State of the Travel Industry and Future Trends

Andrew Mastrandonas, former Director of Internet Partnerships, Sales Strategy and Distribution with US Airways, recently interviewed Jeff Katz, former founding Chairman and CEO of Orbitz.com, to discuss his views on the state of the travel industry.

Mastrandonas: How would you characterize the performance of the travel industry in 2005? In particular, did the U.S. airline industry ‘turn the corner’ in 2005 and are most airlines making significant enough changes that will lead to a profitable future that is sustainable? Or, despite the progress made, is this simply an industry that will always have many weak years and a few intervening good years?

Katz: It was a debacle. There’s no way to call 2005 a ‘corner turning’ year. The industry is still very much hurting, and there are still way too many customer unfriendly aspects of air travel.

If you want to point out things that improved, yield began improving. And yet for passengers, fares still are very low and very flexible. These are hopeful signs. But this is more a mirage, than a meaningful sign that the industry is recovering.

Overall lines are long, airlines are losing vast sums of money, and employees are on the whole struggling to cope with a tough, tough situation. And, no, while dramatic progress has been made by many airlines this is not a sustainable situation.

In Europe and Asia, the situation is different. European airlines (at least the majors) are doing very well. They continue to set a high service standard for customers.

And the hotel industry in many parts of the world is robust with good occupancy and high average room rates. Happily in the hotel world the customer has a lot of choice and can find many price points, and very attractive levels of customer service.

Mastrandonas: Staying with the airlines, do you see consolidation of the industry continuing in 2006 and what’s your best guess on possible tie-ups? Unlike the ill-fated United-US Airways merger attempt, do you see the U.S. government largely staying out of possible mergers, letting the industry consolidate?

Katz: There has been some consolidation occurring and that’s been another bright spot if you’re an economist, at least. The KLM/Air France merger is progressing well and I think represents the future of the way things could, and should be done on a global scale. But it’s taking time and the managements have been very thoughtful in their approach.

US Airways is now a merger of US and America West. Time will tell how that works, but again, consolidation is underway.

And we’ve seen massive capacity outtakes at United, Delta, Northwest and ATA. Independence Airlines which had high hopes of being another Southwest has already liquidated which is yet another form of consolidation.

Will we see more? There is a lot of pressure to consolidate as a way to make industry capacity better fit industry demand. I think we’ll see more, yes. But it’s hard to predict when and how successful it can be. Ultimately in the US the dramatic speed at which low cost carriers are profitably growing has thwarted improvements the traditional carriers have made.

Will the US government play a role? I don’t think we will see a big involvement if mergers should occur soon. This is not a government that tends to intervene in markets.

Mastrandonas: It seems to some that airline fares are increasing and that perhaps the aggressive discounting of the past few years is over. What’s your sense?

Katz: Low fares are here to stay. It is simply a question of how fast they spread and how low is ‘low’. But $1000 one way economy class fares are forever gone in the US.

Mastrandonas: Virgin USA has been trying to get into the air for quite sometime now, and if it does make it, many experts think it could do quite well, particularly if it brings a “Branson-style” of marketing to the U.S. What are the major stumbling blocks to getting this venture off the ground?

Katz: They received financing so I think we will see this new brand begin to fly either late this year or in 2007. Hard to say if they can do well since there is an awful lot of competition in the markets where they may want to fly. It’s the intensity of today’s market, combined with brutal fuel prices that represent their (and indeed everybody’s) major stumbling block.

Everybody thinks Branson-style means savvy marketing and service with a flair. And customers would love this. They just won’t pay above market price for it. So, it won’t be easy but that’s never stopped Richard Branson before.

Mastrandonas: Are there any new online travel players that you think have promise; players that may have new or improved technologies that could shake up the online travel industry in the future?

Katz: We’re still in the early stages of online travel. So, we should expect new competitors, new technologies, and improved capabilities. Right now there’s no one that can really challenge the established players who are online like Orbitz, Expedia, Travelocity and Priceline. And no new players that can really challenge more traditional competitors like American Express.

But, as an example, Orbitz has only been in the market five years. So a new competitor can make very fast progress.

Mastrandonas: How would you characterize the state of the “big three” (Expedia, Orbitz, Travelocity) players in online travel today? Are they in “maintenance mode” now – simply just three large agencies that happen to book online – or do they still offer something unique that the offline players cannot – other than the fact that they are online? It appears in terms of fares, they’re not much different than the rest.

Katz: Expedia, Travelocity, and Orbitz are big companies with tremendous capabilities and large customer bases. They are expanding globally, they are improving technology and innovating in customer service at a rapid pace and they are expanding the breadth of the businesses they do..from cruises, to insurance, to advertising, to sporting events.

It is true that the consumer doesn’t see a lot of difference between the big entities and there has not been a striking or truly important new consumer benefit in the last year. But if one looks at the breadth of capabilities offered to their customers, the global growth and the financial strength that these companies have amassed in recent years, it is pretty remarkable.

Mastrandonas: There has been a lot of hype about ‘dynamic packaging’ in the past few years. Did dynamic packaging really take off as many expected and is this business segment an important part of the online players’ business?

Katz: Dynamic packaging is for real and its one of the main strengths of the big online agencies. It’s a very important part of their business and I think we will see many more exciting customer benefits from this technology.

Mastrandonas: Do you expect to see anything new and exciting in terms of travel technology in 2006? While current technologies from kiosks to online check-in to online flight status and Internet on board flights, are all great, is there anything in the spectrum of travel from searching for hotels and flights to arriving at a destination, that technology has yet improve upon?

Katz: There seems to be growing investment in things that will help customers solve problems – before the fact. Check out, for example, Orbitz’s TLC program. Kiosks are finally being installed at hotels to speed the check in and check out process. And airlines are investing a lot of money in bag bar-coding and bar code readers and this will dramatically reduce baggage handling errors and if you do have a problem will speed the process in finding and getting you your bag when it has been ‘lost’.

Mastrandonas: From an investment perspective, which segment of the travel industry do you think has the most promise in the next 5-10 years and why (we won’t hold you to anything)?

Katz: Well, the data is pretty clear. Investing in airlines is still only for speculators or those who thrive on volatility. And the hotel sector has, in my personal opinion, peaked. So investing in the travel industry is really for those who have an appetite for risk, and are willing to pay attention to what’s going on in a rapidly changing market.

Mastrandonas: Would you like to run an airline again or perhaps another online travel company?

Katz: I get asked this question a lot and I am honored that anyone thinks of me in this regard. Let’s just say that these are trying times in the industry, and there are many good leaders already at work managing through incredibly tough issues. I applaud what they are accomplishing.

Mastrandonas: Where did you go on your last trip, for leisure, and is there anything about the destination that surprised you (good or bad)?

Katz: I was last in Europe. My wife and I went skiing in Austria and spent a few days in Venice, Italy. I was surprised that it was snowing in Venice (January). And that the private water taxi from the airport to the hotel cost nearly $150. But Venice is a beautiful place to visit, especially in the low season when it is not overwhelmed by crowds and unbearable heat.

Biography of Jeff Katz:
Mr. Katz is a member of the following public and non-profit boards:
 Northwest Airlines, a NYSE company, where he also sits on the Audit Committee.

 Leapfrog LLC, a NYSE listed manufacturer and retailer of technology-based toys for education and schools. He is a member of Leapfrog’s Audit and Governance committees.

 City of Hope National Cancer Medical Center, a non profit research institute and comprehensive cancer care hospital. Mr. Katz is a member of the board’s technology committee.

Private boards and venture/private equity affiliations
 A member of the board of Friendster.com, the pioneer in large scale social networking platforms that generate revenue through highly targeted advertising techniques. Friendster is closely held by venture companies, Kleiner Perkins, Benchmark Capital, and Battery Ventures.

 A member of the board of Razorgator, a high growth company with revenue exceeding $100MM that specializes in the sale of secondary event tickets to consumers and corporations. Razorgator is closely held by Kleiner Perkins and Oak Capital.

Mr. Katz joined Orbitz in July 2000 as its founding Chairman, CEO, and President and 14th employee. Orbitz is considered a leader in the online travel industry and renowned for its leading-edge search technology and customer care program. Orbitz was the first major travel e commerce business to run all java/all linux technology in large scale operations and created numerous industry firsts in consumer ease-of use. Orbitz was named, for example, by Forbes magazine as their #1 travel website, #1 by Travel Savvy magazine, and #1 in customer satisfaction by the independent research firm, the Customer Respect Group. At approximately $4 billion in gross travel sales in 2004, it is among the world’s three largest online travel companies and the 7th largest travel agency in the United States.


Andrew Mastrandonas, a native-born New Yorker and most recently from Washington, DC, currently lives in Costa Rica where he owns a bed & breakfast and writes about travel and culture.