The Issue: What Price Reputation?

When a misprinted fare—Fiji for $51—got snapped up by hundreds of travelers, Travelocity CEO Michelle Peluso had to decide whether to honor the fare at a cost of almost $2 million or run the risk of damaging the company's customer-friendly branding campaign

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The nightmare began for Michelle Peluso sometime early in the morning of Apr. 5, 2005, when an incorrect fare from Los Angeles to Fiji on Air Pacific was mistakenly loaded into the reservation system used by the online travel agency. Before long, someone with the screen name "channa" posted a note on FlyerTalk, a popular message board with frequent travelers. "LAX-NAN (Nadi, Fiji)—$51 all in—Travelocity!" read the subject line.

The post was blood in the water for the Web site's sharp-eyed community of "mileage runners," who troll online travel sites for extremely cheap or misfiled fares to distant cities as a way of racking up airline miles. In no time, Channa's discovery had helped prompt more than 400 bookings among the frequent-flier cognoscenti eager to take advantage of the fare, which was displayed to travelers as $0 plus $51 in taxes. The potential cost to Travelocity.com if Peluso decided to honor the clearly erroneous fare: almost $2 million.

Tough Choices

Peluso's tough call was even harder given the company's imminent plans. In just two weeks, she and her team were prepared to launch a major branding initiative intended to distinguish the company for its commitment to customer service. For 18 months, Peluso had guided the company's efforts to prepare for the launch, which included extensive training for customer service representatives and heart-to-hearts with her senior staff about how they'd adhere to the initiative's philosophy. "One of the tenets was we're going to make mistakes," she recalls. "What we really have to figure out is are we going to walk the walk?"

Suddenly, she was faced with a chance to answer that question. After making sure new bookings of the fare were cut off, she gathered her senior team. Her general counsel worried that honoring the fare—especially since their user agreement protected them from such mistakes—would set a precedent they would have to uphold. After all, the misfiled fare wasn't Travelocity's fault: It had likely been manually uploaded by someone at either the airline or the reservation system.

Her operations chief was concerned about how some of the proposed solutions—giving out gift cards to affected travelers, for instance—would be carried out. Meanwhile, her chief marketing officer, who was about to spend more than a million dollars on a branding campaign, could foresee the headline risks and insisted they had to honor the fare.

Minimizing the Impact

After listening to all sides, Peluso agreed that they had to honor the fare. "We couldn't shy away," she says. "The only real test of whether [the branding initiative] was authentic was what happens when something bad happens." Nine hundred posts after Channa's original alert, Peluso even logged onto FlyerTalk herself to announce her decision, wishing the fliers "Bula" ("welcome" or "hello" in Fijian) and asking them to post a hotel review when they returned.

In the meantime, she and her team were careful to minimize the impact to their bottom line. For instance, they negotiated with Air Pacific to exchange some advertising on their site for some defraying of the cash costs associated with honoring the fares. In addition, a team of programmers worked quickly to develop a screen that would help prevent a similar situation, even if—as with the Fiji fare—the mistake wasn't Travelocity's. Within weeks of the incident, any fares that were 70% or 80% lower than their average historical prices would be double-checked by Travelocity. Since the tool was installed, it has flagged more than 16,000 fares, with 800 of those identified as misfilings.

Today, Peluso is still confident she made the right decision. "It cost us money. It was a difficult decision to make. It was particularly painful because we were about to launch this campaign. And it was frustrating because we knew people knew it was a fake fare," she says. "But it made us a stronger company and cemented our relationships with our suppliers."

McGregor is BusinessWeek's management editor.