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JULY 21, 2000 VOL. 26 NO. 28 | SEARCH ASIAWEEK

Expect a Delay Prior to Takeoff
Nine Asian airlines have announced a promising Internet initiative. But travelers will have to be on stand-by for real savings

Imagine you are lounging around your apartment on a Saturday afternoon when you and your significant other suddenly decide to fly to Bangkok for a night. The travel agencies that sell discounted tickets have closed for the weekend. You could buy a ticket at the airport but that would be at the full published fare -- you are not independently wealthy. Now imagine that many of Asia's key airlines have joined forces to launch a respectable website that offers cheap, secure, last-minute airline tickets with a minimum of hassle. And after you buy, you can select your seat, choose a low-sodium meal and even save time by concluding your pre-boarding check-in. Dream on.

Two weeks ago, nine Asian airlines announced that they were forming an Internet travel agency -- as yet unnamed -- that will provide not just airline tickets but hotel bookings, car rentals and tour reservations. The partners include Air New Zealand, Ansett Australia, Asiana, Cathay Pacific Airways, China Airlines, Malaysia Airlines, Qantas Airways, Royal Brunei Airlines and Singapore Airlines (SIA). Similar European and U.S. portals have already been launched. "The age of Internet travel has finally arrived," says Jean-Louis Morisot, regional airline analyst for Goldman Sachs in Singapore. "The airline portals are not just going to be revenue enhancing and facilitate cost-cutting. For airlines, their customers, suppliers and shareholders, [the portals are] a giant leap."

That's the vision. But while it's true that the Internet could eventually lead to a host of improvements, they are probably several years away at the earliest. "We believe the effort to form the alliance by the nine airlines is fear-driven," says Alex Kong, CEO of, the leading online travel agency in Asia and probably the company most directly affected by the new competition. "It is fear that the other airline alliances formed in North America and Europe would threaten their market share." Kong believes the heavily regulated nature of Asia's airline industry will make it difficult for an online airline partnership to succeed because prices in the region are so variable and the fare schedules so complex. "It's going to be a big, big challenge [for the Asian airlines]," he says.

The airline industry doesn't have a good track record in fulfilling promised cost-savings. Recall some of the rhetoric surrounding airline alliances, which were supposed to make travel easy and seamless for customers and more efficient for carriers. Three years ago, an alliance between U.S.-based Northwest Airlines and the Dutch carrier KLM promised savings on everything from joint purchases of 747 jumbos to cans of orange juice -- with the result being lower ticket prices for travelers and higher profits for investors. But the alliance didn't quite deliver its bottom-line promise. Other alliances like Star and Oneworld indeed make travel more simple on long itineraries involving multiple carriers. But these groups were not set up to be ticket-sellers.

Internet use in Asia remains relatively small -- and consumer online purchasing barely significant. Globally, only 4% to 5% of airline revenues are generated online. In Asia, the figure is less than 2%. Analysts say they expect that online sales for Asian airlines will jump to as much as 10% to 12% of revenues in three years and 15% to 20% in five years. Analysts in the U.S. project up to 25% to 35% of total sales will be through online channels in five years. Says Pratik Gupta, Internet analyst for Salomon Smith Barney in Singapore: "My guess is that as Internet usage grows and consumers and suppliers use the Internet, airlines will gradually see impact on the bottom line."

The announced portal, which is supposed to be up and running by the end of this year, cracks open a door that has long been shut: It provides a steady and cordial mode of communication between supplier and end-user. In Asia, travel agents have been the middlemen between the carrier and passenger up until the traveler steps to the check-in counter. But if airlines begin dealing directly with flyers even during the planning stages of trips, they might collect valuable information about what routes, airplanes and schedules their customers want. A recent Morgan Stanley brokerage report on airlines says greater use of online ticket buying and selling eventually could shift power away from airlines to consumers by giving flyers much more information on flights and pricing.

For the carriers, the benefits could be more tangible and realized more quickly. At its heart, a web portal for airlines is merely another way to distribute tickets and fill seats. Best of all, it is reasonably cheap to set up and operate. Airlines have already begun to balk at paying commissions of 7% to 10% of the ticket price to travel agents. This resistance started among U.S. airlines and spread to Europe. In October, SIA announced it would stop paying commissions on tickets bought through travel agents to and from Singapore. Since then, Cathay, Thai Airways, Qantas and Ansett Australia have at least partially trimmed commissions. Airlines have promised to pass the savings onto consumers.

Timothy Ross, an airline analyst at UBS Warburg in Hong Kong, points out that air travel costs have been falling for decades. And despite regular grumbling from consumers about slippage in quality, more and more people are flying all the time. Air travel from Asia is rising at an 8%-to-10% annual rate. And as a growing middle class in India and China attains the income to fly, the rate will probably increase further over the next decade. Ross says Internet ticket sales could allow for a new era in cheaper air travel: "If you look at the way airline tickets have traditionally been sold, you'll find labor-intensive, high-cost methods like using travel agents. Moving online means airlines take more control of the final distribution of their main product."

Perhaps the greatest long-term threat posed by airlines websites is to travel agents. Airlines had once tread lightly here since they traditionally relied on the agents to fill seats. Even now, it is likely that the airlines are less interested in completely substituting the Internet for travel agents as they are in adding a new mode of distribution. Still, travel agents can probably not count much longer on being the best choice for a flyer looking for a cheap seat. "I think the time is up for the smaller bucket shop travel agencies," says Ross. "But online agencies that add value and have content on their websites will probably thrive. I doubt that we'll see an end to the travel agency business. But there will be a lot of consolidation."

Wendy Wong, an analyst for Merrill Lynch in Hong Kong wrote recently that she sees the creation of the airline website mostly as a survival tactic: If the airlines didn't coalesce online quickly, someone else would come in and grab the business. "When incumbent airlines eliminate inefficiencies in their operations, they make it harder for new entrants," she writes. "Their market share is reinforced." Clearly, the online alliance is a long-term strategy. It probably isn't time to throw away the travel agent's phone number just yet.

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