By James Pilcher
The Cincinnati Enquirer

The Internet, once considered a major success story for the airlines, may now be getting a lion's share of the blame for the industry's ongoing financial woes.

Many experts are saying that while the traveling public has benefited with historically low fares, fliers are coming to expect low prices on airline and other travel Web sites. This goes doubly true for cost-conscious leisure fliers, including passengers during the current holiday travel season, which kicked off Friday.

And they say that this prohibits airlines from charging enough to make a profit. For example, the area's biggest carrier, Delta Air Lines, lost $326 million last quarter and is expected to lose $1 billion for the year.

But airlines such as Delta dispute this, saying they still save more money by converting passengers over to the Web than they lose from low fares.

"It seemed like the story has always been that the airlines are offering hundreds of discounts out there and diluting their revenues," said Delta's director of e-commerce and distribution Kevin Connor, who oversees the airline's Web site. "But that has never been the case. In Delta's case, for example, less than 2 percent of the tickets we sell online have fares that are unique to the Web."

Put another way, the low fares everyone expects from the Internet have always been there. But industry analyst Jamie Baker says that the Internet has made it easier to find those fares, and in turn, has led people to expect those fares even more.

"The Internet initially was all about saving costs with precious little attention paid to pricing offsets," said Mr. Baker, of the Wall Street firm JP Morgan Securities. "And now it has applied significant pricing pressures and I think we're moving to the point where the Internet costs airlines more in lost yield than it saves in distribution expense."

Atlanta-based Delta, which operates its second-largest hub locally, has already sold more than $1 billion worth of tickets on its own Web site. Mr. Connor says that of all the tickets Delta sells (roughly 36.5 million so far this year), 30 percent are purchased online - half on delta.com and half on other sites such as Orbitz (Delta is part owner), Travelocity or Bestfares.com.

Internet ticket sales have become such a big part of the industry that even the U.S. Department of Transportation has taken a look. Last month, the department decided that such Web sites did not need to be regulated, as computer reservation systems are.

"It's the best tool that we've had in this industry in years," Bestfares.com president and chief executive officer Tom Parsons said. "It has made the customers street smart, and for the first time, it has brought comparison shopping between airlines and even airports. It's like someone looking at the Sunday paper to see who has Pepsi on sale this week."

And as airline and airfare Web sites have become more popular, average airfares have plummeted. In January 2000, the average fare was $140.80, according to the airlines' major trade group, the Air Transport Association. Two months ago, that figure was $122.50.

Delta's Mr. Connor acknowledges that Web sites have made travelers more savvy shoppers, and that may have led to lower-than normal prices. But he also says that the economy as well as the impact of the Sept. 11 attacks on demand has had a much higher impact, saying that only five points of a 15 percentage point drop in prices can be attributed to the Internet.

He also says that a ticket bought on delta.com costs the company about a third of what a ticket purchased through a travel agent does, even after Delta eliminated travel agent commissions.

"We save $78 million on fees to the global distribution system alone," Mr. Connor said. "I will say that we do have some pretty interesting debates on this internally, but in the end, everyone sees that this is still a huge benefit for us."

But Mr. Parsons, whose company buys discounted tickets in bulk from airlines such as Delta and offers them on a separate Web site, says since Delta has done away with travel agent commissions, many business fliers are booking their own tickets, regardless of corporate ticketing policies.

That may be pushing them away from higher fares that are more lucrative to the airlines.

"They've taken the cop out of the system, and now those guys are saying they'd be willing to drive to Louisville to save $300, when before there would be someone to remind them that their contract with Delta required them to buy a certain fare," Mr. Parsons said.

Mr. Parsons predicts that airlines such as Delta will begin cracking down on how many low-fare tickets they make available on the Web to keep supply more in line with demand.

Mr. Baker welcomes such a move, saying that the industry hasn't applied its usual strict revenue management policies to its own Web sites.

"They need to limit their inventories to what I call the opaque sites such as Priceline and such," Mr. Baker said. "It would be better that Delta move that ticket through its own proprietary site at $70 than through Priceline at $60."

But Mr. Connor says that the Web is here to stay for airlines.

"To paraphrase Mark Twain, the reports of price dilution are greatly exaggerated," Mr. Connor said. "There is the potential there that we could save $100 million but cost ourselves $300 million by selling the tickets too low.

"But we know that ahead of time, and we're not going to let that happen."

E-mail jpilcher@enquirer.com