Municipalities across the country have been suing the online travel agencies, charging them with cheating the local governments out of lodging taxes. Agencies responded by keeping hotels in those cities out of searches. Until now, it’s been primarily smaller cities like Columbus, Georgia. But last week, the state of Florida got in the game, suing Expedia and Orbitz, claiming that the agencies failed to pay the full amount of taxes owed.

The state’s argument rests on the distribution model of the big agencies. When you book a $150 room with a hotel directly, the rate you reserve is the top-line number the hotel receives. Taxes are calculated on the basis of that $150 price, and submitted to governments accordingly. When you book with an Orbitz, Expedia, Travelocity, Priceline, or Hotwire, you may be paying one price, but the agency is paying another. So you may pay $150, but a Travelocity may be paying $100 to the hotel and keeping $50 in profit. For such reservations, the hotel submits taxes based on the $100 wholesale price. State and local governments argue that they should be receiving the taxes based on the retail rate, not the wholesale. So a thousand lawsuits bloom.

When I visited Orbitz headquarters in Chicago at the end of September, I asked Brian Hoyt, the company’s Vice President of Corporate Communications & Government Affairs, about this legal trend. Hoyt replied that the premise of these suits was fundamentally wrong: The lawsuits presumed that the agency was the hotelier, when in fact they were just the middleman, adding a convenience charge to the booking that they negotiated for their customers. “Orbitz is no more a hotelier than Ticketmaster is a baseball team.”

But the state of Florida has just upgraded Orbitz to the big leagues.

I’ve been sympathetic to the agencies on this front since I first posted about it in May. But the agencies aren’t doing themselves any favors: The problem for Orbitz and their peers is exacerbated by the fact that the agencies don’t break out their prices in a transparent manner. The $150 rate in the example above doesn’t show up as $100 plus $50 in fees. It shows up as $150.

Further, the agencies tack on extra “taxes & fees” (reduced recently, admittedly, but still there) without explaining the breakdown. Since the margins on hotel bookings are fat, and the taxes are based on the lower wholesale rate, there’s some room for profit in those fees, too. (It’s much like the “handling” in “shipping and handling” charges.)

The Florida case is a huge deal for the agencies, and the consumers who book there. Just the Orlando and Miami bookings alone would hurt the companies’ bottom line.

Let’s assume for the moment that the agencies lose this battle, regardless of the merits of the argument. One strategy would be to lobby for a federal solution, in which a national legal standard for tax collection is determined and applied federally. Another strategy would be to reform the ways in which agencies quote hotel rates.

Look at the these two current examples of hotel rate and tax quotation:

Expedia:

Orbitz:

Same hotel, same dates. First off, note the slight variation between the agencies. The difference may be due to variation in negotiated rates, or in fees. But you won’t ever know, because the agencies aren’t telling you what you’re actually buying.

I can understand the why the agencies want to keep their real rates quient. But since the prices aren’t broken out, it’s possible for states like Florida to launch lawsuits. If the agencies can’t get a federal solution, they may need to start quoting the wholesale rates plus the fees.

And if these lawsuits lead to greater price transparency, that’s going to be a huge change.

Small travel agencies historically laid claim to area-specific expertise and hands-on customer service. Then the online travel agencies came around and made mincemeat of them. Now, having played a big part in the slaughter, Orbitz is trying to bring some of the old-school features of a small, personalized travel agent to the 21st century and the online customer base.

In particular, I’m referring to two of the online agency’s features, which it hopes will set it apart from the online competition. First, destination specialists — customer service reps trained to answer questions about the most popular vacation destinations. A caller (or online chatter) might be interested in, say, Cancun, and have questions about different hotels. The destination specialist (who may or may not be an Orbitz employee) should be able to answer some of those questions.

Second, there’s a suite of post-purchase follow-up services that Orbitz promises, under the umbrella of the “OrbitzTLC” label. Sure, it includes the automated “your flight is delayed” e-mails that the airlines offer, but what makes it interesting is the human element: Like a travel agent who would make arrangements for you when things went awry, Orbitz promises to work to rebook you when your flights are canceled or delayed. And going beyond the Main Street travel agent’s limits, a group of former air traffic controllers watches live ATC data to see where the problems arise. A team of former airline employees calls the airlines to proactively negotiate rebookings on your behalf, breaking out the legal mumbo jumbo from the contracts of carriage.

What makes both services interesting to me is the merger of higher-touch human contact with online shopping. But none of this is new. Destination specialists were rolled out at the company in 2008, and TLC has been around even longer. And the concepts behind both aren’t new at all — they’re at the very heart of what travel agencies used to earn their money doing: providing a service that extended beyond the booking of tickets.

I admit that I only considered any of this after a recent visit to Orbitz headquarters in Chicago, in the company of other travel bloggers. (Full disclosure: The flight and hotel were on Orbitz’ dime.) But most of the participants in the meeting — all people who watch the travel space closely — were unaware of the extent to which these services existed. Several of us honestly thought that OrbitzTLC was just the generic flight alerts to your phone or e-mail. That tells me that Orbitz hasn’t promoted these services clearly or effectively.

And let’s face it, the barriers to entry for other agencies aren’t insurmountable. Sure, there’s a recruiting and training expense that’s not negligible, but it’s manageable. It’s not like there’s an entire floor of a downtown Chicago office tower dedicated to these services. There’s nothing stopping a competitor from starting up a similar service. (Travelocity mentions “Proactive Contact” in their guarantees, but again, it’s not very clearly defined or well promoted.)

Orbitz would be wise to promote these services more aggressively, if they really believe these services are an important differentiator from other online (and offline) agencies.

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Back in April, Orbitz rolled back its hotel booking fees, in the face of some smashmouth competition between the online travel agencies. At the time, Orbitz promised that the hotel fee cuts would last until July 15. But no: They’ve been extended.

Orbitz was one of the last agencies to reduce its airline booking fees. Those fee cuts were set to resume on June 1. They didn’t. Until further notice, the fees are history.

It’s a brutal world and a nasty fight for market share, and agencies aren’t bringing the fees back. Expedia, Travelocity, Priceline, and Hotwire all eliminated their airline booking fees.

But other agencies haven’t reducing the hotel booking fees the way Orbitz has. Orbitz is trying to carve out a space as the site for hotel bookings.

On the one hand, they’ve got a better price than other agencies, so this gives Orbitz a competitive advantage that travelers would be wise to take advantage of.

But it simultaneously shows that Orbitz is hurting and needs to cut prices in order to generate business.

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Upgraded: Room rate guarantees
In a continuing escalation of the war between the online travel agencies, Orbitz has added their Price Assurance guarantee to hotel reservations. If you book a room, and then someone else uses Orbitz to book the same hotel, with the same class of hotel room and on the same dates, and the price has dropped since you booked it, you get a refund. That’s a lot of if’s! This is not as robust as Yapta’s effort to track hotel room rates, but it’s an improvement, nonetheless.

Upgraded: Coffee on Southwest
Southwest Airlines is cranking out an improved brew on its flights. They are quick to remind customers that they’re still not charging a fee for the pleasure of arabica beans at 35,000 feet.

Downgraded: Coffee on Northwest
Back on the ground, a Northwest Airlines flight attendant charged with tending to an unaccompanied minor allegedly took an 8-year old to Starbucks. The flight attendant allegedly gave the girl a venti coffee loaded with cream and sugar, which made her sick. “I told her I was tired and she took me to Starbucks and said, ‘Go order a large coffee.’ She made me pay with my own money.” Why would anyone give an eight-year old, who is about to get into a plane, coffee? I wouldn’t have been surprised to hear that an airline employee had slipped the kid a Benadryl, frankly, but giving an 8-year old a giant coffee makes no sense. Northwest says the story “doesn’t match their records.”

Upgraded: Stories of irate passengers
Every time I think the latest story of a passenger gone wild on an aircraft is the winner, there’s a new story that takes the crown. And I quote: “A British woman allegedly had an in-flight meal of prescription drugs, wine and liquid soap — before trying to bite the crew of a London-bound jetliner. Galina Rusanova punched and kicked flight attendants on the Chicago-based United Airlines flight after downing two or three bottles of wine, prescription drugs and liquid soap from the jet’s lavatory, prosecutors said.”

Upgraded: Nonstops to see Yakov Smirnoff
Upgraded: Airline monopolies
Branson, Missouri! America’s low-rent Vegas! No, gambling or smut, but you can get Soviet Union jokes o’plenty! But this Ozark mecca of entertainment has-beens finally has its own airport. It apparently bears the distinction of being America’s first privately-owned airport with commercial service, and it was built without federal transportation funds. The flipside of this savings to the taxpayer: The airport can negotiate exclusivity on routes. If airlines have exclusive contracts for service for a delimited timeframe, “That’s a major incentive to an airline because they know they won’t have to duke it out over fares with anyone.” In English, we call that monopoly.

Five major US agencies have (temporarily) eliminated booking fees on air tickets. Now, Orbitz is escalating the fight against its competitors by changing its display of rates and reducing the booking fee on hotel rooms.

Orbitz will show the total of base rate, taxes, and fees on the search results page. (No word on mandatory charges like resort fees that hotels hide from searches.)

How much of a change is this? On the surface, this is a positive step toward greater price transparency. But is it really a big shift? Since hotel searches are geographically limited, taxes rise proportionally with base rates. Lower rates would, by definition, mean lower total prices. (This is unlike airfares, where base fares on two airlines may be the same, but the total prices may vary based on the number of stopovers or the airports involved.)

In terms of fees, the simultaneous reduction and integration of fees in results muddies things. Orbitz says they’re reducing hotel booking fees charged by the site, with a sunset clause that expires the reduction after July 15, 2009.

But who would notice? Since the fees aren’t itemized, it’s hard to see what the actual fee to Orbitz is. Customers may not care about whom they’re paying their fees to, but it’s not really transparent.

At first, I thought this would put pressure on Priceline, which claims to be “working hard to keep priceline’s hotel booking fees lower than Expedia, Travelocity, Orbitz, and even Hotels.com.” But if Orbitz fees aren’t broken out, then the real pressure is to show total cost up front.

As far as transparency is concerned, this is still a good move. Let’s hope these changes gain sway with others, and that they last beyond July 15.

Three weeks ago, to the day, I asked when Orbitz would drop its airfare booking fee in response to fee-cutting by Priceline, Hotwire, Travelocity, and Expedia. The answer: Today.

Orbitz has followed suit and has temporarily ended the airfare booking fee, for tickets purchased through May 31, 2009. The fine print: “Valid for round-trip or one-way flights through May 31, 2009. Excludes multi-carrier itineraries and flights originating outside the U.S., Canada, Mexico and the Caribbean.” Too bad about the multi-carrier itineraries. That’s something Orbitz excels at, so perhaps it makes sense that they still charge a premium for it. But still, too bad.

In their press release, they pitch that the combination of the newly-deleted fees and the Price Assurance program (analyzed here and here) makes them the online agency of choice. Assuming that the fares are the same at, say, Orbitz and Expedia, but the only difference was Orbitz’ Price Assurance program, then yes, I’d choose the no-fee Orbitz (even if I’m still a skeptic as to the real worth of Price Assurance).

But regardless: the clock is ticking. May 31 is the same expiration date as Travelocity and Expedia, which is not a huge window of opportunity.

But will they really bring fees back on June 1? I still maintain that, once you and your competitors let the genie out of the bottle, it’s hard to be the first to squeeze it back in. Priceline and Hotwire are unlikely to add the fee back in. Will Orbitz blink? Will Expedia? Travelocity?

I’m still betting that the no-fee environment will be extended. If one agency brings the fee back, expect a marketing blitz by competitors, touting the difference.

In the meantime, consumers benefit.

Today, Travelocity dropped its booking fee for airline tickets. A week ago, Expedia did the same.

Both agencies are promising that the fees will be on hiatus until May 31, 2009. But bringing the charge back may be tough: Back in 2007, Priceline and Hotwire dropped their booking fees “temporarily,” and they still haven’t brought the fees back.

That leaves Orbitz as the lone holdout among the biggest U.S. travel agencies. So when will Orbitz, the biggest holdout, throw in the towel on fees?

Consumers should welcome the rollback of these add-on booking charges. But this episode shows how brutal the online travel marketplace is right now. If online travel agencies want to collect a surcharge, they’re going to have to get creative, and earn it. Simply offering price comparisons and a few online alerts — which are free elsewhere — won’t cut it. And Travelocity, Expedia, Priceline, and Hotwire have admitted that.

Sure, Orbitz may counterargue that they provide value-added with their price guarantee, but since that service is of relatively limited value, I wouldn’t pay a premium for it (though maybe it’s worth the $6.99+ gamble for someone else…)

Travelocity is even poking a stick in Orbitz’ eye by copying their “Price Assurance” model and bringing it to vacation packages under the name “PriceGuardian.” If someone else books the same package as you, and the price has dropped, you get a check for the difference. Yeah, good luck with that.

What we may see is a shift to voluntary fees for add-on services, much like the airlines are going a-la-carte themselves. Want a price-drop guarantee? Pay a few bucks up front. Want text message alerts? A few more bucks. That I could see happening. But the standard one-size-fits-all fee is history at the mainstream agencies.

Back in June, Orbitz launched “Price Assurance,” by which customers would get refunds if other customers bought the same itinerary for a lower price. I reviewed it, with skepticism, when it was rolled out.

Here’s what I wrote when it was rolled out:

Unlike Yapta, which tracks fare drops and alerts you when the published price goes down, Orbitz will automatically send you a check IF AND ONLY IF another Orbitz customer purchases the same ticket you booked, and they do it for less money. If the price just goes down, but no one buys that ticket on Orbitz, you’re out of luck. No refund.

So when would you be more likely to win in the refund lottery? It would need to be a frequently purchased itinerary, so I’d be expecting it on major business routes like Washington-Chicago, San Francisco-New York, etc. Trying to get a price drop refund on that Bozeman, Montana to Fayetteville, North Carolina itinerary? Good luck with that.

So were my hunches right, or wrong? I asked Orbitz what the numbers really look like. Here’s an update from their reps:

Orbitz has mailed refund checks to travelers on over 2,400 routes since June 2008. This information is based on flights purchased on Orbitz.com in instances where a customer has purchased an airline ticket, and a subsequent Orbitz customer purchases a ticket on the same flight at a lower price, automatically generating a refund.

Subsequently, Orbitz provided a spreadsheet with the top ten refunded routes from ten cities. (The document was labeled “top 20,” but there are 70 routes mentioned.)

As I predicted, the majority of routes are indeed major business routes between American cities. There are some quirky outliers, though. Atlanta to Liberia, Costa Rica; Chicago to Guadalajara, Mexico; Miami to Barranquilla, Colombia; New York to Paris. The major business routes remain king, though.

Have any of you bought a ticket on Orbitz and gotten a refund afterward? If so, hit the comments.

[UPDATE: In a followup, Orbitz has provided the top 20 routes that have generated refunds. The list of 70 routes originally posted represents the top ten refund routes for those particular departure cities. I'm appending the top 20 list as well. Thanks to Orbitz for sharing the data!]

See the complete list, as provided by Orbitz, below the jump…

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TechCrunch reported and Budget Travel confirms that American Airlines is pulling its fares out of the granddaddy of all airfare aggregators, Kayak.com. Effective August 1, you won’t see AA fares on Kayak.

TechCrunch also reports, citing “the CEO of a competing travel site” as a source, that American is “considering doing the same with Orbitz. If it does so, other airlines such as Continental and Northwest may follow suit.”

For starters, this stinks for consumers, because it’s making comparison shopping harder. Already we’re stuck comparing apples to oranges, thanks to the variation between the airlines’ myriad fees. But in the long run, I’m betting that pulling out of comparison sites will stink for the airline, too, and we’ll see this decision reversed.

The comparison with Southwest will inevitably arise. Sure, Southwest doesn’t show up in comparison sites, but Southwest customers have been “trained” for years now to skip the search engines and go straight to the airline. American doesn’t have that kind of culture built up, and it’s unlikely to go all-in toward creating such a culture at this point. Just pulling out of Kayak won’t do the trick. And worse, it’s a real pain in the butt to waste time looking all over the internet for the lowest fare. I have always disliked that about Southwest, but hey, it’s working for them. Still, Southwest is the exception — not everyone can pull off selling tickets solely on their their own. Even JetBlue caved in and started publishing fares on other sites.

American Airlines has played these games before. They once yanked first-class fares from Expedia, but came back three weeks later.

This sort of thing goes both ways, too. Notably, online travel agencies don’t claim to cover ALL the options. Orbitz, for example, limits customers’ choices in its rental car search to those companies that pay to be included.

I’m betting that American’s pullout is a bargaining strategy. They hate to pay any referral fees to sites that drive them customers, but they don’t want to lose those customers entirely. Their real goal: to negotiate a smaller revenue split with Kayak and/or Orbitz.

If I’m right, then American’s fares will be back online for comparison shopping within a month or so. If I’m wrong, then we will likely see other airlines do the same, and the business model of Kayak and its competitors is at risk. It’s not just venture capitalists who lose out if those sites fail: The consumer loses. So I really hope my prediction is right.

Elizabeth of Go Green Travel Green (not pictured) writes in to remind me of the new “price assurance” policy that Orbitz rolled out last week.

After you book your flight, Price Assurance guarantees that if someone else books the same flight (same date, same time) through Orbitz at a better rate than yours, Orbitz will send you a check for the difference (between $5 and $250 per person).

According to the Wall Street Journal, the move is an attempt to ward off competition from Priceline and Hotwire, both of which eliminated the ticket booking fees so often associated with online travel agencies. (Orbitz charges a $6 booking fee edit:$4.99 to $11.99 booking fee, variable depending on the itinerary, per ticket.)

So instead of offering a guaranteed discount (i.e., no booking fee), Orbitz is offering you the possibility of greater rewards, but for greater risk. It’s a gamble. And, in my estimation, it’s a losing bet, with the odds favor the house on this one.

Unlike Yapta, which tracks fare drops and alerts you when the published price goes down, Orbitz will automatically send you a check IF AND ONLY IF another Orbitz customer purchases the same ticket you booked, and they do it for less money. If the price just goes down, but no one buys that ticket on Orbitz, you’re out of luck. No refund.

So when would you be more likely to win in the refund lottery? It would need to be a frequently purchased itinerary, so I’d be expecting it on major business routes like Washington-Chicago, San Francisco-New York, etc. Trying to get a price drop refund on that Bozeman, Montana to Fayetteville, North Carolina itinerary? Good luck with that.

And besides, do you really expect fares to go DOWN much anytime soon? If Orbitz starts offering the other side of that wager, I’ll be in.

For the most part, I’d stick with either the airline’s own website, Priceline, or Hotwire, to save on the booking fee.

Related:
- The black art of repricing tickets
- Track airfare before and AFTER you buy?
- Putting low-fare guarantees to the test
- Orbitz (aff)

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