{"id":15873,"date":"2016-11-18T17:11:17","date_gmt":"2016-11-18T22:11:17","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/orbitz-the-disruption-of-digital-distribution\/"},"modified":"2016-11-18T17:11:17","modified_gmt":"2016-11-18T22:11:17","slug":"orbitz-turning-digital-distribution-from-a-challenge-to-an-opportunity","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/orbitz-turning-digital-distribution-from-a-challenge-to-an-opportunity\/","title":{"rendered":"Orbitz: Turning Digital Distribution from a Challenge to an Opportunity"},"content":{"rendered":"

It was the year 2001. The leaders of five major airlines (Delta, United, American, Continental, and Northwest Airlines)\u00a0were greatly concerned about the rising threat of digital distribution through 3rd-party online travel agencies\/exchanges such as Expedia.\u00a0In contrast to traditional distribution channels of live travel agents and brokers, in digital distribution the sale of a plane ticket takes place online, with data entry and sale finalization executed digitally by the consumer. Some consumers\u00a0also receive on-demand help from live support representative via text chat or phone.<\/p>\n

In 2001, digital distribution was becoming more relevant in the airline ticketing space than ever before due to factors such as consumer demand (more consumers regularly shopping online) and airline cost pressure (billions of dollars spent on agent commissions, a cost which could be reduced if distribution was shifted online).<\/p>\n

At the time, airlines were faced with three main possible digital distribution strategies:<\/p>\n

    \n
  1. Rely primarily on 3rd-party exchanges<\/strong> (e.g., Hawaiian Airlines): embrace exchanges as the primary digital distribution channel, cutting costs elsewhere to fund commissions<\/li>\n
  2. Participate in 3rd-party exchanges, but prioritize direct-to-consumer channel<\/strong> (e.g., United Airlines): participate broadly in 3rd-party exchanges, but use tactics to pull customers to own website<\/li>\n
  3. Exclusively focus on direct-to-consumer sales<\/strong> (e.g., Southwest Airlines): distribute exclusively through own website using strong differentiation to attract customers<\/li>\n<\/ol>\n

    However, in the eyes of Delta, United, American, Continental, and Northwest Airlines, the options above posed 4 main challenges:<\/p>\n

    Uncertainty around how large the nascent digital channel would become<\/strong><\/span><\/p>\n

    In 2001, only 7% of airline bookings were being made over digital channels [1]; however, researchers projected a 28-50% annual digital growth rate through\u00a02005.<\/p>\n

    High cost to distribute through 3rd-party exchanges<\/strong><\/span><\/p>\n

    In 2001, there was an ~$26 commission cost per ticket booked, similar to the cost of an live agent [1]. This represented ~8% of the price of an average airline ticket price ($320) [2].<\/p>\n

    Unlevel playing field on some 3rd-party exchanges<\/strong><\/span><\/p>\n

    For example, the SABRE digital booking system was accused of being biased towards\u00a0American Airlines, its parent company.<\/p>\n

    Low volume through carrier-owned websites\/exchanges<\/strong><\/span><\/p>\n

    Only 3% of airline bookings at the time occurred on an airline’s owned website [1].<\/p>\n

    Thus, these 5 airlines decided to band together to form a joint venture called Orbitz in order\u00a0to cut out the middleman. By creating their own joint digital distribution platform, the airlines created the following benefits for themselves:<\/p>\n