Source : travelweekly.com
By : Danny King
Category : Hotel Internet Marketing
Expedia’s recent agreement to power Travelocity’s North American websites has set analysts to speculating that it portends either an outright buyout of Travelocity or an imminent initial public offering by Travelocity’s parent, Sabre Holdings. Maybe. Maybe not. What is certain is that, more immediately, it gives Expedia greater leverage in its dealings with hotel companies while girding itself against unrelenting global competition from Priceline. Last year, Expedia accounted for about 45% of online travel agency (OTA) bookings by U.S. consumers, with Travelocity making up another 16% or so. According to PhoCusWright, Orbitz had about 21%, while the overseas-heavy Priceline had about 11%. Travelocity Roaming GnomeWhile Travelocity executives insist that the company will continue as a competitive, standalone entity, Expedia, with the agreement in place, stands to gain access to almost two-thirds of a channel in which more than $40 billion in travel was booked last year. “Expedia preserves capital, keeps Travelocity out of a competitor’s hands and will add a potentially significant revenue stream,” Lazard Capital Markets analyst Jake Fuller wrote in an Aug. 23 note to clients. Fuller estimated that the agreement could add more than $300 million in annual revenue for Expedia, whose revenue jumped 17% last year, to $4.03 million. Just as importantly, that anticipated growth stands to give Expedia a little more leverage against Priceline, which has been aggressively trying to chip away at Expedia’s business both in the U.S. and abroad.
analysisPriceline, which overtook Expedia in total annual revenue three years ago as a result of its overseas expansion, completed its $1.8 billion acquisition of metasearch leader Kayak in May, a mere four months after launching a U.S. advertising campaign for its largest European unit, Booking.com. And while Expedia responded by paying about $630 million for a majority stake in the German metasearch company Trivago this year, that move temporarily backfired; the additional expenditures caused Expedia’s second-quarter net income to decline 32% from a year earlier, causing the company’s stock to plunge 27% after earnings were announced. With Trivago further integrated and Travelocity within its control, Expedia is set to benefit further as the travel industry continues to rebound and more people book rooms and airline tickets online. The big question is how the lodging industry will respond. Hoteliers have long and frequently sounded alarms about OTAs because they are hotels’ most expensive sales channel. Estimating that OTAs cost them about twice as much as any other channel in terms of the wholesale prices they get for rooms sold, hotels have been pushing hard to generate more of their online sales on their own websites. Investors initially suggested that the Expedia-Travelocity partnership had given OTAs even more leverage across the board. Expedia’s stock jumped 5.1% the day after the Aug. 22 announcement, Orbitz shares advanced 3.6%, and Priceline rose 2.1%. Since then, though, investors appear less sure about how the agreement will benefit Expedia, whose stock on Aug. 29 had slipped back to just 1.4% more than its Aug. 22 closing price.
Even so, the agreement could spell an additional challenge for hoteliers that had recently been experiencing some success diverting bookings sales to their own websites. Hotels’ websites have been generating about twice the U.S. bookings that OTAs generate. Hotel data and technology company TravelClick pegged hotel website and OTA distribution-channel shares for 2012 at 26% and 12%, respectively, though the two channels’ booking-growth rates were even at about 6% each. Trying to keep pace with the hoteliers’ push to corral online bookings has been costly for OTAs. Max Starkov, CEO of hotel Internet marketing firm HeBS Digital, said OTAs this year have dropped commissions, in the form of wholesale room-rate discounts, to less than 15%, compared with what had traditionally been about 20%. But hoteliers now must worry about that balance of power tilting back to the OTAs as a result of the Expedia-Travelocity agreement. “This will be against the best interests of the [hotel] industry, especially independent hotels who would be an easy prey to this two-prong monopoly,” Starkov warned. “Major hotel brands would be less vulnerable, especially if they continue focusing on the direct online channel and become more innovative and technologically savvy.”
Expedia and Travelocity were both founded in 1996. Expedia was originally a Microsoft division, while Travelocity was launched when American Airlines still owned Sabre. Both OTAs benefited greatly five years later when hotels began aggressively selling discounted inventory to them in the wake of the 9/11 terrorist attacks and have been battling each other for ground ever since. Despite rampant speculation about an eventual merger, both Expedia and Travelocity insist that the agreement, which will start taking hold next year, is nothing more than a partnership and that the Travelocity brand will not be going away. Dara KhosrowshahiIn the Aug. 22 statement announcing the partnership, Expedia CEO Dara Khosrowshahi said the agreement “will enable Travelocity to focus on further building its brand while at the same time providing consumers with an enhanced suite of travel products and services.” Travelocity spokesman Joel Frey was also insistent that the agreement will allow the company to devote more resources to its marketing and branding efforts, which includes its well-known Roaming Gnome. “The brand’s not going away. It’s not a merger,” said Frey, adding that the company will be in better position to improve its promotional efforts and supplier agreements once freed up from the back-end operations. “We are playing to our strengths, which is marketing.” That said, Travelocity has been paring down its operations, selling both its corporate-travel business and its Travelguru unit last June. As for why Expedia did not just buy Travelocity outright, Hudson Crossing travel industry analyst Henry Harteveldt attributed the reason to “DOJ roadkill,” suggesting that the U.S. Department of Justice’s recent legal action to scuttle the American Airlines-US Airways merger agreement might have made both OTAs gun-shy. Regardless, there was a clear winner in this agreement, according to PhoCusWright principal analyst Douglas Quinby. “Travelocity insists they’re still in the fight and plan to compete as fiercely as ever,” Quinby said. “However, with Expedia powering the platform, it seems a risky proposition to put your core product in the hands of one of your top competitors. Expedia has won the affiliate deal of the year.”
Source : travelweekly.com/Travel-News/Online-Travel/OTAs-deal-could-shift-online-sales-away-from-hotels/