Web travel agencies brace for airline downsizing

By Kyle Peterson - Analysis

CHICAGO (Reuters) - Online travel agencies, after growing rapidly for years, could face a slump in domestic bookings later this year when U.S. airlines slash the number of tickets for sale.

All three publicly traded online travel agencies (OTAs) -- Expedia Inc (EXPE.O), Orbitz Worldwide Inc (OWW.N) and Priceline.com Inc (PCLN.O) -- have warned that airline downsizing could hurt other travel businesses.

None predicted a specific impact on their industry, but at least one expert says the implication is clear:

"We expect it to hurt the OTAs because it could lead to higher air pricing, which could deter travel," said Marianne Wolk, an analyst at Susquehanna Financial Group.

Capacity cuts are certain to put a crimp in domestic air travel sales, she said, adding that "there should be a secondary negative impact on travel overall."

The trouble stems from a crisis in the airline industry resulting from surging fuel prices that have offset a series of fare hikes and led to steep quarterly losses for carriers.

Major airlines like AMR Corp's (AMR.N) American Airlines and UAL Corp's (UAUA.O) United Airlines have responded by downsizing to cut costs and command higher fares.

American has promised to cut domestic capacity by up to 12 percent in the fourth quarter, while United said it would cut its fourth-quarter mainline capacity by up to 16.5 percent.

Airlines also have angered travelers by charging fees for items and services like in-flight refreshments and baggage checks that once were complimentary.

But it's not just passengers who will share the pain. The entire travel industry will take its lumps, OTA leaders say.

"We would expect the capacity cuts coming up in Q3 and Q4 to continue to push air fares higher, putting ongoing pressure on ticket volumes," Mike Adler, chief financial officer at Expedia, said on an earnings conference call last week.

"As most publicly traded travel companies have reported, economic uncertainty and high fuel prices are affecting the broad travel market, and significant airline capacity reductions in the fall will also have a negative impact," Priceline Chief Executive Jeffery Boyd said on an earnings conference call on Tuesday.

DIVERSIFY

The best defense against weakness in U.S. air travel bookings is to diversify operations, Susquehanna's Wolk said. U.S. travel companies that sprawl across Europe and Asia are better insulated against trauma in the domestic market.

She said Orbitz has higher U.S. exposure than Expedia and Priceline, noting 80 percent of Orbitz's business is derived from domestic air bookings.