Orbitz, Inc.

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Orbitz, Inc.

200 South Wacker Drive, Suite 1900
Chicago, Illinois 60606
U.S.A.
Telephone: (312) 894-5000
Toll Free: (888) 656-4546
Fax: (312) 894-5010
Web site: http://www.orbitz.com

Public Company
Incorporated: 2000 as DUNC, LLC
Employees: 306
Sales: $175.5 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: ORBZ
NAIC: 561510 Travel Agencies

Orbitz, Inc. operates a top three online travel agency. Orbitz.com has more than 19 million registered users, who can search among more than two billion fares on 455 airlines. This includes the largest selection of web-only airfares. Orbitz also offers deals on lodging (among 39,000 properties), rental cars (from 25 companies), vacation packages (30 providers), and cruises (18 lines). Airline ticket sales account for an estimated 70 percent of revenues. Other offerings include Orbitz for Business, aimed at corporate travelers, and Supplier Link Technology, an airline ticket distribution system. Orbitz was founded by United, American, Continental, Delta, and Northwest.

Origins

Five airlines—United Airlines Inc., Delta Air Lines Inc., Continental Airlines Inc., Northwest Airlines Corp., and, later, AMR Corp. (American Airlines)—teamed to create a new online travel service. (American became an equity partner in March 2000; total start-up funding was around $100 million.) Together, the five founding partners controlled 90 percent of seats on domestic commercial flights. Existing computer reservations systems such as SABRE did not present competing fares in an unbiased way, said company officials.

The venture was known to the media as "T2" when it was announced in November 1999. In fact, the partnership was incorporated as "DUNC, LLC" on February 24, 2000; "DUNC, Inc." was incorporated on May 4, 2000. These entities were officially named Orbitz, LLC and Orbitz, Inc. in July 2000. By this time, 30 affiliate airlines had signed up. Users could still buy tickets from 450 other airlines on the site.

Orbitz hired consumer advocate Cornish Hitchcock as an adviser at the time of its launch, when it had a total of 12 employees. By this time, six other airlines—Hawaiian, Midway, Midwest Express, Spirit, US Airways, and Vanguard—had agreed to sponsor the service. The total investment was $50 million.

The next month, Orbitz landed Jeffrey Katz, former CEO of Swissair AG, who left the airline to head the Internet start-up. Katz, an American native, would then commute from Los Angeles to Chicago in true airline exec fashion. Katz had once been an executive for the SABRE computer reservation system, owner of the Travelocity online ticket site.

Orbitz ended 2000 with 125 employees and no sales as it ramped up for a four-month beta test to begin the next February. The company's first hire was Chief Technology Officer Alex Zoghlin. Nara Schoenberg's profile of him in the Chicago Tribune painted him as an irrepressible, ponytail-wearing prankster and unlikely Navy vet with a strong entrepreneurial upbringing. He was also a computer whiz who had pioneered web browsers at the University of Illinois with Netscape cofounder Marc Andreessen (who would join the Orbitz board in 2003). Zoghlin left the firm in April 2003.

Traditional travel agents and competing travel sites protested Orbitz' cozy relationship with airlines, including its ability to sell cut-rate Internet specials not available through such traditional computer reservation systems as SABRE, Worldspan, and Galileo. Orbitz was also enabling the airlines to save on the fees they had been paying to have their flights listed on these databases by setting up its own "Supplier Link" distribution system.

However, Orbitz was able to successfully clear antitrust investigations, beginning with that of the Department of Transportation, in April 2001. (However, in June 2002, the Transportation Department reported it was conceivable that Orbitz might be able to undercut other web sites because of its close alliance with the airlines, reducing competition in the long run.) A Justice Department probe was finally completed in August 2003.

There were a number of rivals online. The oldest, Priceline, used a formula that required customers to essentially bid for tickets, rather than pick among listed fares themselves. Another group of airlines was launching a service called Hotwire that operated on a similar concept. There was also software designed to sort through fare offerings on individual airlines' web sites.

Launching the Site: 2001

Orbitz.com officially opened for business in June 2001. It claimed to have more web-only bargain fares than any other site. Orbitz also boasted the ability to inform customers of flight cancellations and changes through their pagers and mobile phones. The site also made it easy to search nearby airports for better fares. Orbitz.com sold $3.3 million on its first full day; it signed up 5,000 new customers in a single Sunday.

The Orbitz site had been billed as being powered by the fastest search engine in the world, custom designed at MIT. However, users experienced a number of technical glitches, particularly relating to international flights. There were also compatibility problems with older web browsers and with AOL, and complaints of inadequate customer service. An Orbitz spokesperson accused competitors of a "smear campaign."

Southwest Airlines sued Orbitz, complaining that the site listed its fare and flight information in a misleading way. Orbitz did not actually sell Southwest tickets. Vanguard Airlines, one of Orbitz's own partners, also had a troublesome relationship with the company.

A number of factors affected the travel industry after Orbitz started business. These included a weak global economy and the 9/11 terrorist attacks on the United States. This resulted in a weak reception on the stock market for another couple of years.

Orbitz began charging a $5 per ticket fee in December 2001. The company reported $43.4 million in operating revenue for the year. Orbitz's estimated $2.5 billion in bookings in 2002 more than tripled the previous year's result. The company lost $17.9 million for the year on revenues of $175.5 million.

In July 2002, Orbitz launched Supplier Link, billed as the first new airline ticket distribution system in more than 30 years. Around the same time, the company unveiled a special service to help corporate users save money on business travel. Savings of up to 75 percent on transaction fees were touted, since it only charged a $5–$6 per ticket fee. Specialized cost reporting and itinerary management tools were part of the service. The business unit originally targeted smaller businesses with annual travel budgets between $1 million and $10 million; Orbitz landed its first account with a major corporation, McDonald's, in October 2003.

Public in 2003

An initial public offering was scheduled for 2002, but postponed due to weakness in the stock market and other conditions. While the online travel market was competitive, Orbitz's prospectus suggested a successful future by leveraging the site's pull on seekers of airline tickets to pitch higher margin services. The company began reselling hotel rooms online in the spring of 2003. According to Business Week, Orbitz actually listed rooms available on Travelweb.com in exchange for commissions.

Orbitz gained by the postponement of its initial public offering (IPO). The IPO had originally been expected to take in $125 million when set for May 2002. In the next year and a half, the company's numbers grew and it was coming closer to profitability. Skeptics blasted Orbitz's lack of consistent profits, and noted that the commission rates the airlines paid were scheduled to drop to 37 percent of their value by 2006.

When the IPO was rescheduled in November 2003, the company said it expected to reap up to $303.6 million. Orbitz, Inc. began trading on December 16 at $26 a share, and the company raised $317 million in the IPO. The five founding airlines sold some stock but retained an ownership stake.

Orbitz increased its offerings of rooms at 100 independent hotels in March 2003. The company already had an association with TravelWeb, a consortium made up of Marriott International Inc., Hilton Hotels Corp., Hyatt Corp., and others. Orbitz sold 2.3 million room nights in 2002, one-fifth that of Expedia, Inc., owned by USA Interactive.