By: Karen Pelletier

Intro to E-Marketing

Company Overview• Travelocity is one of the leading providers of travel services on the internet

–Particularly for leisure and small-business travelers•Travelocity provides various features for customers

–one-stop travel shopping and reservation services–Real-time access to schedule, pricing, and availability information for over 500 airlines, 13,000 hotels, and all major rental car companies–Offers vacation packages–Promotional fares–Travel news–Destination information

Facts• Headquartered in Fort Worth, Texas• Segments to people who are travelling leisurely

– 70% of online bookings

• In under five years it has grown from being the 33,000 largest US travel agency to the 6th largest– Converts more online travel browsers to buyers than any other

online travel website– Hires 25 customer service representatives each week– Handles more than 14,000 calls and 3,000 emails per day

• In 2001 Travelocity demonstrated that is one of the few online business that can make money– Gross margins of about 67%– Earns revenue from travel commissions, advertising, and a cut of SABRE’s booking fees

Airlines have identified two groups of customers– Brand-loyal customers who use one airline

exclusively• Motivated by frequent-flier programs, corporate contracts

with the airline, perceptions of the quality of that airline, and the dominance of that airline at the local airport

• Tend to buy tickets directly from the airline instead of shopping around

– Airlines tend to focus more on loyal customers

– Price-sensitive customers• Customers perceive the service of acquiring airline tickets

to be a commodity product and they are driven primarily by price

– Online travel agencies have an advantage for segmenting to this type of customer

Travel Industry Background

• Travelocity wants to take the place of the traditional travel agencies– Traditional travel agencies fill the value-added role of providing

information to the traveling public– Connect consumers to the numerous travel suppliers– Provide a physical location for handling paperwork– They are a personal point of contact for travelers (face-to-face

contact helps build a trusting relationship)– Work with travelers to help them learn about destinations,

timetables, fare structures, and the “fine print” of travel offers

Travel Industry Cont.Travel agents use specialized computer terminals and applications to

tap into electronic global distribution systems (GDS)– SABRE, Apollo Galileo, Worldspan– Search for flights, computer fares, check availability, and make reservations

Travel agents are a crucial distribution channel for travel suppliers because they create a point of presence for suppliers– Ticketing, sales and promotions accounts for 20% of an airline’s operating costs– For many years travel agents were a major distribution channel because airline

companies cannot afford to have a direct-sales outlet in every town– Suppliers (airlines) actively marketed themselves to travel agents to enlist the

agent’s help in influencing the end consumer– Travel agents were paid commissions for their services– Both suppliers (airlines) and customers both benefited from the services of the

travel agents

The Rise of Online Travel AgentsTravelocity and other online travel sites have a large impact on

travel– Gives customers more choice and more power in making their travel

plans– Easily do their own searches– Create their own travel itineraries– Book their own flight from the comfort of their homes

Online travel agents benefited from a confluence of trends which include:

•People were becoming more literate with travel and computers

•Low-cost public Internet access performs the same function as the proprietary connections used by travel agents•Airlines adopted a new system of paperless ticketing systems•Widespread penetration of credit cards

The Rise of Online Travel Agents Cont.

• The number of customers who use the internet to make their travel plans are increasing– Consumers spend more than $1 billion per month on travel sites (which

is 1/3 of the money spent online)

– 75% of American households have used the Internet to research travel

– 20% have actually purchased travel online– Analysts expect the number of online travel buyers to triple

between 1998-2003 (reaching 72 million)– Customers want to buy travel online more than any other

product– Research firm Forrester estimates that 18.9 million

households will spend $16.7 billion in 2001 on leisure travel compared to 14.9 million households that spent $12.3 billion in 2000

The shift to online travel agents has changed the power structure of the travel industry– Previously, travel agents enjoyed a 10% commission on ticket sales so

now suppliers (airlines) can reduce their costs significantly (reducing the costs of call centers, travel agent commissions, and costs from handling paper tickets)

– Airlines have reduced and even eliminated the commissions that they are willing to pay agents which led to many traditional travel agencies to go out of business

• It would be impossible without GDSs (global distribution systems) for consumers to book online– It accounts for 70% of all airline tickets booked– GDSs compile data for airlines, hotels, car rental companies, and cruise

lines– Online sites and travel agencies use GDSs for a fee to access

information and book tickets– As commission prices are driven down, online agencies are realizing that

it is important to obtain their own higher-margin inventory contracted directly from the supplier

Some travel agents are considering shifting from the traditional agent model of commission sales to a merchant model of reselling travel services– Major reason for this is because airlines are

reducing/elimination commissions (Continental Airlines on Oct 24, 2001 announced the elimination of commissions on travel that was booked on the internet)

Although this may seem negative for travel agents it may prove positive for online agencies since airlines are struggling because of the recession and threats of terrorism

• Airlines face extreme pressures to reduce costs and fill empty seats

Merchant ModelThe merchant model would consist of buying airline tickets and

hotel inventory at a wholesale price and selling it at a higher price – This would leave a profit for Travelocity since there are no longer any

commissions– Tickets not sold could be bought back by the supplier– This revenue model would benefit both the supplier and travel agencies

• It is predicted that online sites will continue to be a thing of the future (and increase in usage) since suppliers want to maximize their profits and this would ensure that they would have multiple distribution channels

Two Sources of Competition• Other online travel agencies• Direct-sales efforts of suppliers

– Suppliers value the indirect channel provided by travel agents but they prefer to create direct relationships with loyal customers

• Three major players in online travel agencies are Travelocity, Expedia, and Orbitz– Other competition are Priceline, hotwire, and lowestfare

– In 2000, Travelocity and Expedia were in the lead with 35 and 25 percent of gross online bookings

• Orbitz is a serious threat to independent online travel agents– Owned by the same airlines that supply tickets through online travel agents

– Preferential access to the best fares

– Spent more than $100 million advertising investment

Competition• Early 2002 Travelocity faced increasing competition

– New entrants which include orbitz.com – Airline companies started to market aggressively online

• In response to the increase in competition, Travelocity is considering launching a loyalty program

• Mike Stacy, vice-president believes that a loyalty program can help respond to competitive pressures– But it brings up a number of questions – How will it be structured? – What have worked in other industries? – Will it generate enough repeat purchases

to keep Travelocity profitable?

Competitive Response

Travelocity increased its advertising expenditures, improved its technology infrastructure, expanded its products, and entered into co-branding agreements to keep pace with the competition– Travelocity believes that people not only shop online for the

“lowest” price but they are looking for the “right” price• The online experience which includes a good shopping experience,

easy navigation, and a reliable site affects the purchase• Invests heavily in its technological infrastructure and its customer

service

– Product Diversification• Pushing its non-air bookings more aggressively• In 2000- Hotel reservations increased 132%, car rental revenues

increased 98%, and vacation/cruise sales nearly quadrupled• Non-air revenues in 2000 was 20% Non-air revenues in 2001 was

29%

Competitive Response Cont.• Some of Travelocity’s co-branding includes entering into partnership

agreements with America Online, Yahoo, Excite, Lycos, and Time Warner’s Road Runner– Travelocity runs the travel section of the portals in exchange for reaching

a larger customer base and they share the revenues

• Launching loyalty programs to build a trusting relationship with customers and to combat the fundamental threat that airline tickets are a commodity product (price driven) – Program to reward customers for their continuous business– Two different loyalty programs which are defined by the nature of the

benefits• In-kind bonus- free airline travel as a reward for paid airline travel

– Better at generating loyalty and additional revenue because customers must stay with the company to redeem the bonus and higher chance of doing paid business

• Fungible bonus- Accumulated loyalty points to buy a “free gift” from catalog– More useful when in-kind benefits would be too expensive to offer within a

reasonable span of customer business, such as when it would take years for the average customer to earn a useful number of loyalty points

Loyalty Programs• Airlines use their loyalty programs to influence customer behavior more than

just encouraging repeat business– Offer double miles if they fly a certain routes at certain times– Give special bonus for taking three more flights by a certain deadline– Airlines use their loyalty programs to further disintermediate travel agents of both

the traditional and the online variety

• A loyalty program is generally considered to be a cost center– Source of new costs in the form of administrative expenses, promotional costs,

and the cost of the benefit itself

• Larger airlines are converting their loyalty programs into profit centers– Sell “miles” to other companies for the other company’s loyalty program (ex.

Various travel partner programs- airline miles for staying with a partner hotel or for renting a car)

– Consumer demand for airline miles lets airlines sell loyalty program miles for about 2 cents a mile of up-front revenue. This brings a very high profit margin because some customers wait years before redeeming award miles, some consumers never redeem their miles, and airlines manage to restrict award travel to seats that would be empty anyway

Strategy & Goals• Travelocity intends to both retain customers and

encourage additional purchases from their customers

• Developed a number of programs to build loyalty – As of 2002, no other online travel agent company has offered

loyalty programs– Launched a Travelocity credit card through Citibank

• Customers earn points on all modes of travel and face no blackout dates

• Marketed through direct mail• Working to develop more creative ways of

marketing the card to increase response rates

To improve customer loyalty Travelocity created “Travelocity Preferred” with two different programs to meet individual needs

• $29.95 Travelocity Preferred Benefits– Two category upgrades on Carnival Cruise Lines– 15% savings at 4,000 nationwide restaurants– Global Assistance

• $79.95 Travelocity Elite Benefits– 5% cash back on specially marked Travelocity fares– Airline club lounge pass– 20% savings at 7,000 restaurants nationwide– Personal concierge service