In snubbing the online travel agent industry by signing on to American Airline's Direct Connect reservation system, priceline.com (Nasdaq: PCLN) might have put its business into a tailspin.
Even considering recent developments, the airline industry's future doesn't seem less likely to involve online travel agents (OTAs) accessing every airline's individual reservation system to get fare information. Rather, the model seems to be based on the agreement Expedia (Nasdaq: EXPE) and US Airways (NYSE: LCC) reached that allows each side to come out ahead.
American parent AMR (NYSE: AMR), newly profitable and flexing its muscle as travelers return to the air, is looking to grow its profits by requiring OTAs to use its in-house booking system rather than going through global distribution system (GDS) operators like Travelport and Sabre, which own 48% of Orbitz Worldwide (NYSE: OWW) and Travelocity, respectively. By having the OTAs go through its in-house system, American keeps ownership of the customer relationship. This allows American to sell travelers options and services such as priority seating, additional baggage allowances, and pillows at higher fees. The airlines are turning more profitable as a direct result of the many new fees they've initiated.
Yet opposition to American's plan is broad. A new coalition calling itself the Open Allies for Airfare Transparency recently came out against the Direct Connect model, and could ultimately hurt Priceline's business. Not only does the coalition include its rivals and the GDS operators that Priceline relies upon for fare information, but major corporations like Oracle (Nasdaq: ORCL), and several other companies have sided with the OTAs against the opaque nature of American's Direct Connect.
It would be better for all parties if AMR followed US Airways' lead and gave a little to get a little. US Airways will now offer all of its content to the GDS operators and in return Expedia will distribute US Airways' Choice Seats program through new channels, such as Expedia's online travel marketplace. This gives the airline the opportunity to have more people exposed to the chance to buy more products (e.g., seating upgrades).
By flying into the headwind created by AMR's Direct Connect plan, Priceline may find itself getting grounded among its industry peers and the GDS operators it needs to function. Travelport says it expects travel agencies to honor their commitment to the GDS. Flying on a wing and a prayer may leave Priceline on the tarmac if the industry settles this amicably.
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