Trends in the Online Intermediary Market

Travel Agency/Intermediary Market

In the next 2-3 years HeBS expects the big online agencies/intermediaries to become even bigger through M&A. The merchant and opaque services will become even more popular at the expense of Internet less-savvy hoteliers. The disparity between Internet savvy hoteliers that push forward with comprehensive Direct Web Distribution Strategies and well-balanced Indirect Distribution Strategies, and the less savvy hoteliers (brands, franchisees, independents and hospitality management companies) that are becoming increasingly dependent on the online intermediaries, will increase even further.

Online travel is the largest e-commerce category and has attracted numerous big and small players. There are many possible classifications of the online travel services:

By ownership:

• Owned by big offline travel suppliers (Trip.com owned by Cendant)
• Owned by big inventory distribution systems (Travelocity owned partly by Sabre)
• Joint ventures of major travel suppliers: Orbitz.com, Hotwire.com, TravelWeb.
• Public (e.g. Expedia) and privately owned (e.g. HDN.com)

By business model:

• Agency Model (e.g. placestostay.com, TravelHero.com)
• Merchant Model (e.g. Hotels.com, Travelscape.com)
• Opaque Rate Model (e.g. Priceline, Hotwire, etc)

By product range:

• One-stop multi-travel-product shops (e.g. Expedia )
• Lodging-focused sites (e.g. Hotels.com)

The online agencies/intermediaries are projected to maintain a steady online market share in the next 2 years. This share will depend to a great extent on how proactive the travel suppliers will become and how aggressive the direct-to-consumer sales efforts will be:

                                                      1999      2000     2001    2002   2003

Online Agency Share:                  48%      49%      47%    47%    47%

Supplier Branded Websites:      52%      51%       53%   53%    53%

(2001 PhoCusWright)

Jupiter Research provides a similar projection for the online market shares of travel suppliers vs. intermediaries in 2002, but its estimate for 2005 is much more favorable to the travel suppliers:

                                                         2002        2005

Online Agency Share:                   48%         45%

Supplier Branded Websites:       52%        55%

(2001, Jupiter Research)

The two leading online travel services, Expedia and Travelocity, will book more than $5 billion this year. Pegasus Solutions, originally established as a switch between major hotel brands and the GDSs, is already distributing hotel inventory through non-GDS channels on a mass scale, through websites and affiliates. WorldRes is in fact the first Web-based non-GDS hotel inventory distribution system.

Trends in the Intermediary Market

Here are several noticeable trends in the travel agency/intermediary market:

The Agency Model is becoming a thing of the past:

The leading US-based online agencies/intermediaries have embraced the "Merchant Model" and have switched from pure "Agency Model" to various forms of "Merchant Model" and "Opaque Rate Model". The Agency Model-type of hotel inventory is being used only as secondary and supplementary to the Merchant and Opaque Model inventory or as primary only in destinations where there are no Merchant hotels. For example in its "Hotels" section, Expedia features first its "Opaque Rate" and "Merchant Model" hotel offerings and only after that offers other hotels from its Worldspan inventory feed, the “Agency Model”.

Travel players embrace the Merchant Model:

Travelocity.com made a strategic acquisition earlier this year of Site59.com, whose dynamic packaging technology allows Travelocity to a) gradually start substituting and in the future replacing the Hotels.com Merchant listings with its own offerings, and b) respond to the growing popularity of Expedia's travel packages and dynamic bundling of travel components (air+hotel+car, etc). In the same manner Orbitz.com now uses TravelWeb for its Merchant Model hotel offers. Cendant recently acquired Lodging.com, a mid-size Merchant Model service provider.

Proliferation of non-GDS distribution of hotel inventory:

The increased direct sales via hotel-branded websites and focus of online intermediaries on the merchant and opaque models has created a major shift away from utilizing the GDS for hotel bookings. For example, Hotels.com sold 4.243 million hotel room nights in 2001 without using the GDS. In Q2 2002 Expedia reported 2.6 million total hotel room nights, including 2.1 million merchant room nights, which were booked without the use of the GDS. TravelClick reports that room nights booked via the GDS in the first half of 2002 have decreased by 6.9%.

Consolidation is the name of the game:

The consolidation of the travel agency/intermediary market in the U.S., which has been very intensive in the past 24 months, has created a hegemony of several large dominant players (Travelocity, Expedia, etc) and only a few remaining independent travel players worth mentioning (e.g. WorldRes). All major online agencies/intermediaries were either acquired by large offline public companies (Expedia and USA Interactive) or by global GDSs (Amadeus and OneTravel.com). A number of smaller online intermediaries were acquired by larger online agencies (Travelocity and Site 59, etc.). Similar trends could be seen in Europe and Asia.

Emergence of several "Mega e-Travel Ecosystems":

Several dominant online travel ecosystems emerged as a result of the consolidation activity over the last 24 months:

USA Interactive: Expedia--Hotels.com--CitySearch--ReserveAmerica--Interval International

Cendant:Galileo--Cendant Hotels--Trip.com--CheapTickets.com--Highwire.com--Lodging.com

Sabre--GetThere.com--Travelocity--DirectMeetings--VacationCoach--Site59, plus major users of Sabre (e.g. American Express) and GetThere (2000 corporations; 7 of the 10 top agency groups)

Joint Ventures to the rescue:

Joint ventures among several big travel industry players have become a successful approach by travel suppliers to deal with the increasing threat of online intermediaries. First Orbitz.com, then Hotwire, and most recently TravelWeb, are examples of how travel suppliers can overcome rivalries, pool resources and develop robust online services, which neither of the JV participants can afford on their own. We expect similar initiatives in the future, especially online services that combine the best of breed (e.g. major airline alliance + major car rental + major hotel brand) and JVs of destination-related travel suppliers.

Making it big on the Internet is very difficult today:

The launch of Orbitz, a $100 million joint venture, demonstrates the high cost of entry into the travel space. It is a costly undertaking that requires cooperation with existing industry players. Therefore, new entrants face enormous challenges. With the dot.com boom over and venture capital practically non-existent for B2C travel ventures, new and existing online agencies/intermediaries will not be able to raise sufficient capital to fuel their growth and compete with the mega-agencies like Expedia. We believe that in the next few years, only joint ventures of established travel players have the chance of becoming significant online players. Other successful ventures will be niche players that cater to special interest travel (e.g. spas, snowboarding, white water rafting) and destination-focused portals and players.

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