LECTURE NOTES 10

THE AIR TRANSPORT SECTOR & ON-LINE DISTRIBUTION

1. CHARACTERISTICS OF THE SECTOR

Air transport is now a major industry. It emerged in 1919, soon after the First World War, but it was not until peace was restored after the 2WW that the era of major expansion really began. • Aviation provides the only worldwide transportation network, which makes it essential for global business and tourism. It plays a vital role in facilitating economic growth, particularly in developing countries.• It is the key element in the world’s largest industry, travel and tourism, which generates aprox. 4000 bil. US$ in revenue a year, takes almost 11% of consumer spending and employs over 200 mil people, or roughly one in every nine people in the global labor force. • More than 40% of international tourists now travel by air (47%).• The air transport industry generates a total of 29 million jobs globally (through direct, indirect and induced impacts).• Aviation’s global economic impact is estimated at US$ 2,960 billion, equivalent to 8% of world Gross Domestic Product (GDP).• Over the last 50 years, the airline industry has consistently grown at a very fast rate, well above the growth in world GDP (6.2% a year compared to about half of that for GDP). •The high rates of growth have not been accompanied by high profitability rates. Airline profit margin have been well below average compared with firms in other industries and over the last few years there have been some heavy losses. • The world’s 900 airlines have a total fleet of nearly 22,000 aircraft. They serve some 1,670 airports through a route network of several million kilometers managed by around 160 air navigation service providers.• 25% of all companies’ sales are dependent on air transport. 70% of businesses report that serving a bigger market is a key benefit of using air services.

The air transport industry includes those activities that are directly dependent on transporting people and goods by air. This includes:• the aviation sector – airports, airlines, general aviation, air navigation service providers and those activities directly serving passengers or providing airfreight services;• the civil aerospace sector, which comprises the manufacture and maintenance of aircraft systems, frames and engines.Together, these two sectors provide a measure of the total industry, which is termed the air transport industry.

Drivers of growth

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The demand for air transport has increased steadily over the years.Passenger numbers have grown by 45% over the last decade and have more than doubled since the mid-1980s. Freight traffic has increased even more rapidly, by over 80% on a tone-kilometer performed basis over the last decade and almost three-fold since the mid-1980s.Its rapid growth has been driven by a number of factors, including:• Rising GDP, disposable income, and living standards – increasing the demand for travel for both business and leisure purposes.• Reduced air travel costs – improvements in airline efficiency and increased competition have reduced world airfares by around 40% in real (i.e. inflation-adjusted) terms since the mid-1970s.• Globalization and intensified international trade - the average distance traveled tends to increase as people take long-haul holidays and do business in countries which now have more favorable political and social environments.• Deregulation, relaxation of travel restrictions, air transport liberalization - starting with the US domestic air market in the late 1970s, followed in the 1980s by the European Union (effectively completed in the late 1990s), with other regions deregulating gradually. • Technical characteristics of aircrafts that result in several advantages for air transport compared to other means of transport:

- rapidity - flexibility – adaptable and convertible capacity – passengers to mail or

cargo, military into civil - just-in-time accessibility to markets - providing a new and faster

mechanism for distributing goods and services throughout the world, contributing to growth in existing industries, increasing overall economic efficiency.- air transport reduces the cost of trade and opens up new market opportunities by moving products and services quickly over long distances.

- reliability – scheduled airlines – frequency, timetables, relatively stable tariffs, taxes

- efficiency – economic efficiency – larger access as a result of decreased prices

- convenience- safety

2. DEMAND FOR AIR TRAVEL

Demand is highly elastic with respect to income, rather less elastic with respect to fares and relatively inelastic with respect to service levels.

- high income elasticity can be seen in the relationship between economic activity and air travel demand. Although air travel tends to grow faster than GDP, it still follows very closely the cyclical pattern of GDP. In North America, high average income levels are reflected in each person making at least two air trips per year, whereas in countries like China and India, only one in every 100 people take an air trip.

There are also other socio-economic factors that influence demand, like:

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- a continued increase in paid holidays and in the number of two-income families should bring more people into the category of those able to afford air transport.

- the influence of increased higher education should also have a positive effect on air travel demand

- the growing integration in North America and Europe might increase demand within those regions

- liberalization of airline competition

Demand for air travel comprises two different segments, with different motivations to travel and with a specific behavior with respect to various travel offers: leisure travel demand and business travel demand.

Leisure travel has been growing more rapidly than business travel and is something that affects the aggregate elasticity of demand. The demand for leisure travel is price elastic, but that for business travel is price inelastic. Across the world as a whole, the leisure/business breakdown is now approx 60/40, virtually reversing the position as it was in the early postwar period. The business travel share varies widely, being very much higher on domestic routes. It also varies a lot by airline (Swissair, for ex. – business passengers – more than 20%). Business travelers are very important for the airlines for it is mainly these passengers who pay high fares that yield a lot of revenue – for British airways, 30% of passengers generate 70% of revenue.

Business travel has been the primary source for high-yield passengers, critical to the economic viability of the hub-and-spoke model used by the major airlines. However, over the past several years, business travel has accounted for an ever smaller share of airline revenues. In 2001 before September 11, the share had dropped to 23 percent, from more than 35 percent in 1999, in the United States. While some of this drop is normal cyclicality as companies cut back on travel, other factors indicate that the decline may be longer term. After September 11, the inconveniences caused by time-consuming new security measures have made business travel even less attractive, and the likelihood is that these inconveniences will continue for the foreseeable future.

In order to reduce the cost of travel, companies have made several fundamental changes that are likely to have long-lasting effects on business travel revenues. Large corporations have used their purchasing power to negotiate volume discounts on fares, with price reductions on some routes often as high as 20 to 30%. Furthermore, most corporations are now enforcing the travel restrictions tied to these volume agreements.

Some alternatives to business travel on commercial airlines may now finally take hold. Companies are turning increasingly to travel substitutes such as videoconferencing and have been experimenting with shared corporate jets as a replacement for first-class travel for top executives. New advances such as Web conferencing have boosted demand for videoconferencing services, with a 30% year-over-year increase prior to September 11. Forced

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behavioral changes in the aftermath of the terrorist attacks have pushed the growth rate for these services up to 40%. In addition, the expansion of fractional jet models for business aircraft significantly increases the availability of business jets as a travel alternative. The corporate jet option, which is becoming more attractive given the increased time required to negotiate security procedures at major airports, takes away at least 10% of first-class travelers (2005). In view of these changes in the way corporations work and purchase travel, we believe that business travel revenues will remain under pressure even when the world economy recovers.

4. AIR TRANSPORT OFFER

Two countries, USA (20%) and UK (10%) represent aprox 30% of the world air transport offer. There are two ways of conducting air transport operations:

- scheduled flights- non-scheduled flights – charter flights – aprox 17% of international air

trafficCharter flights are more frequent in countries that specialize in tourism, representing aprox. 60% of RPK in European countries.

5. REGULATION VERSUS COMPETITION DEBATE

Natural monopoly theoryFor many years air transport was a closely regulated industry, both domestically and internationally. Governments traditionally regarded air transport as, in some sense, public utility. Strictly speaking, it is not. Economists prefer to reserve the term “public utility” to enterprises that have the characteristics of a natural monopoly. Natural monopolies exist where the advantage of size are so great that a service can only be provided, at least cost, if it is supplied by one and only one firm. A single firm becomes the monopoly because the average cost of providing the service reaches a minimum only when an output rate large enough to satisfy the entire market has been reached. In a situation like this competition will not be sustainable.

There is a general agreement on the need for regulation in natural monopoly industry. These are industries in which the ration of fixed costs (inescapable) to variable (escapable) cost is often very high. The fixed costs are often associated with heavy infrastructure investment, which often generates some enormous economies of scale, with average costs falling as output expands. Telecommunications, gas and electricity distribution, water supply are often cited as examples.

It is recognized that there are elements of natural monopoly in the supply of airport facilities. But are there any in airline operations? Where airport authorities supply runaways and terminals, navigation and air traffic control facilities are supplied by governments and where the ”track” is god-given,

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airlines are very much in the position of having their infrastructure supplied for them. It is generally accepted that airlines are characterized by a relatively low fixed to variable cost ration. Most of the costs incurred are escapable. There are also some sunk costs – like advertising expenditures. It is also not true to say that there are no elements of natural monopoly in airline industry. Investment in sophisticated computer reservation systems involves a great deal of capital expenditure and the average cost of running a system falls sharply as the number of bookings increases. But a priori sunk costs in the airline industry are very low by the standards of other industries.Also, a priori, there is no particular reason to expect the long-run average cost of airline operation to fall with increase in output. Even though airlines do not qualify as public utilities from an economic point of view, governments treat them as “quasi-public utilities”.

Contestable markets theoryThe theory of contestable markets was developed in the early 1980s. The key point in this theory concerns the threat of competition, as distinct form actual competition. According to this theory, firms in oligopolistic industries will still price at the same levels as they would in more competitive industries, provided a threat of competition exists. For the threat of competition to be credible and for a market to be classed as contestable, a number of pre-conditions must be met:

- no barriers to the entry of new firms to the market – no extra costs borne by new entrants that are not borne by incumbent firms already in the market

- there should be no heavy sunk costs – cost that once incurred, is inescapable

For its entry to be a real threat, a new firm must be able, if it wants to, to engage in “hit-and-run” entry. It must be able to go into the market, make profits for a brief period of time and, if things look as if they are not working on a long term basis, get out of the market again without having irrevocably committed a lot of resources and without losing a lot of money. If hit-and-run competition is profitable, any attempt by incumbent firms to raise prices above competition levels will provoke entry.

- the time it takes incumbents to respond to new entry by varying their prices is longer than the time the new firm needs to make its entry profitable – there must be some delay in the reaction of incumbent firms; otherwise the incentive for entry, the existence of prices above competition levels, could be withdrawn as soon as entry takes place, making entry an unattractive proposition.

The proponents of this theory considered the airline industry as a textbook example of a contestable market (Bailey and Baumol, 1984).

Experience of deregulation – scope economies theoryUntil 1978, the U.S. government, through the Civil Aeronautics Board (CAB), regulated many areas of commercial aviation such as fares, routes, and

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schedules. The Airline Deregulation Act of 1978, however, removed many of these controls, thus changing the face of civil aviation in the United States. The most important effect of the Act was on the passenger market. For the first time in 40 years, airlines could enter the market or (from 1981) expand their routes as they saw fit. Airlines (from 1982) also had full freedom to set their fares. In 1984, the CAB was finally abolished since its primary duty, that of regulating the airline industry, was no longer necessary.What effect did deregulation have in the short term? - First, many airlines abandoned less profitable routes that took passengers to smaller cities. Decontrol of routes permitted them to plan their operations as they see fit.- A second effect was the increase in productivity by removing the previous detailed restrictions on airline prices. Decontrol of prices allowed airlines to fill their planes by offering large numbers of heavily discounted fares for seats that would otherwise go unused. And deregulation has compelled improvements in efficiency through the intense pressures of the price competition it unleashed- A third and related effect was the growth of “hub-and-spoke” routes. The major airlines “adopted” key cities as centers for their operations; these key cities served as stops for most flights, even if they were not on a direct route between two other end points. Delta Air Lines had a major hub at Atlanta while Eastern ran its hub operations from Miami. Both airlines ran many daily roundtrip flights from their hubs, thus keeping planes in the air for more hours each day and filling more seats. For example, the number of daily nonstop flights between New York and West Palm Beach, Florida, jumped from five to 23.- Fourth, deregulation allowed new start-up airlines to enter the market without having to agree to the demands of the larger established airlines.

Route strategies: the hub and spoke systemDuring the 1980s a system of predominantly point-to-point routes was replaced by one where the major airlines concentrated their routes on a few major airports linked by frequent services using large aircraft, with smaller, nearby airports connected to these hubs by shorted routes using smaller aircraft. This “hub-and-spoke” system offered two major benefits:• It allowed greater efficiency through concentrating traveler and maintenance facilities in fewer locations, while permitting cost savings through higher levels of capacity utilization and the use of larger, more cost efficient aircraft for inter-hub travel. The efficiency benefits of the hub-and-spike system were reinforced by scheduling flights such that incoming short-haul arrivals were concentrated at particular times to allow passengers to be pooled for the longer-haul flights on large aircraft. • It allowed major carriers to establish dominance in major regional markets and on particular routes. In effect, the major airlines became more geographically differentiated in their route offerings. The ability of a single airline to dominate individual hubs was reinforced by mergers. For example, when TWA acquired Ozark in 1986, it controlled over 80 percent of flights in and out of St Louis. Northwest accounted for 65 percent of traffic in and out of Detroit Metropolitan Airport. The hub-and-spoke system also

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created a barrier to the entry of new carriers who often found it difficult to obtain gates and landing slots at the major hubs.

The hub and spoke system also allowed the major airlines to offer a more integrated, through-ticketing service by establishing alliances with local (“commuter”) airlines. Thus, American Eagle, United Express, and Delta Shuttle were franchise systems established by AMR, UAL and Delta respectively whereby commuter airlines used the reservation and ticketing systems of the major airlines and coordinated their operations and marketing policies with those of their bigger partners.

Air lines are just a special form of network. Because aircrafts differ in range and in capacity this network is partially hierarchical. Because customers want to go from an origin to a destination it is also partially a peer network. A well-known method to reduce the number of connections between nodes is to set up a concentrator. In the first case we need 10 connections whereas in the second case we only need 4. Obviously it does not come for free: to go from A1 to A4 we need to first go in A5.

Most disinterested observers agree that airline deregulation has been a success. The overwhelming majority of travelers have enjoyed the benefits that its proponents expected. But, deregulation also has given rise to a number of problems, including congestion and a limited reemergence of monopoly power and, with it, the exploitation of a minority of customers. It would be a mistake, however, to regard these developments merely as failures of deregulation: in important measure they are, in fact, manifestations of its success.

These problems practically illustrate the lesson that the dismantling of comprehensive regulation should not be understood as

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synonymous with total government laissez-faire. The principal failures over the last fifteen years have been failures on the part of government to vigorously and imaginatively fulfill responsibilities that the deregulated industry never intended to abdicate from.1. Tendencies to Increased Concentration and Price Discrimination The wave of mergers and airline failures has made the industry more concentrated at national levels than it was before deregulation. But concentration at the national level is not as important as concentration on individual routes. What passengers care about are the choices available to them between two particular points. By wiping out restrictions and freeing carriers to enter any market, deregulation produced an estimated 25 percent increase in the average number of airlines per route despite the mergers. In this as in all other unregulated industries, there is always the possibility of anti-competitive behavior (that is why there are antitrust laws). The re-concentration of the industry reflects, in part, the failure to disallow mergers of direct competitors. Also, some of the largest airlines have, at least in the past, used their computerized reservations systems to handicap their smaller competitors. Frequent-flyer programs, operating agreements and mergers with regional feeder airlines, and deeply discounted discriminatory fares have all put smaller competitors at a severe disadvantage and contributed to the demise of many of them. Like the hub-and-spoke system itself, these practices also have large efficiency advantages and so pose a familiar dilemma to scholars and practitioners of antitrust. Moreover, these potentially anti-competitive stratagems were scarcer before deregulation because they were unnecessary. Under that regime the government forced the airlines to operate as an effective cartel.

The instances of sharply increased price discrimination that deregulation has made possible are both a competitive and monopolistic phenomenon. They reflect intense competition for the travelers most likely to be attracted by price differences among competitors. They also have promoted economic efficiency in very important ways. The deeply discounted fares to discretionary air travelers have helped fill planes and, by doing so, helped make possible more frequent scheduling, which is particularly valuable to the full-fare travelers.

Still, the discrimination also reflects the exercise of monopoly power, no longer curbed by direct price regulation. The increasing sophistication with which the leading carriers practice what the industry euphemistically calls "yield management" enables them to take full advantage of that monopoly power, particularly in the unrestricted full fares paid by about 10 percent of the travelers. The continuing reconcentration of the industry threatens to extend that exploitation to an increasing proportion of the flying public in the future.

There are three possible ways in which government might respond to this dilemma. First, it could do nothing. The high, unrestricted fares paid by the minority of passengers who cannot qualify for discounts may well be compensated for by frequent-flyer credits and by the improved convenience

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of schedules that the high fares and hubbing help make possible. The airline industry is far more competitive than it was; the benefits of that competition have been widely distributed; and industry profits have been lower, on average, since deregulation. In these circumstances it would be reasonable to conclude that no remedy was required.

Second, the government could actively attempt to make markets more competitive by assuming responsibilities that it has neglected. It could vigorously enforce the antitrust laws. It could also remove barriers to competition by expanding airport capacity enough to allow new competitors to operate on routes, by dissolving preferential arrangements between hub-dominating carriers and their hub airports, and above all, by allowing foreign airlines to compete for domestic traffic, either directly or by investing in local carriers.

Third, where restoration of more effective competition proves infeasible, price ceilings could be reimposed to protect travelers subject to monopolistic exploitation.

2. Safety in the Skies Air travel is unequivocally safer now than it was before deregulation. Of course, the margin of safety may have narrowed. The skies have become more crowded and airlines may, under pressure of competition, have cut corners. If so, the proper remedy is not economic regulation, but more spending on policing safety, air traffic control, and airports.

3. The Quality of Service The question of what has happened to the quality of service is more complicated. First, service for smaller towns and rural communities has improved. They have, on average, experienced a 35 to 40 percent increase in the number of scheduled departures and, thanks to hub-and-spoke operations, have an increased number of destinations available to them. On the other hand, the planes serving them are, on average, smaller and less comfortable. Second, travelers have endured an undeniable increase in congestion, delays, and discomfort. But these are not, in themselves, a sign of failure. After deregulation, low-cost, aggressively competing airlines offered the public low fares, with correspondingly lower-cost service—narrower seating, longer lines, and fewer amenities. The incumbents responded with very deep discounts, accompanied by similarly poorer service. The enormous response of travelers to the availability of these new options is a vindication of deregulation, not a condemnation, even though the quality of the air travel experience has deteriorated as a result. Third, much of the congestion is the result of the failure of governments to do their job. When the demand for any service exceeds the available supply, it means two things. First, the service is probably being produced in inadequate quantity. Second, it is underpriced. As for the supply side, the airline industry relies primarily on the government to provide sufficient air traffic control and on local authorities for airports. The governments have not fulfilled those responsibilities. As for the demand side,

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the spectacle of airplanes filled with passengers, queued up on runways for an hour or more, proves that the price of access to airports and to the air traffic control system at those times and places is too low.

1. DEREGULATION AND LIBERALIZATIONFREEDOMS OF THE AIR

International air services (apart from services within the European Union) are governed by the provisions of inter-governmental instruments. These instruments are usually in the form of air services agreements (ASA) - which are formal treaties between countries - accompanying Memoranda of Understanding (MoU) and exchanges of formal diplomatic notes.

ASAs cover the basic framework under which airlines are granted economic bilateral rights to fly between two countries. The frequency, capacity and other operational issues are normally covered by MoUs.

The bilateral system has its basis under the Chicago Convention and associated multilateral treaties. The Chicago Convention was signed in December 1944 and has governed international air services since then. Nearly 200 countries are signatories to the Convention. The Convention also has a range of annexes covering issues such as aviation security, safety oversight, air worthiness, navigation, environmental protection and facilitation (expediting entry and departure at airports).

Air service agreements are negotiated by governments within the framework of the five freedoms of the air defined in the Chicago Convention 1944 (International Air Transport Agreement):

First Freedom of the Air - the right or privilege, in respect of scheduled international air services, granted by one State to another State or States to fly across its territory without landing 1st freedom – the overflying rights

Second Freedom of the Air - the right to land in its territory for non-traffic purposes 2nd freedom – rights to land for technical reasons

Third Freedom of The Air - the right to put down, in the territory of the first State, traffic coming from the home State of the carrier

Fourth Freedom of The Air - the right to take on, in the territory of the first State, traffic destined for the home State of the carrier 3rd /4th freedom – rights to carry traffic from/to the home state

Fifth Freedom of The Air - the right to put down and to take on, in the territory of the first State, traffic coming from or destined to a third State Fifth Freedom' is the right, in conjunction with a flight to or from the airline's home country, to take on, in a second country, passengers, mail and cargo destined for a third country, and the right to take on, in a third country, passengers, mail and cargo destined for the second country.5th freedom – rights to carry traffic to/from third countries en route.Ex: [Lyon] – Toulouse – Madrid - Lisbon (Air France)

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In addition, other "freedoms of the air" are often referred to. Although not formally defined, these are commonly understood as follows:

Sixth Freedom of The Air - the right, of transporting, via the home State of the carrier, traffic moving between two other States. 6th freedom – carriage of traffic between two foreign states via the state in which the airline is registered – neither recognized nor defined in the Chicago ConventionEx: BA carries a passenger from NY to London, where he is transferred to another BA flight to Bombay, BA – Copenhagen –[London ]- Malaga

Seventh Freedom of The Air - the right of transporting traffic between the territory of the granting State and any third State with no requirement to include on such operation any point in the territory of the recipient State, i.e the service need not connect to or be an extension of any service to/from the home State of the carrier.7th freedom – operation of stand-alone services entirely outside the territory of its home state, to carry traffic between two foreign statesEx: US Airline operating a shuttle service between Tokyo and Seoul

Eighth Freedom of The Air - the right of transporting cabotage traffic between two points in the territory of the granting State on a service which originates or terminates in the home country of the foreign carrier or (in connection with the so-called Seventh Freedom of the Air) outside the territory of the granting State (also known as consecutive cabotage").8th freedom: right to carry traffic between two points within the territory of a foreign state, with the origin or destination in the home country – cabotage Ex: BA – [London] – Hanover – Leipzig

Ninth Freedom of The Air - the right of transporting cabotage traffic of the granting State on a service performed entirely within the territory of the granting State (also known as "stand alone" cabotage).9th freedom – internal cabotage – right to carry traffic within the territory of another countryEx: Air France in Morocco

Mutual exchange of the first and second freedoms usually takes place as a matter of fact. In exchange for the remaining 3 freedoms, governments bargain hard. 3rd and 4th freedoms are always granted together. 6th freedoms are effectively two 3rd/4th freedom services linked together, each of which are operated under the relevant bilateral agreement. In negotiating traffic rights all governments are concerned about the market share secured by their own national carriers.Depending on its location a country has or does not have good opportunities to carry 6th freedom traffic. For instance European countries have good opportunities and Australia virtually none.The 8th freedom is almost never granted. Europe is a special case: EU airlines were granted the 5th and 7th freedom on international routes throughout the Union in 1973 and 8th freedom in 1997.

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The air transport sector in the European Union was liberalized in three successive stages.

The first "package" of measures adopted in December 1987, started to relax the established rules. For example, it limited the right of governments to object to the introduction of new fares. Some flexibility was allowed to enable airlines in two countries which had signed a bilateral agreement to share seating capacity. Until then, absolute parity had been the rule.

In June 1990 a second "package" of measures opened up the market further, allowing greater flexibility over the setting of fares and capacity-sharing. Moreover, the new provisions extended the right to the fifth freedom and opened up the third and fourth freedoms to all Community carriers in general.

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These measures, which were initially limited to passengers, were extended to freight by means of a decision taken in December 1990.

The last stage: the "third package"

The last stage of the liberalization of air transport in the European Union was the subject of a third "package" of measures, which were adopted in July 1992 and applied as from January 1993. This package gradually introduced freedom to provide services within the European Union and led in April 1997 to the freedom to provide cabotage, i.e. the right for an airline of one Member State to operate a route within another Member State.

The main measures are as follows:

Community license: the market is open to all airlines which hold a Community air carrier's license (Council Regulation (EEC) No 2407/92). For a company to obtain this license, most of its capital must be held by Member States or nationals of the European Union. The latter must also exercise effective control over the company. The technical capabilities and financial capacity of the companies concerned are sanctioned by means of national certificates. The third "package" stipulates that companies must submit a two-year development plan to the authorities and provide proof that they will be able to cover their operating costs for a period of three months without income. Lastly, companies which use leased aircraft are required to take up adequate insurance.

Freedom of access to the market is laid down in Regulation (EEC) No 2408/92. This text opened up all international air routes in the European Union to all companies which hold a Community license without any restrictions as from 1 January 1993. Since April 1997, unconditional access to all domestic markets has been granted to all airlines in the European Union.

The most important safeguard measure in the Regulation on access to the market concerns public service obligations, which enable governments to maintain services considered essential for harmonious development within their territory.

This is done in two steps. Firstly, for a given route, the Member State publishes the public service obligations which will be imposed on the carrier in terms of capacity, flight frequency and fares. Then, if no carrier states that it is prepared to provide a service, the Member State may restrict access to the route concerned to a single carrier and decide to grant that carrier financial compensation in exchange for compliance with these obligations.

Freedom with regard to fares and rates was an essential part of freedom of access to the Community market. Regulation (EEC) No 2409/92 stipulates that airlines are no longer required to submit their

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fares to the national authorities for approval. All they have to do is to inform them forty-eight hours before applying the new fare. The Regulation does, however, provide for control mechanisms to be reintroduced in exceptional circumstances.

Generally, a fare increase can not be objected to if there is a high level of competition on the route concerned or if the arrival of new competitors is not hampered by legal provisions or practical contingencies, e.g. saturation at an airport. Conversely, if it is established that airlines are involved in a price war which has already led to two consecutive and general drops in fares and none of them is making any profit on the route concerned, the national authorities may object to a fare reduction.

It has not been necessary so far to apply such a measure since 85% to 90% of passengers now travel at reduced fares within the European Union. The Commission has, however, noted that the "fully flexible" fares, which are not subject to any kind of restriction as regards changing the reservation, the length of stay at the destination, etc. are still excessively high on some routes.

7. STRATEGIC ALLIANCESAirline alliances can cover many areas:

Code sharing. Block spacing. Links between Frequent Flyer Programs. Joint sales and marketing. Joint ventures in catering, ground handling and aircraft maintenance. Joint passenger and cargo flights. Joint purchasing and insurance.

On one hand there are technical alliances, for instance ventures in catering, ground handling and aircraft maintenance. This sort of tactical alliance is created to reduce costs. For instance in one area a couple of airlines can agree to specialize their maintenance teams. One airline maintains 747 aircrafts and another A330 and A340 aircrafts.The most famous alliances are strategic alliances created to handle code sharing, FFPs and some marketing programs. They do not only consist in a commercial agreement. Participants agree to adapt their schedules to increase the number of useful connections inside the alliance.

Code sharing is an agreement between two airlines under which an airline that operates a flight allows another airline to offer that flight under its own flight code.Technically, code-sharing is a arrangement between two carriers that allows them to sell seats on each other's flights under their own designator code. In the case of connecting flights of two or more code-sharing carriers, the passenger's entire flight is displayed as a single carrier service on a reservation system. From the customers' perspective it gives the impression of an on-line service and offer some features related to this service such as single check-in, common frequent flyer program and coordinated flight schedule. Code-shares cover a wide range of services, as does the major

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strategic alliances, but more often it involves a single service or a small network of services.

A stronger form of code sharing involves blocked space arrangements. In this case, one carrier buys space on another airline's craft that it sells in its own right and thus using its own designator code. Block spacing consists for an airline in allocating a number of seats to another airline on some of its flights.

These alliances aim to increase the marketing power of their members in order to successfully meet the challenges of globalization. Alliances aim to provide a global offer to international travelers. The trick in alliances is to have a member in each market. Air France is in Skyteam, Iberia in Oneworld and Lufthansa in Star Alliance. It has also to be said that even if airlines wanted to create regional alliances in order to dominate a market governments would not allow it

The three main global alliances are:

URL Members

http://www.staralliance.com/ Air Canada, Air New Zealand, Ana, Asiana Airlines, Austrian Airlines, British Midland, Lot Polish Airlines, Lufthansa, SAS, Singapore Airlines, Spanair, Tap Portugal, Thai, United, US Airways, Varig, Adria, Blue 1, Croatia Airlines

http://www.oneworld.com/ Aer Lingus, American Airlines, British Airways, Cathay Pacific, Finnair, Iberia, LanChile, Qantas

http://www.skyteam.com/EN/index.jsp

AeroMexico, Air France – KLM, Alitalia, Continental, CSA, Delta, Korean Air, Northwest Airlines

A former alliance, Qualiflyer, founded by Swiss Air died on December 31, 2002.The first alliance, Wings, founded by Northwest and KLM no longer exists though its core companies, Northwest, Continental and KLM still cooperate.Global alliances will continue to change both in composition (it is easy for an airline to change of alliance) and responsibilities (for instance Star Alliance has an IT hub.)

8. DISTRIBUTION

Network actors in the distribution system:

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- CRS, Computer Reservation Systems, are the aggregators that gather the Airlines' and other travel producers' offerings in one place and make them available to travel sellers equipped with a suitable computer. In essence, the CRS sell information distribution to the Airlines and information access to the travel agents etc. - Traditional Travel Agents refers to the brick-and-mortar travel agents that have a broad range of products in categories such as Airlines, Hotels, and Car rental etc.- Web Sellers mainly use Internet as their customer interface. Four sub types in the Web Sellers group have been identified:

- Agent Web, a travel agent with Internet as the main customer interface and sells many Airlines tickets, makes hotel reservations etc. Some Traditional Travel Agents have a web interface in conjunction with their physical stores.

- CRS Web, an online travel agent owned by a CRS. - Proprietary Web, a web interface owned and operated within an

Airline's organization. This Web Seller often only offers its' own tickets. Sometimes other Airlines' offerings are also available; tickets on Airlines in the same alliance are more common to be offered in this case.

- Collaborative Web, a joint-venture between Airlines with several Airlines' offerings; the owning Airlines' and others.

GDS are behind multiple-carrier booking engines (collaborative webs): Expedia and Orbitz use Wordspan, Travelocity Sabre and Opodo Amadeus.

Computer reservation systems, today known as Global Distribution Systems (GDS), were first developed by airlines to handle internal airline operations. When first developed in the 1960 and 1970, CRSs were simply seen as devices for saving time and labor in handling large and growing amounts of flight reservations data. All that changed with deregulation. In deregulated markets, passengers have very many options for their journeys, in terms of carrier, fares, routes and they cannot longer rely upon any one individual airline to provide them with a list of alternatives. For that they have to go to travel agents who are linked into one or more of the powerful CRSs owned or hosted by major carriers. As computer technology advanced and airlines recognized that handling reservations by computer was much more efficient and cost-effective than taking reservations over the telephone, the airlines opened their systems for travel agent use. Around 50% of all flight bookings are made through CRSs operated with the aid of Visual Display Units located in travel agents’ shops. Access to the first screen page and if possible to the top line has become an extremely important factor in airline competition!!Concerns related to CRS operation: – programming the computer to bias the selection of flights in favor of those who operated it. Because CRS owners would charge high prices for services provided by other airlines, Codes of Conduct have been introduced to regulate this aspect.

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– possibility of CRSs becoming more and more oligopolistic – very high fixed costs, marginal costs close to zero, average costs declining as number of bookings dealt with increases. Six systems eventually emerged by the early 1980s allowing agencies direct access to airlines, hotels, and car rental companies. Because of the high cost of automation at the time, only large travel agencies could afford automation. In 1980 just over 4,000 agencies were automated. US:– American Airlines – Sabre– United Airlines – Apollo/Covia– Delta and TWA - WorldspanEurope:

- Galileo International & AmadeusFar Est:

- Axess & Abaccus

Because of increased competition, four major systems that provide CRS services to travel agencies remain today– Apollo (distributed by Galileo), Amadeus (formerly System One), SABRE, and Worldspan (formerly DATAS II and PARS systems). By the late nineties, around 97 percent of US domestic retail agency locations were automated with one or more of these systems.Some of the low-fare airlines are seeking to escape high distribution costs by withdrawing from CRS and introducing ticketless flights – ValuJet – small company based in Atlanta, specialized in leisure traffic over short-haul routes. It is estimated that the cost of producing a single ticket comes to between 15 and 30 $. Ticketless travel is now possible because of automation and the widespread use of credit cards.

Galileo International (Apollo) – 100% Cendant CorpAmadeus – 25% Air France, 25% Iberia, 25% Lufthansa, 25% SAS-> publicSabre – 100% public (AA + Abacus from Asia – sold its 82.2% interest to public)Worldspan – Delta 40%, Northwest Airlines 34%, Trans World Ailines (wholly owned subsidiary of AA) 26%

GDS companies are reinventing their business model by offering innovative products to enhance booking capabilities for purchasers of travel. SABRE has established itself as one of the leaders in online travel through its web interests including GetThere Inc. and Travelocity. Amadeus has been building its e-commerce roots with investments in Vacation.com, 1travel.com, Travelbyus and Uniglobe. Its primary push has been in creating country specific Internet booking solutions for agencies and corporations. Worldspan is behind a number of ecommerce companies such as Expedia and Priceline. Galileo has been beefing up its online presence with its Travel Point booking site and its business travel counterpart, Corporate Travel Point. Galileo’s new owner, Cendant, is purchasing CheapTickets.com and corporate booking web site developed, Highwire. Cendant already owns Wizcom a hotel and car rental booking system.In addition to leveraging existing networks to meet the demand for high-speed Internet connections, GDS companies are introducing e-business

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solutions such as back-office applications, customer relationship management software and online marketplace products.

9. LOYALTY SCHEMES IN AIRLINE MARKETING

There are essentially three kinds of schemes that large airlines can use to exert power, through control over distribution channels in the marketing of air services. These are:

1. frequent flyer programs2. corporate rebates3. travel agency commission overrides

1. Frequent flyer programs For the eligible ticket bought, the passenger accumulates mileage

points according to distance traveled and to the class of ticket purchased, first and business class passengers receiving points at multiples of the basic rate.

The passenger can exchange the mileage points for rewards in the form of free or discount tickets, upgrades from one class to another, special concessions on car hire and hotel accommodation and other benefits in the form of free gifts, dedicated lounges at airports etc. The first FFP – American Airlines – 1981The first European carrier to introduce FFP – British Airways – initially it was a co-owner of Air Miles, which was not a program for frequent flyers only (awards could be earned by purchasing other things, too – gas), then “Latitudes” Lufthansa – Miles & More

Conditions applying to mileage points can be rather complex, making it difficult to compare one FFP against another. European FFPs are less generous than their counterparts. Where European and US carriers are in direct competition, as on transatlantic services, European FFP have to be more generous to remain competitive and so give special bonuses.

a. FFPs provide a valuable source of marketing information about premium fare passengers enabling airlines to target them more effectively; the European FFPs are much more targeted at business travelers

b. FFPs are partially substituting for media advertising, they are discounts for quantity purchases

c. FFPs create strategic advantages for airlines with high market share and reduce the potential for competition – a large network gives passengers more opportunities both to earn mileage points and to use them. – FFP may be considered a barrier to entry for new entrants with a small network

d. Business travelers are heavily influenced by their FFP membership in choosing their flights of a particular airline. –

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Frequent flyers resident in a hub city could become “captive” to the hub airline.

The only real way of offsetting the disadvantage of a small network is for the airline to link its FFP with those of other carriersEx: Virgin Atlantic & British Midland & SAS - EurobonusVirgin Atlantic & Air New Zealand & DeltaMidland & United & South African Airways

2. Corporate rebates Companies in Germany are trying to trace all the accumulated mileage of employees flying Lufthansa and to ask them to be handed over. In Sweden, Saab-Scania, Electrolux, Volvo – convinced SAS to award benefits directly to companies and not to travelersVirgin – “Corporate Freeway “ – scheme introduced in 1994 – 250 companiesThe benefits of business travelers are used to obtain free tickets for other staff. – 12-15% reduction of company travel budget

- they are also a threat to competition – advantage of large networks

3. Travel agency commission overrides TACOs are designed to encourage agents to concentrate bookings on a single carrier. TACOs are paid over and above the standard level of commission – 7%A target threshold is established based on agent’s previous sales. One the threshold has been reached, the additional commission is paid not just on additional sales, but on those already made within the year in question as well. TACOs are deals with intermediaries – less exclusive and have less direct influence on travel decision. Concerns:

- agents can earn TACOs from different airlines at the same time- once the threshold is reached, the following year override commission

will be that much harder to achieve- the incremental commissions earned can become very high – 50% of

the airline’s additional sales revenue- agents might increasingly lead travelers to sub-optimal choices in

order to meet override targets

10. LOW-COST CARRIERS

Everyone is talking about the growing importance of low-fare airlines as means of air transport. The concept originated in the USA, where Southwest Airlines first put it into practice in the mid-1970s. In Europe, no-frills airlines began to play a role from the mid-1990s, initially in the UK and Ireland. Since then, though, the trend has also spread to continental Europe. Besides the long-established companies such as Ryanair or easyJet there are now about 30 airlines that can be classed as low-cost carriers. From 1999 to 2003 the number of seats on offer soared 400%. The growth of these airlines will continue. Forecasts indicate that by 2010 their market share, as a percentage

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of passengers on intra-European flights, may climb from just under 10% at present to around 20-25%. Much of the growth in the no-frills sector did not detract from the established airlines as the low fares generated additional demand. The number of low-cost carriers is now also rising in the Asian-Pacific region (e.g. Air Asia, Bangkok Air, Pacific Blue Airlines, Freedom Air).Unlike the established network airlines, low-cost carriers:

- serve large to medium-sized cities on a purely point-to-point basis; - transfer passengers play practically no role. - they do not offer intercontinental flights. - they target price-conscious business and private travelers.

The airlines achieve cost advantages in a variety of ways:- no free in-flight service: no newspapers, no food etc.- no seat reservation- no frequent-flyer programs- no airport lounges- no choice of class- no choice of seats- no connecting flights- no refunds- no possibility of rebooking to other airlines- no travel agents and - no expensive computer reservation systems; about 90 percent of

easyJet and Ryanair tickets are booked over the Internet.Distribution is mainly via the internet, with correspondingly low costs, meaning that the airlines can save considerably on ground staff. Wages are generally lower than those of the established airlines, or working hours are longer. The fleet consists mostly of aircraft of a single type in order to obtain synergy effects in maintenance and the training of personnel. In addition, the aircraft are in service longer owing to the very short time spent on the ground. Tighter seating increases the planes’ capacity. Low-cost carriers adjust their fares according to the number of seats still available on a flight, pricing the outward and return flights separately. Despite cheaper fares, the breakeven load factor for a no-frills carrier is very low (55% at Ryanair, according to the company itself).The companies’ negotiations with airports on the latter’s charges are particularly important. Since low-fare carriers frequently have considerable market clout in dealing with regional airports – which often have free capacities – some have been able to negotiate extremely low charges.

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- By keeping the logistics simple, no-frills airlines cut turnaround times on the ground and maximize revenue-generating air time. On short-haul routes, for instance, easyJet’s planes are in the air an average of 12 hours a day, compared with 9 hours for the most efficient traditional scheduled carriers. - Some European low-cost carriers fly to and from secondary airports—located as far as 100 kilometers from city centers—thus minimizing landing and ground-handling fees. On intra-European international routes, this adds up to an operating-cost advantage per seat and kilometers flown (unit cost) of 40 to 65 percent as compared with major scheduled carriers.- Lower costs and higher seat-load factors permit no-frills carriers to offer fares 50 to 70% lower than those of the incumbents. The average price (revenues divided by the number of passengers) of the no-frills carriers for a one-way ticket on international intra-European routes is €50 to €85, compared with €180 to €200 for British Airways and Lufthansa. This approach attracts price-sensitive and flexible travelers, but the lack of convenience and flexibility makes the low-cost model unappealing for most passengers traveling on business.- Regardless of the approach low-cost carriers take, they enjoy protection from business cycles, since in hard times demand for premium service tends to decline as more passengers seek less expensive travel alternatives.

Excluding Ryanair, the European low-cost segment accumulated losses from 1996 to 2001, and AB Airlines, ColorAir, and Debonair went bankrupt.

In the United States, the low-cost industry—excluding Southwest Airlines—lost almost $1 billion from 1996 to 2001, and bankruptcies were rife. With easyJet’s acquisition of Go, Ryanair and easyJet between them account for more than 88% of the scheduled low-cost market in Europe. Southwest Airlines holds 50% of the US low-cost market. This pattern suggests that a winner-takes-all dynamic favors the first entrants, which can use low prices to stimulate demand and build brand power Later low-cost entrants, with the same costs and prices, have a harder time generating the traffic needed to fill their planes.

Trends on the low-cost segment

So how do the low-cost carriers plan to grow in the medium term? - by opening routes in markets that aren’t served at all by the bigger airlines, with their emphasis on business passengers.Stimulating demand in Continental market segments that have little overlap with the incumbents’ routes may be enough to fill the new airplanes. But in the long term, it is unlikely that low-cost carriers can equal their penetration of the United Kingdom on the Continent.

Where could long-term growth come from? Analysis suggest that it would require the low-cost airlines to take market share from the big incumbents and charter companies. But the no-frills will find it difficult to overcome the structural limitations and competitive challenges in these markets.

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France, Germany, and Italy all have the levels of domestic traffic needed to sustain low-cost offerings, but flights in these markets are already highly competitive and priced lower than international flights

Given the obstacles to growth in the charter and domestic markets, the expansion of international routes would appear to be the logical long-term growth path for low-cost carriers. British Airways’ short-haul network already suffers from fierce low-cost competition

What scheduled incumbents fear most is that some of their business traffic could be at risk if the low-cost offering reaches a critical mass, both in daily flight frequencies and the number of destinations. This scenario is already a reality in the London area, where low-cost routes with at least three daily flights are concentrated; more than half of British Airways’ international short-haul routes face low-cost competition. It is doubtful, however, that any other region is big enough to make such a broad low-cost offering possibleAt the same time, the low-cost carriers will be hard-pressed to maintain or improve their cost positions as they come of age. They might, for example, lose start-up advantages such as the free or discounted use of secondary airports as those facilities gained a better bargaining position when contracts came up for renegotiation.Europe’s low-cost airlines can double their market share in the next five years, mainly by stimulating demand on the Continent. But shaping the future of intra-European air travel would require the no-frills to make major inroads into the incumbents’ customer base. Evidence suggests that this isn’t likely to happen without taking its toll on the profitability of the low-cost carriers.

Two trends seem likely to determine the future of the low-cost carriers. - First, there is now high potential demand for discount products in air

transport, as in other sectors. But demand growth is set to decline going forward.

- Second, the capacities of low-cost carriers are currently expanding at exorbitant rates. EasyJet and Ryanair, for instance, have each placed a huge order for 250 aircraft (including options) with Airbus and Boeing, respectively. These orders are the largest ever in the history of civil aviation. There are bound to be excess capacities in this segment soon – if this is not already the case.

The no-frills airlines have to compete not only with each other but also with the full-service providers and with other forms of transport. Excess capacities will therefore keep prices permanently under pressure for a long time to come. This makes it doubtful that many companies will in fact manage to continue their success story. Consolidation is, thus, inevitable in this market. Probably just a handful of independent low-fare airlines will remain in Europe in the long run. But low-cost carriers will certainly retain their place in the air transport sector.

11. ON-LINE DISTRIBUTION

In the field of tourism, technology represents a dynamic and powerful factor responsible for numerous changes in the past, present, and future of the travel industry. Technological advances especially in the last two decades

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have facilitated the distribution of travel services and will have a major impact on the future structure of travel distribution systems.

1. The Link between Technology and Tourism

Within the last two decades the tourism industry has experienced tremendous growth. During this period, a series of rapid and radical changes has been noted. The resulting evolution has made travel marketers realize that they are not only in the business of moving pleasure and/or business travelers, but also in the business of communication and information. Changes in consumers’ characteristics, preferences, and decision making, and continuous alterations in a highly competitive global environment have created an ever closer relationship between tourism and information technology.It is important to note that contemporary travelers have different characteristics from travelers of three decades earlier at the beginning of mass tourism development. The lack of travel experiences of earlier travelers and the complexity of the distribution systems favored the creation of standardized travel packages for groups. By contrast, today’s consumers tend to be better educated with wider exposure to travel and strong preferences for unique travel experiences. Their desire for customized travel has influenced their decision-making process as well.To create memorable travel experiences, suppliers need to provide today’s prospective traveler with a full range of options. Here, the completeness and the clarity of the information offered to the traveler by the seller are essential variables of satisfaction. The complexity of the issue increases as the competitive global environment of tourism continuously generates more information. The combination of these forces and the need for high professionalism in handling the information provided to the consumer necessitates the use of technology to gather, manage, distribute, and communicate information. Technology surfaces as the “enabler” that allows tourism businesses to carry out all these functions in order to create products and services that address personal travel demands. Additionally, it helps satisfy the need for value which emerges as a determinant factor of consumer satisfaction. Technology, then, acts as a strong driving force which is reshaping the tourism industry and providing companies with a competitive edge.

2. Electronic tourism: a new distribution channel

The entire travel industry is experiencing an unprecedented period of change. The development of information technologies and telecommunications plus the boom in e-commerce have had a major impact on travel marketing by offering new channels for distributing products. Tourism is, moreover, the dominant industry in retail e-commerce, far ahead of books, music and computers. Many experts believe that 33% of all on-line transactions are related to travel. However, the first challenge facing on-line travel agencies is convincing Web users that the tools for shopping on the Internet are effective since more and more consumers are using the Internet

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to research travel information. The trick now is for agencies to convince these lookers to purchase products on line. According to Forrester Research, only 20 per cent of lookers actually buy on line, for the reasons listed below.

Reasons why consumers do not purchase travel products on line:- they prefer the services of a travel agent- the information found is incomplete- they do not trust virtual agencies- someone else organizes their travel plans- they do not know any good travel sites- they do not know how- they are neophytes on the Internet.Source: Forrester Research

The various tourism sectors that have embraced the Internet revolution have developed numerous alliances with IT companies such as IBM, Logibro and ITA Software. These companies have, in turn, created customized services to meet the needs of the tourism sector.

3. Overview of the top players in on-line distribution

The North American marketIn the United States, many travel agencies have taken advantage of the development of new technologies to modify their distribution channels while new companies have sprung up.The chart below illustrates the top agencies in the on-line travel industry.

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In less than three years, Travelocity.com and Expedia have become major companies.

Since 2003, the situation has changed, with Expedia becoming the market leader.

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The European marketLaunched in September 1999, eBookers is now the second largest European on-line agency. Its chief British competitor, Lastminute.com, is now Europe's leading independent online travel and leisure company.The year 1999 was notable for the arrival of Travelprice.com. This agency quickly established itself and has recorded increasing sales since the year 2000.

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4. New methods of electronic distribution

4.1. “Click-and-mortar” agenciesAs seen earlier, consumers still hesitate to purchase travel products on-line because they prefer the services of a travel agent. For this reason, on-line travel agencies feel obligated to add a “human” touch to their services. The creation of “click-and-mortar” agencies (on-line players supported by a network of traditional travel agencies) is a response to this concern.While numerous traditional travel agencies hasten to establish themselves on the Internet, some virtual agencies are trying to develop off-line sales and support infrastructures. Hotel Reservations Network, Cheap Tickets and Lowestfare.com offer customers the option of reserving plane tickets or hotel rooms through a call centre.Often criticized for their absence from the Web, traditional agencies are now developing the infrastructures needed to offer customers the option of on-line transactions. The strategies differ. Many are setting up their own sites, like the Carlson Wagonlit group (carlsontravel.com, August 1999) and American Express, who announced in the summer of 1999 that it would be investing US$250 million in its Web site. In early 2000, French travel groups Nouvelles Frontières and Club Méditerranée launched their Internet subsidiaries, NF Online and Club Med Online.Other agencies have decided to acquire or establish partnerships with firms already established on the Web. For example, in August 1999 Rosenbluth International purchasedBiztravel.com and created Rosenbluth Interactive. French group Accor purchased a 2.5 per cent interest in U.S. agency WorldRes.com for US$23 million and Cendant acquired Cheap Tickets for US$425 million.

Consequently, partnerships are proving to be viable solutions: there is more cooperation between the old and the new economy. Large chains and traditional brands are increasing their Internet presence. According to the most recent figures, 11 of the 15 most popular on-line retail sites during the 2007 holiday season were “click-and-mortar” companies, in other words, companies using both on-line and off-line distribution.

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4.2. Name-your-price systems: New business modelsE-commerce today is powered by new business models that go beyond the traditional consumer-vendor relationship. The latest technologies enable customers to play a more active role in finding information and making decisions. Some examples of these new ways of doing business are auctions, name-your-price systems and group purchasing.On April 6, 1998, Jay Walker presented consumers with a new way of purchasing products and services on the Internet: the “name your price” on-line system. It is a sort of reverse auction, in that the potential consumer tells the supplier what he is looking for, for example, the desired destination, travel dates and price he is willing to pay. In return, the agent, or in this case the Web site, transmits the offer to the supplier who can either accept or reject it.The system was an instant success with 1.5 million unique visitors in its first month of operation. Following the lead of Priceline.com, other distribution companies developed similar business models, negotiating contracts with suppliers to offer consumers an attractive array of discount products and services. The mechanism between supplier and consumer can take various forms, but in the case of Priceline.com, inventory is purchased only when the consumer closes the deal. Lowestfare.com, Cheap Tickets and Travelscape.com are among the companies who have used the Priceline.com model to sell their on-line travel products.

5. Virtual consolidation

New methods of on-line communication have reduced the access barriers to the travel market, leading to a flood of new players. Hundreds of Internet sites have sprung up in the last few years, looking for a share of this expanding market. According to Bear Stearns investment bank, there are approximately 1,000 virtual travel agencies. These start-ups are founded on new ideas and supported by investor confidence in the new economy. They have significant financial resources at their disposal, enabling them to serve both national and international markets.

Over the years, the number of online tourism providers, both generalists and niche players, has increased, and the market has experienced a gradual consolidation into the hands of the larger and better-funded companies. There have been some notable merger transactions and acquisitions in the US and European travel industry in the past couple of years. In 2004, Orbitz ($1.25 billion), and Ebookers ($404 million) were purchased by the US company Cendant, and Lastminute.com was bought by the US company Sabre in May 2005. New travel-specific search engines emerged, such as the US aggregator www.sidestep.com (May 2005), which proposes to consumers a single site to explore and book travel packages and filter their results to find precisely what they are looking for. From a B2C perspective, the top three US online travel agencies, Travelocity, Expedia and Orbitz, last two owned by Cendant Corp., comprise about 77 per cent of the market.

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On the B2B side, large American travel groups such as Sabre Holdings Corp. and Cendant Corp. dominate the online market.

Consolidation of Virtual Agencies on European MarketIn August and September 1999, British agency eBookers.com acquired La Compagnie des Voyages, the first French on-line agency, and German agency Teletravel Flugreisen GmbH. Almost four months later, it announced the purchase of three other players: Lloyd Tours, Finland’s largest discount agency (revenues of US$9 million), and two German players, Take-Off Reisen and Cosmos. eBookers.com is now present in eleven European countries: Denmark, Finland, France, Germany, Ireland, the Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom.On August 15, 2000, Lastminute.com acquired the top French agency, Dégriftour, for US$88.4 million. This deal made Lastminute.com at the time the third largest e-commerce site in Europe. The transaction was motivated primarily by Dégriftour’s expertise at marketing travel in France. The company enjoys a high recognition factor (45%) in the country.At present, Opodo and Travelocity represent 60 per cent of the entire online travel market.

6. The airlines and on-line travel distributionThe airlines too have recognized the importance of e-commerce, using it to establish direct relationships with their customers and reduce the cost of issuing tickets. It is, in fact, much cheaper to issue a confirmation number and a receipt rather than print up a properly completed paper ticket. According to the carriers, they save $30 for every ticket purchased on-line.Airlines are taking an increasingly large share of the U.S. on-line travel market. The number of tickets sold through airline Web sites is growing steadily. Although airlines are subject to the same rules as travel agencies, they often offer exclusive rates and special promotions to consumers who visit their sites, thus motivating them to purchase their tickets directly rather than from a travel agent.

Discount carrier Southwest Airlines dominates the U.S. on-line market with estimated sales of over US$1.4 billion, or 26 per cent of their overall sales. The seventh largest carrier in the U.S., Southwest has succeeded where other carriers have not because the average volume of reservations on airline sites is 3 to 8 per cent of total revenues.In Europe, British carrier EasyJet records 86 per cent of its airline reservations on-line. Plane ticket sales top US$1.4 million per day.

Not to be left behind in the on-line travel boom and to further reduce the cost of selling and distributing tickets, the top carriers in the world have recently begun launching their own virtual travel agencies. Their goal is very clear: compete head-to-head with the major virtual agencies.

Orbitz stirs up controversySeveral months behind schedule, American, Continental, Delta, Northwest and United Airlines – five airlines that control 75 per cent of domestic air travel in the United States– officially launched Orbitz.com. This new portal

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sells tickets for 455 airline companies, including 35 “partners,” makes hotel reservations and arranges car rentals. A few days after its launch, the site announced that it was selling 10,000 plane tickets per day. After one month of activity, Orbitz.com was ranked the sixth largest travel site with just over four million visitors.The announcement of this site sparked controversy and generated a lot of press. Given the somewhat monopolistic nature of the alliance behind Orbitz, the entire traditional distribution network is seriously wondering whether Orbitz will violate anti-competition regulations. Its competitors fear that member airlines will be able to offer discount tickets on Orbitz that will not be available to other intermediaries. To prevent this form of collusion, the U.S. Department of Justice, at the request of the American Society of Travel Agents (ASTA), examined the new competitive environment created by the arrival of Orbitz. Despite an apparent competitive edge, Orbitz has not yet won the e-commerce war, where the major online travel agencies are waging a tough fight. Expedia, Travelocity.com and Priceline.com already enjoy impressive market shares, which means Orbitz will have to invest heavily in marketing to attract and retain consumers. Orbitz will also face the problem of respecting the individual interests of all the partners who, after all, are still competitors who want to attract customers to their respective flights.

Hotwire: Discount portalFollowing the announced creation of Orbitz, Hotwire entered the distribution network in October 2000 as an initiative of U.S. carriers America West, American, Continental, Northwest, United and US Airways. This business portal offers discount flights, accommodations and car rentals. Hotwire was started with an initial investment of some US$75 million from the partner carriers and the Texas Pacific Group. Technology partners include Eland Technologies, Sabre and Scient. Paradoxically, Sabre, which owns a 70 per cent interest in Travelocity.com, a competing on-line travel agency, will be a distributor for Hotwire. Hotwire’s structure differs from that of Orbitz: the partner carriers hold no voting shares in the company.

July 18, 2001, Orbitz and Hotwire signed an agreement to share information about airfares and hotel rates. This facilitates their customers’ access to all airfares and hotel rates.

Opodo takes offTwo months after the launch of Orbitz, nine airline companies launched Opodo. Aiming to become the European leader of the on-line travel market, this portal started up in December 2001 for the German, British, French and Italian markets. Air France, British Airways and Lufthansa each hold a 22.8 per cent interest in the company, Alitalia, Iberia and KLM each hold a 9.14 per cent share and Aer Lingus, Finnair and Austrian own the rest. The site uses Amadeus technology and offer a wide variety of products: 480 airlines, 55,000 hotels and 23,500 car rental companies.

Reduced commissions

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On February 28, 2001, Northwest Airlines and KLM announced that as of March 1, sales commissions to on-line agencies would be eliminated. This decision came at a time when the sales of airline tickets through virtual agencies were taking off. In fact, 42 per cent of all airline tickets sold on line (representing US$3.6 billion) are sold through Internet travel agencies.The decision to cut commissions had a significant impact on the industry, particularly the small independent travel agencies. In early March, Southwest announced that its tickets could no longer be purchased at Travelocity.com. This move was intended as a response to customer service issues.The question was whether other carriers will follow suit. Forrester Research had forecasted that all airline companies would eliminated their commissions to on-line agencies, leaving them with the choice of either passing on service costs to their customers or seeing their profit margins shrink.

Ticketing AutomationOther technological advancements have facilitated the distribution of travel while cutting costs and increasing responsiveness. Satellite ticket printers (STP) now allow travel intermediaries to issue tickets directly.The electronic ticket delivery network (ETDN) is another form of STP. The difference between them is that the supplier collects a commission for the usage of ETDN, while only a printing fee is received in the case of the STP. Electronic kiosks, which are stand-alone computer terminals found in hotel lobbies, airport terminal, and tourist information offices, now allow travelers to perform a series of different functions such as hotel check-in, purchase of airline tickets, or receipt of information about what a destination has to offer. Another development in facilitating the distribution of travel are electronic travel documents, simply referred to as ticketless travel, where the passenger’s personal information exists in an electronic file with the airline. All the passenger is required to do is present personal identification to obtain a boarding pass (Gee, Makens, & Choy, 1997, p. 213).

Electronic procurement: a new type of allianceBusiness-to-business (B2B) e-commerce and virtual marketplaces are slowly developing. For businesses, there are many advantages to using these Internet sourcing systems: access to a large supply of products and services, competitive prices, economies of scale and reduced order processing, just to name a few. Forrester Research estimates the B2B market is worth over US$6.3 trillion. The travel industry, particularly the airline and hotel sectors, will benefit from this boom, which has already created a number of alliances and partnerships.On Air Canada’s initiative, 13 of the world’s biggest carriers announced the creation of the largest B2B e-commerce site for the airline industry. Launched in the fall of 2000 under the name Aeroxchange, this Web site offers airlines the world’s largest selection of airplane parts, services and general supplies. It is expected to process purchases worth more than US$50 billion a year for various items, especially airframes, aircraft assemblies and engine components, as well as maintenance contracts and a wide range of aeronautical goods and services. In addition to the founding members, airlines who do not belong to the Star Alliance, other firms with industry ties

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and their suppliers will be invited to use the services of the site, which will be administered independently of the carriers themselves.

8. The FutureThe single most important issue concerning the future of the travel distribution systems is the elimination of the intermediary or middleman (i.e. travel agent and even the wholesaler) from the distribution chain.Indeed, the two most powerful technological trends, ticketless travel and the Internet, tend to challenge the survival of travel intermediaries. Individual computer users with direct access to ample on-line travel information can make their own travel arrangements. This, in combination with the possibility of using an electronic, instead of a regular ticket, makes traveling possible without the use of intermediaries.It is possible that travel intermediaries will shift their business on-line.This could involve collecting, managing, adding value, and redistributing information via the World Wide Web to computer users. They can also make use of upcoming technologies by providing on-line videos of vacation destinations and direct e-mail messages to update their customers on the latest travel bargains. However, one should keep in mind that competitors from fields not directly related to tourism, such as telecommunications and computer companies, possess technologies that can make on-line travel planning possible. These companies constitute a serious threat for travel intermediaries that plan to go on-line.No matter what the future developments may be, many insist that the value of the personal element of the travel intermediary business cannot be substituted by non-personal technological advancements. Additionally, it can be argued that those who do travel frequently, such as corporate executives, cannot spend time on booking their own travel. What can be stated with certainty is that the structure of travel distribution systems is changing, and adopting new technologies to do business will be the single most important factor in the future survival of travel intermediaries.

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