All signs point to a stalled, or at least slowed, growth market for third-party distributors.
All signs point to a stalled, or at least slowed, growth market for online travel agencies.
The most recent evidence came Friday when Expedia and Travelocity announced they would consolidate their businesses. Expedia will handle most of Travelocity's operations, from running searches to answering customer inquiries to processing bookings; in turn, Travelocity will largely become a brand aimed at attracting customers to its website. Expedia will collect the related fees from airlines and hotels and then pay a commission to Travelocity.
Consolidations such as this typically don’t occur in a growth market.
Travelocity’s CEO told the Wall Street Journal that as the online travel industry has become more competitive in recent years, Travelocity has fallen behind its rivals on search capabilities. Travelocity is owned by Sabre Holdings Corporation, which is undergoing a CEO change as former CEO Sam Gilliland stepped down earlier this month and former president Tom Klein was promoted into the CEO role.
Additional evidence that the OTA sector might be at or near its peak: Last week PAR Capital Management sold 8.1 million of its 24.6 million shares of Orbitz Worldwide stock. PAR has been an equity investor in Orbitz since 2007 and subsequently acquired additional shares in November 2009 in a debt-for-equity exchange.
Also, as the online hotel booking landscape has broadened and thousands of sites are now vying for their piece of the pie, many of the traditional OTAs find themselves shelling out more of their budget than ever to stay on top.
In June, Expedia’s Hotwire brand was the most advertised online travel brand on television in the U.S., according to iSpot.tv data. Hotwire’s spots aired 3,069 times at an estimated cost of $4.4 million.
Consequently, Expedia recently posted another quarter of weak results, citing increased competition. Aggressive advertising by Priceline.com drew away a significant amount of business and Expedia's profit fell 32% during the second quarter. Its marketing costs jumped 33%.
TripAdvisor, which was spun off from Expedia in December 2011, recently announced it would spend $30 million on TV advertising for its new hotel metasearch functionality.
Speaking of metasearch, Google’s Hotel Finder tool is an example of where third-party travel sites are headed, and while the legacy OTAs snap up metasearch sites they are joined by meta newcomers, such as Hipmunk and Room77.
Google's entrance into the travel distribution arena is throwing a wrench into the business models of OTAs and hotel supplier sites by increasing supplier-direct bookings but driving up search placement costs. Sites such as Travelocity, with limited search-engine optimization and marketing budgets compared to Expedia, Priceline and Orbitz, are being forced to consider their options.
Despite its lagging back-of-house technologies, Expedia apparently liked the Roaming Gnome well enough to allow Travelocity to continue with branding. Expedia CEO Dara Khosrowshahi called Travelocity “one of the best known travel brands in the U.S. and Canada."
Finally, as the aforementioned hurdles lead to more expenditures for OTAs, revenues from suppliers are decreasing. Throughout 2012, many of the larger hotel chains have reportedly negotiated significantly lower commission margins, in some cases as much as 5%, according to sources.
Important to note is that OTAs have traditionally performed well during industry downturns when hoteliers are desperate for demand and will sacrifice higher costs to get it. As hotel performance reaches pre-recession peaks, revenue managers can effectively shift their channel mix to lower-cost channels.
Even the old-fashioned brick-and-mortar travel agencies are taking their potshots at OTAs. According to a recent Travel Weekly report, traditional agents are gaining a competitive advantage over OTAs in packaged and escorted tours, as well as all-inclusive resort products. Travel agents are booking 30% of packaged tours compared with 17% for OTAs.
Agents are handling 24% of all-inclusive reservations, compared to 22% for the major online players.
While OTAs clearly serve an important role in the hotel industry—and Priceline’s stock approaches $1,000 per share—hotel suppliers today can be more confident they’re back in control of their inventory. Take advantage by decreasing dependency on costly channels and continuing to work with independent sites such as Google to drive down the cost of demand.
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