The online travel space has always been super-competitive, but established players like Expedia Group and Booking Holdings face a growing roster of formidable competitors, including hotels, Google and Airbnb.
Dennis' Online Travel Briefing
Editor’s Note: Every Wednesday, Executive Editor and online travel rockstar Dennis Schaal will bring readers exclusive reporting and insight into the business of online travel and digital booking, and how this sector has an impact across the travel industry.
Online Travel This Week
For major online travel agencies, their competitive position and outlook is way different in 2022 than in the aftermath of 9/11 and the end of the Great Recession in 2009.
A couple of travel research brands, Skift Research and Bernstein, agree that the future will be much more challenging for the online travel agency sector.
In a December Skift podcast, Booking Site Winners and Losers, which featured Skift Research’s Seth Borko and myself, Borko said online travel agencies recovered robustly after 9/11 in 2001 and the financial crisis of 2007 to 2009 as hotels needed the big online travel agencies to help them fill rooms.
But it’s different now.
“Hotels have maintained pricing power, and ADRs (Average Daily Rates) are nearly 90 percent recovered,” Borko said, referring to competitive dynamics at the end of 2021 and adding that the extent of the hotel recovery depends on the region. “OTAs’ reputation for discounting has suffered as hotel direct bookings come with lower rates. And customers have more to spend.”
Borko, who covered much of this subject in a recent Skift Research Online Travel Agency Factbook, said this time, during the pandemic, the online travel agencies aren’t getting the same lift they did after past crises.
“Although they are recovering quite fast, it was not quite the boon to OTAs that many thought it might have been because it wasn’t quite a repeat of the last two crises,” Borko said.
Borko said the online travel agencies’ gross bookings and commissions have largely recovered relative to pre-pandemic 2019, setting themselves up to make gains.
“The problem is on the cost side,” Borko said. They’ve driven themselves into a huge hole on profitability. While revenue is coming back, EBITDA (earnings before interest, taxes, depreciation and amortization) and other profits are not coming back as quickly.”
He argued that the online travel agencies’ margin levels won’t rebound as quickly as their gross bookings have.
Hotels chains such as Marriott and Hilton were very aggressive in pushing direct booking campaigns from 2017 to 2019. Expedia countered to a degree, downgrading branded properties in favor of independents.
Although the hotels’ frequent TV and other brand advertising of recent year promoting direct bookings have diminished, Borko warned that “channel wars are coming back” in the next few years.
In other words, as online travel agencies try to regain their profit momentum, hotels won’t sit idly by in the contest for traveler eyeballs.
Bernstein, in its new report, Online Travel Agencies: “A Rough Guide to Online Travel,” is perhaps a tad more pessimistic about the future of online travel agencies, although Bernstein believes they will be around for some time.
“That we, lodging analysts rather than internet analysts, are the authors of this Blackbook is telling,” the report said. “These are no longer 30%+ growth disruptors, but rather established players in travel, in competition with their underlying product and themselves being disrupted by tech intrusion, notably from Google and Airbnb. Our central thesis is that the core business (i.e., hotel distribution/metasearch) is a slowing opportunity, as the previous tailwinds of online penetration, share gains from direct distribution, and share gains from competitors abate or even reverse.”
The consensus relative bullishness about the online travel agencies “is too positive on the path ahead,” Bernstein said.
Among the trends, there will be
Hotel OTA revenue growth is set to slow from a 23% CAGR in 2010-19 to mid-single-digits post Covid-19, with branded hotels notably taking back control of their distribution. Other opportunities in travel exist, but these face tougher competition (e.g., against Airbnb), are lower take rate/margin (flight, package, B2B, etc.) or are small market opportunities (e.g., car hire and cruise). OTAs are going nowhere — for certain customers and suppliers, they provide a highly valuable service; but our analysis suggests the consensus view is too positive on the path ahead.
Among the the trends, there will be “market share shifts to direct bookings, and a refragmentation of the OTA market, with Google, Airbnb, and Hopper creating a more challenging competitive landscape than ever before,” Bernstein said. “Growth going forward, where achievable, will be from either new verticals, competing more aggressively on price, or from taking share from each other.”
In particular, Bernstein predicted that Booking Holdings will “underperform,” and it classified Expedia Group as “market perform.”
“The key difference is we expect Booking to disappoint earlier, with consensus margins too high in the shorter term, whereas with Expedia we see more revenue over risk the longer term,” Bernstein said.
Both Expedia Group and Booking Holdings declined to comment on the Bernstein report.
The debate on the future of the online travel agencies is nothing new. In the aftermath of a weak second half off 2019 for Expedia Group, which led to the ouster of the CEO at the end of the year, speculation was rife that the online travel agencies would be playing a weak hand because of Google’s incursions in online travel.
Meanwhile, Airbnb had its best ever third quarter last year.
At Skift Global Forum in September, I asked Uber CEO Dara Khosrowshahi, a former Expedia CEO and current board member, about an earlier Bernstein report that was likewise unenthusiastic about the future of online travel agencies.
“Well, I think the return will be boom time and then it’ll be up to the OTAs to create their own booms,” he said.
That will be the stiff challenge for online travel agencies: to create new and lucrative revenue streams, perhaps in fintech and elsewhere, to accelerate growth and get those margins expanding again.
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