Building an online flight business, with all of the inherent complexities, is very difficult work. Expedia Inc. is going to throw some more money at it, and it can make gains while providing an additional differentiator from Booking.com, which offers lodging only.
Expedia, Travelocity, Orbitz, and the Priceline Group have scampered in recent years to increase their hotel businesses in relation to their flight offerings. So yesterday, in explaining one aspect of Expedia Inc.’s pending $1.6 billion cash acquisition of Orbitz Worldwide, Expedia Inc. CFO Mark Okerstrom made an almost-startling admission: “We do love air.”
Not oxygen but the flight business, that is.
Orbitz was founded by major U.S. airlines, was understandably flight-oriented for many years and struggled to transition into a hotel-oriented business. When major U.S. airlines all but eliminated commissions in the early 2000s, the online travel world pivoted toward the hotel business, which has much larger margins than flights.
Orbitz did a decent job of reorienting itself toward the hotel business over the years but it still sells a lot of flights. In fact, in the fourth quarter of 2014, Orbitz’s standalone air revenue was $53.2 million, or 24 percent of total net revenue, compared with standalone hotels at $87.5 million, which was 40 percent of total revenue.
On the hotel front, Orbitz has been growing and room nights sold in the fourth quarter grew 18 percent. But Orbitz’s problem is that it hasn’t been able to achieve the global scale in hotels that the faster-growing Booking.com and Expedia have done.
Flight Investments on the Way
In a conference call about the Expedia acquisition of Orbitz, Okerstrom said the flight business has become “very interesting” lately.
He said online travel agencies have “under-invested” in the flight business, which can be a great tool to upsell consumers other products such as car rentals and travel insurance.
If Expedia and Orbitz have under-invested in flights in the rush to build their hotel businesses, you can expect Expedia in the future to correct that imbalance somewhat on Expedia.com, Orbitz.com, Travelocity.com and other Expedia Inc. properties.
What are the Implications?
Airlines have been delivering ancillary services such as bag fees, Wi-Fi, seats with extra legroom, and early boarding in unprecedented fashion and, with some exceptions, most of these products or services can only be booked on airline websites and not on online travel agency websites.
For example, as JetBlue gets ready in the second quarter to introduce new fare families that bundle various flight perks, you can bet that it would take years for most online travel agencies to be able to offer these new products on their own websites.
It Takes Focus
As flight-oriented CheapOair in New York and a struggling eDreams Odigeo in Spain told us interviews with their CEOs, selling flights is a highly complex business that takes a lot of resources and focus — and buildings full of engineers working on these problems 24/7.
You can expect Expedia/Travelocity/Orbitz to put more emphasis on their long-neglected flight businesses.
That may not be welcome news for CheapOair and eDreams Odigeo. On the other hand, although Expedia Inc. may correct an imbalance and tilt back a tad toward fixing its flight businesses it still won’t be able to muster the almost-singleminded focus that some of its competitors, including CheapOair and eDreams Odigeo, have been able to muster.
On the other hand, Expedia Inc. will have volumes of travelers that CheapOair and eDreams Odigeo can only hope for.
Meanwhile, in other merger-related news, the American Hotel & Lodging Association, the U.S. hotel industry trade group, expressed concerns about Expedia’s proposed acquisition of Orbitz but didn’t go further than that.
“Consumers expect and hotels offer a variety of choices and diversity in their travel selections,” said Katherine Lugar, president and CEO of the American Hotel & Lodging Association. “From booking options to hotel type to unique experiences offered, hotels are constantly innovating and providing new products to the traveling public. This most recent merger raises questions, and appears to be counter to the goal of creating more consumer choice. We will be watching this development closely as the process moves forward.”
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Photo credit: Expedia plans on investing more heavily in the complexities of the flight business. Pictured, JetBlue's A321s with Mint business class service feature a Marketplace, where passengers can take snacks and soft drinks for free. JetBlue