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Analyzing the OTAs
January 10 2013

Travel research analyst Brian Mullan provided an update of where the top OTAs stand and how their near-term strategies will directly affect the hotel industry.

  • Will the hotel industry be able to succeed in its quest to lower distribution costs? “So far it has proven difficult,” said analyst Brian Mullan.
  • Many of the large OTAs are shifting their business model to less airline business and more hotel business.
  • Google is a potential future threat to online travel agencies.
By Jason Q. Freed
HNN contributor

NEW YORK—Whether you’re in the camp that believes online travel agencies are single-handedly ruining the hotel industry or in the camp that looks to them for a majority of your demand, there’s one thing almost all hoteliers agree on: Third-party room distributors are here to stay.

However, while OTAs serve an important role in the industry, it’s no secret their relationship with hoteliers is not perfect, said Brian Mullan, a research analyst with Janney Capital Markets in New York.

Mullan covers five of the most influential travel players outside of the hotel brands themselves: Priceline, Expedia, TripAdvisor, Orbitz Worldwide and MakeMyTrip Limited. He studies moves made by the companies and assigns a rating to their stock price based on potential gains or losses related to performance.

Mullan recently spoke with to provide an update of where the top OTAs stand today and how their near-term strategies will directly affect the hotel industry.

“As investors, what you want to watch is how the industry continues to evolve,” he said. “Will the hotel industry be able to succeed in its quest to lower distribution costs? So far it has proven difficult.”

As an overall trend, Mullan noted many of the large OTAs are shifting their business model to less airline business and more hotel business because the margins on a hotel booking are much larger.

“Every OTA recognizes the economics are far greater in the hotel industry,” he said. “From the OTA perspective, they want to see fragmentation in the industry ... in the hotel industry, there are countless brands and then you have all the independent hotels on top of that.”

Mullan said hoteliers’ fears that they’ve lost control of inventory are real, and he suggested that issue should be a top priority for the industry to overcome.

“Occupancy has finally caught up and now you are hearing of more hotels in the pipeline,” Mullan said. “In what other industry would you be adding more supply when you have lost control on the pricing of the existing supply?”

Similarly, OTAs face a potential threat in Google, Mullan said. The search-engine’s inroads into the travel space are “making customers acquisition more expensive for all OTAs.”

Below is a breakdown on each of the top OTAs as of 31 December 2012, illustrating how Mullan said recent moves and future plans are affecting stock prices.

Priceline (Nasdaq: PCLN)
Market cap:
$30.9 billion
Trading at: $620.39
% change versus last year:  +32.6%
Outlook: Priceline’s stock performance during the past four years has been “just phenomenal,” Mullan said. In that timeframe, the company’s stock essentially rose from less than $100 to more than $600.

“The driver of that growth and the tremendous outperformance has been their website,” Mullan said. “They dominate in Europe.” is a hotel-only platform, which gives it a revenue advantage over hotel-airline models.

“Europe historically has lagged the U.S. in terms of online penetration although the gap has been narrowing recently,” Mullan said. “ has been the main beneficiary of the shift in hotel bookings from offline to online.” also continues to make inroads in North America.

“It’s reasonable to expect to continue to take share in North America,” Mullan said.

Expedia (Nasdaq: EXPE)
Market cap:
  $8.3 billion
Trading at: $61.44
% change versus last year: +111.7%
Outlook: In terms of stock price, Expedia had a tremendous 2012, up roughly 100%, Mullan said. Most of those increases were driven by a re-platforming of and significant roomnight growth domestically.

“I think they were able to reaccelerate domestic roomnight growth more than people were expecting,” Mullan said. “And they made more progress internationally than people were giving them credit for.”

In the third quarter, for the first time ever, Expedia said 50% of their roomnights were international, which has been a goal for the company for a number of years.

Mullan said Expedia should be able to continue to grow its roomnight demand in 2013. In terms of stock price, two important questions revolve around whether the company will grow demand as fast as investors are expecting and whether the Expedia Traveler Preference program—introduced in August—will drive roomnight growth in Europe more than analysts are expecting.

“Will (Expedia Traveler Preference) affect their hotel margins domestically more or less than people are expecting?” he asked.

TripAdvisor (Nasdaq: TRIP)
Market cap:
$6 billion
Trading at: $41.92
% change versus last year: +66.3%
Outlook: TripAdvisor—which operates under a unique business model from the rest in that the site is advertising-based rather than booking-commission based—went public just more than a year ago after being spun off from parent company Expedia. The stock price, Mullan said, has been volatile because it’s a newly public company.

“Over the past few months the sentiment has shifted,” he said. “People are recognizing the unique position (TripAdvisor) is in.”

As Google makes inroads and makes free search traffic harder to come by for OTAs, Mullan said third parties are looking toward other customer-acquisition channels, of which TripAdvisor is one.

TripAdvisor’s main metrics are cost-per-click revenue and what it calls “hotel shopper growth,” both of which should continue to grow in 2013, Mullan said.

MakeMyTrip Limited (Nasdaq: MMYT)
Market cap:
$462 million
Trading at: $12.44
% change versus last year: -48.3% 
Outlook:, an India-based travel agency, is No. 1 in gross bookings market share in India today.

While the potential for growth is unparalleled because of the rapidly increasing travel population in India, Mullan said initial expectations for the company were too high.

“The long-term opportunity is great but the near-term challenge is Internet penetration rates,” he said. “India is in the very early stages of online travel.”

MakeMyTrip is air-booking dominated, but the company is seeking to grow its hotel business.

“There is opportunity to grow gross bookings with hotel, but it’s still a long-term, multiyear story,” Mullan said.

Orbitz Worldwide (NYSE: OWW)
Market cap:
$286 million
Trading at: $2.72
% change versus last year: -27.7%
Outlook: Like all OTAs today, Orbitz is seeking to shift their demand from airline to more hotel business because hotel margins are more profitable. The company has been moving slowly toward accomplishing its goal of a 50-50 split between air and hotel demand.

“They’re seeking to grow the hotel business through their private-label channel,” Mullan said, citing as an example deal with American Express where Orbitz will power all AmEx bookings.

“Domestic air take rates have continued to trend down,” Mullan said on the company’s near-term outlook. “If they can succeed in growing roomnights faster than people expect, then they can be OK.”

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