"Rossgate" Continues - Federal Grand Jury Subpeonas Documents From Hilton

Today, a federal grand jury in New York requested documents from Hilton relating to the allegations that two former Starwood executives (Ross Klein and Amar Lalvani) improperly removed thousands of sensitive and confidential documents relating to Starwood's luxury brands. According to Starwood, these documents were used to enable Hilton to dramatically shorten the time required to bring Denizen to market. In addition, they contained valuable proprietary data about Starwood's development pipeline, developers etc

Hilton has "temporarily" suspended development of the Denizen brand and suspended both Ross and Amar on paid leave.

Oddly enough, however, Hilton has not suspended Ross and Amar from the Denizen website. They are still prominently featured as the brand leaders.














As an aside, we can't help but laugh at how similar Ross looks in this picture to former Starwood Hotels CEO Barry Sternlicht. Funnier still because Barry was the original brains behind the W brand long before Ross arrived on the scene.


This investigation will prove a huge distraction for both Hilton and Starwood over the coming months - how much time will both chains focus on these efforts vs. generating revenue in these trying times?

And how will this change Hilton's development pipeline? We can't imagine that many developers (what few that are in fact looking right now) will be looking to sign a deal with Denizen anytime soon - today's developments should open new opportunities for other, non-Hilton brands in the "lifestyle brand" category.

How far beyond Ross and Amar did the knowledge of these documents go within Hilton? That could be the difference between this affair bringing down just the two Denizens vs. something much broader.

Starwood sues Hilton over Denizen - "Zengate"

The Wall Street Journal is reporting that Starwood Hotels and Resorts Worldwide (HOT) has sued Hilton Hotels over trade secrets relating to Hilton's new brand, Denizen. We previously discussed Denizen when it was launched a few weeks ago in Berlin and noted its remarkable similarities to Starwood's W Brand. However, at the time, we chalked it up to Ross Klein's memory and panache. (Hey, Panache isn't a bad name for a boutique brand, is it?)

If Starwood's claims are true, it may be more than simply enduring style and charm that helped define Denizen. Starwood claims "This is the clearest imaginable case of corporate espionage, theft of trade secrets, unfair competition and computer fraud." Strong words indeed.

So, what, if anything, might have Ross taken with him? Revenue projections and past performance? Bliss soap samples? Music play list for the elevators? This isn't like stealing the recipe for Coke or the nuclear launch codes but it clearly sounds as if Ross left with more than a towel or two.

Indeed, according to Starwood, Ross and Amar departed with literally boxes (8 of them!) of documents detailing extensive market research, sensitive management contracts and blueprints for developing a new brand - something Starwood clearly knows a few things about given the launches of W, Element, and aloft.

Starwood has also sought a full injunction against Hilton from using any of the documents in launching the Denizen brand which, if successful, could effectively shutter the brand for some time.

It will be interesting to watch this play out in court. And it will be a huge distraction for both chains at a time when revenue generation is critical.

Is ALGT (Allegiant Air) losing altitude? Not at all...

Allegiant Air pre-announced Q1 earnings of $1.34 to $1.38 per share this evening - beating analysts' estimates of $1.18 per share. Good news in the airline industry? Yes, really. But ALGT is no American, Delta or even AirTran or JetBlue. Why?

First, this is an airline built for leisure. Flying two or three days a week from Podunk cities with limited other service (no offense, Sioux Falls, Duluth and Bozeman) to key leisure destinations such as Las Vegas, Orlando and the like attracts few, if any business travelers. Business travelers demand frequency - two flights a week just won't cut it - especially when they are to cities with little business demand in the first place (now, no offense to Vegas, St Pete and Orlando.) And where are the larger airlines hurting? Business travelers and international travelers - this is common knowledge. Guess how many of those kinds of travelers show up on ALGT? About zero.

Second, those leisure travelers buy a lot more than just air - they also buy hotel rooms. Lots of them. And guess who makes a margin on those hotel rooms. Yes, Allegiant Air operates as a traditional travel wholesaler - a business the rest of the airline industry got out of years ago. But, if you haven't noticed, the hotel industry is hurting these days - and guess who they are offering great package rates to? Yes, ALGT.

Third, ALGT is really, really cheap. They don't operate complicated hubs. They only fly relatively old (and cheap to acquire) MD-80s. They do the majority of their bookings by far on their own website. And they market in tiny cities - what do you think the cost of marketing is to customers in Springfield, Missouri vs. Chicago? Most of their flights are simple "out and backs" from their key focus cities - they leave in the morning, fly somewhere and return back. No need for crew hotel rooms. Best of all, many of these small cities are so desperate for air service (even if it is to Orlando) they are even willing to contribute marketing funds to ALGT to market their services. Not a bad place to be.

Finally, ALGT is relatively insulated from competition. The major airlines want nothing to do with Vegas right now, much less from Fargo. Several years ago, Northwest got cranky when ALGT began cranking up operations in Fargo, Bismark and other small towns that Northwest has traditionally protected as their turf (code for kept service levels reasonably high but fares off the charts.) Northwest added flights from Sioux Falls, Fargo etc into Vegas but they rapidly proved to be failures. Northwest's costs were too high and they didn't have the packages (read: hotel rooms) that ALGT continues to drive significant margin from.

Of late, some carriers seem to have taken note of Allegiant's success and added competitive service. Alaska Airlines woke up and realized that ALGT was moving significant passengers from tiny Bellingham (~88 miles from hometown Seattle) to Vegas and added three flights per week in direct competition with ALGT. Airtran also seems to be concerned (or has decided imitation is easier than innovation) and has added a bunch of 3 and 4 times weekly service from Orlando to such as Charleston WV, Allentown, Knoxville and Ashville. But these routes have little chance of success. First, neither Airtran nor Alasaka Air have the hotel inventory required to make these routes work in the same way that ALGT does. They also have fundamentally higher costs than ALGT. Finally, who cares? If Allentown gets more service than it can handle (pushing down yields as a result) between Airtran and Allegiant, Allegiant can simply pull up stakes and move the aircraft elsewhere. And, history has shown that, with competition negated, Airtran (or Delta or Northwest) will rapidly depart the market as well. Pity Allentown.

Southwest announces Boston schedule

Today, Southwest announced destinations and schedules their new Boston flights set to begin in Mid-August. Not surprisingly, they announced service to Chicago Midway (MDW) and Baltimore (BWI) with five flights to each destination. Both MDW and BWI are Southwest powerhouse cities with plenty of onward connecting flights as well as a loyal Southwest base.

And Boston has a loyal base of Southwest travelers as well - they have just been forced to drive to Providence (PVD) or Manchester (MHT) for Southwest's low fares and service. Many have speculated that Southwest might pull down service in these two cities now that they will operate service directly into Beantown's main airport. Fear not PVD and MHT fans. Southwest mentions more than once that the new Logan service is part of Southwest's "expanded New England service." So, at least for now, it appears Southwest will be growing in New England overall.

On a sidenote, we applaud any company (travel industry or not) that can actually use "wicked awesome" in a press release!

Orbitz finally falls in line with no booking fees: OWW

This morning, Orbitz matched competitors Expedia, Travelocity and long-time forerunner Priceline in removing booking fees on airline tickets. The duel continues. Orbitz, like Expedia and Travelocity, is billing it as a "promotion" through May 31st but as we've stated before, we don't think that putting this genie back in the bottle will be easy come late May.

Wisely, Orbitz excluded tickets that utilize a combination of airlines from the fee waiver. This is laudable because these kinds of tickets are difficult, if not impossible, for the supplier sites to sell. (when was the last time you bought a Delta ticket at United.com?) Also, because of Orbitz's strong ITA Software search engine backbone, Orbitz often provides lower combinations of multiple carriers than Expedia, Travelocity or Priceline. This may enable Orbitz to preserve at least some of their fee revenue - time will tell how much.

We also like that Orbitz is weaving their innovative Price Assurance plan (which protects consumers from airfare decreases after buying a ticket) tightly into the no-fee marketing. This provides a one-two punch vs. Expedia and the supplier (airline) websites which do not have a similar program.
But, we do worry about the costs associated with both of these efforts. Consumers apparently appreciate Price Assurance, but these payments come directly from Orbitz - not the airlines. Absent much or most of the $7 per ticket fee revenue that Orbitz has enjoyed, this program may get expensive quickly.

Similarly, as previously discussed, a much larger portion of Orbitz's earnings come from booking fees. (Citi estimates nearly 60% for OWW vs ~10% for EXPE.)

Orbitz's long-time focus on air (at the expense of higher margin hotels) is finally coming home to roost - OUCH or OWW may be perfect now more than ever.

Innovation rages on in Meta-Search

The smack-down in travel meta-search between Fly.com, TripAdvisor.com and market leader Kayak.com with consumers so far emerging as the big winners. The emerging players (Fly and TA) are continuing to push out new functionality that is offering consumers new and interesting ways to search for airfares.

Today, Fly.com released a great new feature that allows users (once they have searched) to easily explore how changing adjusting their travel dates can save them money. Talk about a feature that is right for the times! Fly.com allows users to easily compare air fares on multiple days. Better still, it enables users to compare airfares across months at a time based on a variable trip duration. Finally, a consumer can simply say that they want to go to Los Angeles for 4 days sometime over the next 4 months and Fly.com will show the user a multitude of travel dates with associated fares - it enables consumers to easily make trade-offs between flying on say, a Saturday in mid-May vs. the end of spring break. And, a user can even declare a fixed outbound or return day - perfect for those trips when you know exactly when you have to leave or return but are somewhat flexible on one end of the trip or the other. Finally, Fly.com has made it easy to see if staying over a Saturday night really makes a difference or not! Or it may yield the perfect excuse to stay an extra day on that business trip to South Florida in January...

Bravo, fly.com!

$14 Transcon Flights? Really? Yes.

JetBlue launched a sale of sales today on the JFK-SFO and SFO-Long Beach (LGB) routes with a fare of $14. Not misprint, not a fare error but an actual $14 transcon flight!

Don't get too excited as it is valid only on very very limited dates in early April but it is certainly a amazing deal.

But, is JetBlue taking a page out of the RyanAir playbook? We don't think so.

RyanAir is obviously famous for very low (like 1 Euro or even 1 cent) fares but RyanAir is also equally famous for loading up fees after the booking for everything from using a credit card to buy your ticket, checking in with an agent, checking a bag etc. JetBlue is quite the opposite - there are still free drinks and snacks, free Live TV and, as appears to be the point of this promotion, the first bag is still free. In fact, the major airlines are all charging more for the first bag than the airfare in this case - therein lies the point of this promotion.

JetBlue will undoubtedly generate huge buzz - a veritable public relations bonanza - while calling attention to their lack of checked baggage fees. All for a few plane loads of $14 fares.

We'll go ahead and call it a brilliant marketing move - finally a US airline is using actual fares as an integral part of the marketing message. Bravo JetBlue!