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Northwest fee change puzzling

Published Sep. 9, 2005

The end of commissions to travel Web sites raises issues of fairness and competition, but the airline is quiet.

Northwest Airlines' recent decision to stop paying commissions to Web sites that sell its tickets has reverberated throughout the travel industry, both online and off. Inc. has added $10 to Northwest fares to make up for the lost commission and suspects the nation's No. 4 airline is trying to increase traffic to its own Web site by squeezing out competition. also added a $10 surcharge _ not to mention a blinking message about Northwest's fares on its site _ in response.

Brick-and-mortar travel agents worry the March 1 policy shift by Northwest and its partner KLM Royal Dutch Airlines will not only be followed by other major carriers, but that it represents an effort by the industry to phase out commissions altogether.

Richard M. Copland, president and CEO of the American Society of Travel Agents, has called Northwest's decision "another power play on the part of the airlines to shift costs to the consumers, increase the price of air travel and punish all competitors."

On the day of Northwest's announcement, shares of Travelocity of Fort Worth, Texas, fell 33 percent, while shares of rival Expedia Inc. dropped 17 percent.

Minneapolis-based Northwest, which over the summer accused Travelocity of misleading consumers through biased displays favoring British Airways, issued a brief press release Feb. 28 announcing the elimination of Internet commissions, without explanation.

Northwest declined to comment.

Travelocity said Thursday that Northwest's weekly ticket sales have dropped by more than 25 percent, or about $1.25-million, since its zero commission stance took effect.

"The overall level of business on Travelocity has not decreased, but people are booking away from Northwest flights," said Bruce Charendoff, senior vice president of, a unit of Sabre Holdings Corp.

Independent ticket brokers say the most significant threat to fair play looms in the form of Orbitz, a travel Web site founded by the parent companies of Northwest, United Airlines, Continental Airlines, American Airlines and Delta Air Lines. The fear is airlines will reserve their best fares for Orbitz, which denies any such plan.

Orbitz, which is planning to launch this spring, touts technology guaranteeing consumers the lowest fares available. Orbitz executives say a level playing field is ensured, in part because Orbitz will charge airlines the same commissions they pay competitors.

But now Northwest will not have to pay commissions to Orbitz, according to the terms of the contract, making it $10 cheaper to book a Northwest fare on Orbitz than on Travelocity.

Representatives at United, Continental, American and Delta said their companies would not comment on the issue of commissions, citing federal laws prohibiting price signaling.

The Department of Justice and the Department of Transportation are investigating Orbitz of Chicago to determine whether the airline-backed venture poses a threat to price competition.

Orbitz CEO Jeffrey Katz, formerly the president of Swissair, calls the entire affair a "Washington food fight" and is adamant that the Northwest decision was made independent of any discussions with Orbitz or its other founding partners.

Far from reducing competition, Katz said Orbitz will be the first unbiased marketplace where airlines can compete on price and not on their ability to negotiate deals to gain preferential treatment with online travel sites.

Financial analysts say it is highly possible Northwest's action could be a harbinger of a zero-commission future for the entire industry.

"Similar to the fare increase tactics utilized by major airlines, we believe (Northwest) and KLM are sending a zero-commission signal to competitors in hopes that the other major airlines will follow suit," Mark J. Rowen, a Prudential Securities analyst, wrote in a report.

If other major airlines do not follow Northwest's move _ and a couple have indicated they will not, according to Travelocity _ Rowen predicted Northwest would reverse itself. Other analysts say they had been anticipating a move like Northwest's.

The industry trend toward zero commissions was first evident when airlines placed a $10 cap on the 5 percent commission paid to Internet travel agencies. Traditional travel agents can charge the airlines as much as a $50 commission per round-trip ticket.

Henry Harteveldt, a senior analyst with Forrester Research in Cambridge, Mass., who follows travel Web sites, expects the elimination of commissions to occur within six months.

"This is an industry run by lemmings," he said.

Even if commissions once charged to airlines are shifted to travelers, Harteveldt argues, the lowered costs of online ticket distribution will continue to reward consumers who book fares online.

"I don't think this has anything to do with Orbitz," Harteveldt said. "I simply think it shows airlines in a softening economy taking control of distribution costs."

Even Travelocity and Expedia acknowledge they'd been preparing for the possibility of zero commissions, reducing their emphasis on revenues from commissions and beefing up their sites' offerings for booking cars, hotels and package deals.

Expedia, which was started by Microsoft Corp. and is headquartered in Bellevue, Wash., is negotiating with Northwest and has not decided whether to levy a fee on the carrier's fares.

Travelocity's Charendoff says it is unclear what Northwest and the other airlines are planning, but he said it is not unreasonable to be at least a little distrustful.

"We're mystified at why Northwest would reduce commissions to its lowest cost distribution channel," he said.