Smaller online travel agencies try to make money by grabbing nickels and eurocent coins ahead of the steamrollers of global advertising behemoths. The underreported story of why China's largest travel company acquired a tiny Dutch travel group highlights the phenomenon.
Trip.com Group bought online travel agency group Travix from corporate travel giant BCD Travel in December. Regulators okayed the sale last month, though only Dutch media noticed. The companies didn’t disclose the price of the transaction.
Trip.com Group is coy about why it bought the company. Here’s a look at some likely rationales. Plus, we’ll consider which other European companies might be targets for mergers and acquisitions by online travel giants and private equity firms.
One rationale for Trip.com’s interest in Travix may be the Dutch company’s approach to selling plane tickets.
Some backstory, first: In 2015, Ctrip, the company’s operating name at the time, bought Travelfusion, a tech vendor that powers searching, booking, and payments for airlines that build connections with travel agencies. But Travelfusion has little automation for changing or canceling tickets.
Travix has been solving some problems Trip.com Group’s Travelfusion misses. Last year, the company began mixing newer ways of selling fares together with older ways with easy comparison of both. It got help for this with technology from Amadeus, the Madrid-based travel software giant. The system promises to skip the typical custom technical work and commercial negotiation that an agency needs to sell an airline’s “fare families,” or bundles of plane tickets with other perks.
Airlines want to sell their fares as they like. So they want more technological control over how third-parties sell their tickets and related upsells, like extra legroom seats. Dutch airline KLM, for instance, waives its $24 (€22) roundtrip booking fee for any travel agent that uses its preferred technical connections, such as ones via Travelfusion.
Trip.com Group may have other reasons for wanting Travix, of course.
It may believe Travix is better at making use of data than the average small online travel agency group.
Data savvy matters for agencies. Flight sales are low margin. So upselling and packaging deliver most of the profits. Yet agencies often struggle to tease out data to learn how to upsell effectively.
Five years ago, Travix had a dozen data gatekeepers with access to dashboards for querying data. Now, thanks to the use of Google’s cloud services and business intelligence services from companies like Looker, it has more than 150 workers with access to data for faster analysis.
Democratizing data access helps speed up the testing of new consumer sales tactics, for example. At least, in theory, these tests can improve the transaction and profit yield at scale.
A “Winner Take Most” Ad Game in Niche Markets
Travix has weaknesses, though, which make it a curious acquisition for a giant like Trip.com. Perhaps its biggest weakness is its size. Like all small agencies, global giants like Expedia Group and Booking Holdings outgun Travix in advertising expenditure.
Mastering customer acquisition through ad spending is a scale game. Google’s ad auctions favor, meaning they accept lower winning bids, from companies whose ads deserve, in its view, a high “quality score.” The quality score sounds like a consumer-friendly feature. Google is giving prominence to ads consumers are more likely to click on. But it advantages the travel giants.
Much like how years of tutoring and private schooling can help a child get an edge in university admissions, giant travel brands can find ways to put their thumb on the scale in Google’s ad auctions. Scale brings travel brands many advantages, such as machine learning savvy and large TV ad budgets. Those advantages mean consumers are more likely to click on their ads. That factor, in turn, wins the companies a higher quality score and thus cheaper auction rates in Google’s ad auctions.
A smaller agency can compete by developing a loyal customer base within a niche, such as the Dutch-speaking market for intra-European leisure flight bookings. When you have more repeat customers who seek out your brand, you boost your Google ad quality score relative to the giants and thus lower your cost of acquiring new customers online.
Travix is certainly small. It sells only about $2 billion of travel, mostly in low-margin airfare, a year. Travix’s brands are among the market leaders in the Netherlands and Germany and have four million transacting customers a year.
To boost revenue, Trip.com Group might now give Travix advice on how to use world-class machine learning to enhance the accuracy of its predictions about marketing effectiveness, assessing a consumer’s long-term value, or recommendations for upsells.
The Chinese giant might also offer optimized integrations with another of its acquisitions, price-comparison search engine Skyscanner, which could deliver more traffic. In reverse, Skyscanner might learn more about the inner workings of a European travel agency that is one of its partners, benefiting from its perspective.
Trip.com Group may have decided that it was easier to acquire Travix, which has loyal customers in niche segments, than to compete with Travix via its Trip brand. Travix has several years’ head start in building culturally relevant brands and on-the-ground relationships with suppliers.
Trip.com Group’s goal last year had seemed to be to build Trip.com into a colossal Western-facing international brand, as Skift has reported.
But small investments in agencies and tech vendors outside of China, such as the near-majority stake it took in India’s MakeMyTrip last year, suggest it might bide its time in the short-term with acquisitions targeted in foreign and niche markets rather than build up its Trip brand exclusively. Vendors that support the agencies, such as dynamic packaging provider Peakwork or DerbySoft, might also be on its acquisitions list.
Travis isn’t alone among Europe’s small online booking companies. So who else might be up for grabs?
Several other agencies also focus on geographic markets where locals prefer customer service in their native language. These agencies also may try ways of presenting or selling fares that stand out from what the global giants offer. Plus, they may strive to offer locally popular payment methods, such as ones with regional banks, and advertise using locally relevant marketing campaigns.
Here’s a quick look at some of the names that might or might not be subject to merger and acquisition activity soon.
Invia Group might attract the eyes of Trip.com Group, too. Invia is a set of travel brands mainly serving Czech- and German-speaking leisure travelers. In 2016, the group received a loan from CEFC, the financing arm of China’s Belt and Road Initiative (BRI), which has since been passed to the Chinese state-controlled conglomerate Citic.
Invia’s operator, Rockaway Capital, has said that the group’s annual turnover last year was more than $1.5 billion (€1.4 billion). Many of Invia Group’s brands, such as Ab-in-den-urlaub, emphasize the sales of tour packages. The group claimed to have served 3 million travelers last year.
Another brand that might be in play is the consumer-facing online travel agency HRS, a division of Germany’s HRS group. Just as BCD Travel decided to focus on corporate travel by selling Travix to Trip.com Group, HRS may decide to focus on corporate travel and sell its consumer brand.
HRS has only 17 percent of Germany’s online consumer hotel bookings market, down from 23.6 percent two years ago. It is losing share against the juggernaut called Booking.com, which boosted its share to 65.7 percent from 58 percent in 2017, according to industry report “Hotel Market Germany 2020.” Expedia and Trivago have kept a flat share of about 12 percent of the market over the same two years.
Private equity might make HRS more resilient by bringing its consumer-facing product into a group like Etraveli or Edreams, which each may run on a relatively more modern tech stack.
Adding to the list of potential dance partners is the online travel agency group Otravo. The company includes brands like Travelgenio, Vliegtickets.nl, and VakantieDiscounter, and has a turnover of about $2 billion (nearly €2 billion). The group is a roll-up of travel brands done by Waterland, a Dutch private equity firm.
Etraveli, a Nordic online travel agency, may be in play, too. CVC Capital Partners bought it in 2017 for about $565 million (€508 million).
Edreams Odigeo, a publicly held conglomerate, is a potential merger partner. Equity markets have recently beaten down the Barcelona-based Edreams Odigeo’s market capitalization to about $220 million (€200 million). That’s well under the reported $700 million offer CVC Capital Partners had made for it two years ago.
While eDreams had doubled its net income in three years to $44 million last year, the crisis may have gutted its profitability for this year.
A block to a CVC buyout of eDreams would be the travel company’s debt load. Edreams Odigeo has about $470 million (€425 million) in debt due in 2023. The group has been negotiation with its lender banks for leniency on servicing terms, credit agency Moody’s said in April. Sluggishness may be another hurdle. While eDreams has been making strides, its employee reviews on Glassdoor suggest that some of its old technologies and bureaucratic processes frustrated software engineers
When it comes to Europe’s technical talent, companies like eDreams have been losing to Kiwi.com, a Czech-based travel tech startup. Kiwi’s flagship product combines airplane tickets across different airlines that the carriers don’t usually agree to connect. Last year General Atlantic took a majority stake in the company. The amount wasn’t disclosed but sources said it was around $125 million.
While Kiwi’s technology is well-regarded among developers, the pandemic caused the agency more trouble than other agencies. That’s because Kiwi helps put together itineraries across airline carriers, making it devilishly complicated to file for refunds on behalf of consumers for canceled flights. It may be months until Kiwi digs out from the backlog, CEO Oliver Dlouhý said in a video to customers last month.
Scale as a Driving Force for Mergers
Online travel agencies that heavily sell flights are a category where it’s hard to be smarter than your dumbest competitor. You might create a profitable business. Still, the model is too easy to copy, leading to too much competition.
Occasionally one or two companies do get an edge, perhaps in developing talent with skill at addressing a knotty problem in a profitable way that’s hard to mimic. The skill at which Kiwi tackles so-called virtual interlining of tickets might be one example. Edreams has aimed to stand out by offering a way of buying travel via a subscription. Etraveli has tried to set itself apart with a business-to-business offering.
When a small company gains an edge, private equity firms can sometimes inject the cash needed to help that company get an actual leg up over its competitors until it becomes an acquisition target by the global giants.
Small companies can gain an edge over peers despite being in the shadow of giants. But ultimately, scale matters. Several studies by Google and other tech giants have reported that the quality of predictions made by artificial intelligence is tied more to the amount of data used to train the models than any other factor. In other words, the more data you have, the better you get.
The need for scale gives a vital incentive for online travel companies to merge. So expect more deals soon, as the pandemic has reduced many company valuations to attractive levels.
Tags: ctrip, edreams Odigeo, edreams odigeo group, etraveli, google, hrs, Kiwi.com, m&a, mergers and acquisitions, online travel agencies, private equity, startups, travel startups, trip.com group, venture capital
Photo credit: A view of Schiphol International Airport in Amsterdam, Netherlands in August 2018. Amsterdam-based Travix has been acquired by online travel giant Trip.com Group at a time when many smaller online travel agencies across Europe are looking for mergers and acquisitions. Piroschka van de Wouw / Reuters