Online travel market in a nut-shell

Travel & Tourism

One of the biggest world wide sectors is ‘Travel and Tourism’; contributing for 10.6% of the world GDP, Travel & tourism is expected to grow in an annual pace of 4.6% in the years 2006-2015.
The most toured country in the world is once again France, with 78M foreign tourists in 2006.

Travel is considered one of the most interesting topics for blogs and user generated content. Websites such as Tripadvisor and Wikitravel are prospering thanks to the ever-growing trends of travel, and thanks to travelers who share their experience online.

Flights

While the Travel & tourism industry includes Hotels, car rental, transportation, spa and much more, We choose to begin our work at Etrip with flights, being the most interesting and widely changing commodity in the travel world.

We use the word commodity not by mistake: The boom in low cost airlines (over 120M travelers in Europe alone on 2006) is an accelerator in a process that makes all flights equal, differing from each other only by destination, time and price. We believe that travel search engines represent this mix in the best way, giving their own contribution to the commoditization process of flight tickets.

Online travel sales

According to Forrester research, online travel sales represent 30% of the US e-commerce, accumulating to $63Bn in 2005. This is a figure representing the US market alone. The parties in this huge, globally spread cake can be divided into 3 main sectors:

Providers (airlines, hotels, car rentals etc.)

Travel agencies (Expedia, Orbitz and Travelocity) – the major ones in the US are also considered as the big 3 in global terms.

Aggregators – Travel search engines (A market dominated by Kayak, Mobissimo, Sidestep and the offspring Farecast).

Airlines

Following the moves of the leading low cost carriers, Southwest, Ryanair and Easyjet, Traditional airlines (national carriers such as American Airlines or British Airways) are now selling as much as 10% of the flight tickets directly on their homepages.

This is a nice and well-growing figure that can be mainly explained in sales at home markets. But, compared to the >95% of the toal sales that the low cost airlines websites represent, and taking into consideration that the remaining 90% are divided between land-based and online travel agencies, it is clear that airlines has still a way to go in their online direct sales efforts.

Online travel agencies

Expedia, Orbitz and Travelocity are the leading trio in the US market, representing together 80% of the US online travel market, they count estimated revenues of $40Bn. Flight ticket sales represent roughly 30%-40% of this figure.

An interesting fact is that while online travel agencies best selling product is a product sold directly in the provider’s own site, they are able to sale the same flight, Lufthansa for instacne, might be selling in its own website for a better price. This paradox represents the strength of the major online travel agencies, compared to the weaker (though continuously growing) position of the airlines- in particular in the online travel field.

Travel search engines

TSE is the one that tries to enjoy from both worlds: They aggregate results from both airlines and travel agencies, trying to give the customer the broad overview of the market (that travel agencies are supposed to do)- with the ability to look into more than just one travel agency and then compare and see if the airline website happens to offer a cheaper deal.

How do they work?

TSE sees the purchase of travel products as a 3 steps process: Choose route – Compare offers – Purchase at the best provider

They wish for the customer to user their service for the second step, time and time again, while they receive a small fee from the provider the customer chose to buy from.          Now, lets think through this entire process again:

 What can be changed in the market?

We had Airlines, Travel agencies and Travel search engines. Why would travel agencies have the best price for a given flight?

The reason that travel agencies receive unique prices from airlines that outperform the airlines own websites is that this is the airline’s only way to reach customers in foreign markets.

BUT, if this reach can be provided by someone else, TSE in this case, the one player that does not charge large commissions for this service and is happy with just a minor $2-$5 pay-back, what reason would an airline have to favor the travel agency?

That’s exactly what the directors of Expedia, Orbitz and Travelocity thought when they went and established Kayak, Sidestep, Mobissimo and the other TSE.

However, something is not working right with the model of TSE. Else, how would you explain the fact that after 5 years in the market, TSE represents just $1.8 BN of the global revenues in the industry, a mere 1-2% of the online travel revenues?