Yesterday American Airlines (AAL) and their recent acquisition US Airways, in a move that will have shocked those who have spent the last five years under a rock, announced that they would no longer be listing their flights and fares on Orbitz (OWW). Okay, so the sarcasm may be a little overdone, but this is just the latest in a long-running dispute between the online booking agent and the giant carrier. The airline first pulled their flights from the site in 2010, prompting a legal battle that American lost. This time, though, it may be different.
The outcome of the lawsuit that followed was a ruling by an Illinois court that American had to list on Orbitz. That ruling was in turn followed by an American Airways suit against Orbitz, which was settled out of court, claiming that the online listing company was deliberately giving less prominence to their flights than they gave to competitors. As you can see, it has been a rocky relationship.
The initial market reaction to the news has been quite revealing. Both stocks traded lower, but AAL lost less than 1 percent yesterday, while OWW dropped over 4.5 percent. That makes perfect sense and is a pattern that I expect to see continue as the two companies’ respective industries are in different stages of development, and consequently the airline has a lot more power in price negotiations than the website.
The airline business, after years of inefficiency exploited by a rash of new, dynamic, low cost carriers, has been moving toward consolidation in the last couple of years. Major carriers have cut costs (and flights) and now are somewhat more competitive with the discount airlines where they have to be, while taking advantage of their monopoly positions in smaller markets.
As an example, for me to fly this weekend from the regional airport near where I live to a major city, which is only a 45 minute flight away, where American Airlines is my only option, would cost roughly $520. I know it is Labor Day weekend and short notice, but that represents some serious pricing power.
Online booking, on the other hand, is still seeing increasing competition as metasearch engines such as Kayak, which has been owned by The Priceline Group (PCLN) since 2012, Momondo, Hipmunk and a host of others gain traffic. They compare prices on different booking sites for customers. In other words, while the airlines still have areas of business with significant pricing power and little competition, online booking sites do not. That explains why, in my sample search, there was only $1 between the highest and lowest prices available from multiple sites.
The airlines’ pricing power may be frustrating to travelers, but until it changes it gives companies such as American Airlines a backstop when competition heats up. For that reason the forward P/E of AAL, at below 8 looks way too low and the stock is still undervalued.
OWW, however, is anything but cheap at a forward P/E of just under 20. Once again, in disputes about fees with booking sites, it is the big airlines that hold the pricing power. Assuming that American faces no legal difficulty this time around, Orbitz will be the loser in this battle; American has plenty of other places to place their tickets. Given the plethora of other sites available and the fact that most prospective customers use either metasearch or regular search engines such as Google (GOOG) in their initial search for flights, it would seem that Orbitz and other sites need American Airlines more than the other way around.
Ultimately not being listed on Orbitz will do little or no harm to AAL, especially as this decision is only in regard to individual bookings. Businesses using Orbitz will still see American and US Airways flights listed. For Orbitz, and other travel booking sites, though, it could be indicative of a period of further margin squeezing. If, as I suspect, not being on every site is shown not to hurt an airline, then future discussions on commissions paid to the booking sites will look very different.
Once again, as frustrating as it may be for consumers, the big airlines will have the upper hand when it comes to pricing. That may result in your flights costing a few bucks more, but it is good for stock in American Airlines.