenices after all are not nonprofits looking to benefit just the consumer," he says. "They make good profits and want to be more powerful. The senators’ letter may well be a result of online travel agency lobbying.”

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About the University of Maryland's Robert H. Smith School of Business

The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and part-time MBA, executive MBA, online MBA, specialty master's, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

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