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Online Travel Agents Industry and the Changing Business Dynamics

The online travel industry comprises online travel agents (OTAs) who act as intermediaries for travel related products and services, such as airline tickets, car rentals, hotel accommodations, cruise line tickets, etc. They act as a go-between the product providers and end users through web portals and/or mobile platforms, in turn, earning commission revenue. The OTAs offer consumers a versatile experience by not only providing a multitude of travel options, but also present trusted users’ reviews and accurate local information, which enhances users’ travel experience.

The online travel industry has undergone a notable transformation in the recent past which has changed the industry dynamics. Televisory’s analysis of the latest developments in the online travel industry revealed three key trends:

Firstly, the online travel sales (commission revenue) of the major OTAs (Expedia, TripAdvisor, Priceline Group, Ctrip, Makemytrip) has grown significantly at a CAGR of 21.6% during 2012-15. This growth was driven by the shift in consumer preference from offline to online booking as a result of increased user adaptability towards the online medium as well as easy accessibility to travel products through smartphones and other handheld devices. The growth of mobile commerce has transformed the functioning of consumers’ interaction with OTAs, this has led to an exponential increase in total visitors in the past 4 years (evident through the below chart). 

Source: Televisory’s Research (data of Expedia, TripAdvisor, Priceline Group, Ctrip and Makemytrip)

Throughout the world, mobile bookings are growing faster than the desktop reservations. In 2012, the number of bookings by mobile phones/devices were approx. 5.0% of the total bookings. However, in 2015, the figure was much higher and stood at 20.0% of the total reservations (source: Pelican Solutions, online booking trends to watch for in 2015).

Secondly, while revenues registered a healthy growth during the 2012-15 period, the operating margins of the OTAs have been declining during the same phase. Televisory’s analysis reveal that the average operating margin of the companies examined declined sharply to 16.5% (2015) from 24.8% (2012). The key reason for this could be attributed to a significant rise in the advertising and sales promotion expenditure (17.7% in 2012 to 26.6% in 2015), in order to increase the market share amidst the high level of competition amongst industry players.

Source: Televisory’s Research (data of Expedia, TripAdvisor, Priceline Group, Ctrip and Makemytrip)

Lastly, as the online travel industry is characterised by low entry barriers owing to minimal set-up costs associated with building a website, therefore, the industry is marked by a large number of small operators. However, a large chunk is still controlled by a few major brands such as Expedia, Priceline Group, Trip Advisor, etc. This is mainly on the account of huge consolidation activity witnessed by the industry during the foregone 4 years. The industry is traditionally marked by the low bargaining power of the suppliers due to stiff competition from a large number of players. Moreover, there is low bargaining power with the end consumers accompanied with low brand loyalty and easy switch over to the products of the competitor solely on the basis of prices. Furthermore, there is no differentiation in the product offering and the OTAs usually, compete on pricing and promotions to attract customers. Thus, all these factors have led to a dwindling margin for many small players, who either closed the shop or are being acquired by a larger firm. Further, even most of the comparable existing players were acquired by their counterparts in order to swallow the direct competition.

Source: Bloomberg

Although, the online travel industry has seen high revenue growth in the past few years as a result of the increase in internet users and their adaptability, but, the growth rate has started to wane. The travel service providers (airlines, hotels, car rental services, etc.) have started providing online bookings through their websites in order to reign in the high growth phase in the online travel industry and to save the commission expenses, thereby creating direct competition for the OTAs. Additionally, OTAs continue to face competition and a substitution threat from their offline counterparts.

Source: Televisory’s Research (data of  Expedia, TripAdvisor, Priceline Group, Ctrip and Makemytrip)

Televisory believes that though the online travel industry will continue to grow over the medium term. This will be supported by the large untapped internet users, the growth rate will slow down and the operating profits will continue to remain under pressure. Moreover, this might decline further on account of high competition among industry participants as well as a change in suppliers’ (travel service providers) business model.  

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