There are no free peanuts on a flight that five major airlines hope to offer this summer.
Instead, there are warnings: This flight entails risks to your financial health.
The risks are spelled out in detail in the airlines’ proposal to raise $125 million by selling shares in their online travel venture, Orbitz.
If the deal gets clearance, they’ll be printed in Orbitz’s IPO prospectus, along with the special protections being offered the pilot and crew, not to mention Orbitz’s owners: United, American, Delta, Northwest and Continental airlines.
The cash-strapped airlines are hoping to pass off some of their risk in Orbitz while setting themselves up for a big payday.
They’re looking out for their crew. Take Jeffrey Katz, Orbitz CEO, who owns 1.8 percent. He’s in line for a payment of as much as $2.5 million if Orbitz’s stock crashes within a month after take-off.
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What’s the downside protection for ordinary investors?
None. No parachute, not even an airsickness bag.
That’s how our free market system works. Investors who take the big risks up front control the deal, usually long after the IPO.
Still, the airlines’ decision to take Orbitz public with a scant financial operating history and sizable losses reminds us, if we needed a memory-jogger, that they’ve never lacked for nerve.
From the day Orbitz was announced two years ago–back when online exchanges were red-hot investments–Orbitz’s owners maintained that what was good for them also would be good for the public.
Congress, state and federal regulators still haven’t decided.
Orbitz’s owners say they shave as much as 30 percent off their cost of selling tickets when fliers use their site, then pass some of the savings to customers.
Fliers benefit, they say, by getting convenient 24-7 access to the industry’s cheapest fares, thanks to Orbitz’s marketing pacts with more than 40 carriers.
Orbitz taps the Internet’s famous potential for eliminating middle players–much to the distress of challenged travel agents.
But Orbitz’s owners aren’t ordinary dot-comers. They control a majority of their industry’s tickets–an advantage that booking agents and competing sites claim Orbitz uses to unfair advantage.
The debate, raging for two years now, only will grow louder as Orbitz continues to expand in one of e-commerce’s brightest and fastest-growing niches.
Orbitz went from a start-up last June to the No. 3 travel site after Expedia and Travelocity.
U.S. Department of Transportation officials signed off on Orbitz’s launch last year, but a second review is under way with a report expected July 1. Travel agents, meanwhile, have filed a class-action lawsuit claiming antitrust violations.
While its legal troubles brew, Orbitz is trying to put its start-up costs behind it.
That’s where the IPO comes in: Orbitz needs cash.
The airlines are hardly flush and their Web venture, though its losses are shrinking, isn’t profitable. Orbitz lost $9.2 million from operations in the first quarter on $32.2 million in net sales.
If everything goes well–no travel disruptions, no adverse antitrust rulings, no competitive surprises–Orbitz’s future looks reasonably bright.
But there’s not much room for screw-ups.
Orbitz had less than $40 million in cash at the end of the first quarter, and its owners can’t afford to put in more money. “We do not anticipate that they will do so,” the IPO filing states.
The airlines are counting on IPO investors to bankroll the venture.
They’re also hoping for a windfall when they sell their stock, which they’re permitted to begin doing six months after the IPO.
No doubt, they’re hoping Orbitz’s stock will follow the trajectory of profitable Expedia, up 75 percent since fall.
So buckle up, IPO fliers. But remember, there are no free peanuts.
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And no airsickness bags.
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