OTA transactions shoot up in January

After experiencing a constant under-performance for all of 2011 - the OTA market in the USA came alive in January 2012.

As post Christmas blues were banished with excitement for the summer and already seeing tightening of supply, consumers shopped till the dropped ONLINE for airline tickets.

However given that discounts are going to be few and far between for the summer months as the impact of the United merger and the general tightening of supply becomes more apparent, the likelihood is that this is an aberration not a trend.

I could of course be wrong - but I doubt it.

Agree with me?

Only time will tell for sure

Cheers

Shhhhh! GDS Incentives Are Headed South

While I missed The Beat Live this year - there were still about 130 people who showed up to debate the current market situation.

Writing in Travel Market Report Michele McDonald (who also publishes TTU) has tackled the thorny subject of  the future state of GDS incentive fees. There remains a pervasive view that the battle between the GDSs and the airlines will have consequences. Almost everyone focuses on the issue of cost.

There is a split in the ranks of the intermediaries. Some Agencies advocate pure transparency and provide the information on the incentive fees  to their clients. Others regard it as a perk of the business. However in looking at the holistic view of how much money is paid out - then we have to look at the total significant amounts paid out. My consulting firm has assessed the situation from publicly available documents and we believe that the total amount paid out in direct and indirect incentives by the GDS is a very large amount. $3billion is what we are projecting for 2011. That powers a lot of agencies' revenues. However this largesse is not spread spread equally. The squeaky wheel syndrome favours larger agencies. Further there are clearly geographic differences where highly competitive markets garner higher incentives than other markets where only one GDS may dominate.

There are some dirty little secrets that some agency owners and players tend to ignore. One of which is that legacy GDSs squarely compete with their customers - in more ways than one. We know that all of the GDSs have an interest in one or more agency outlets. EG Travelocity for Business, Travelport and its partners controlling Orbitz, and yes even Amadeus can still be said to have an interest despite having sold its outlet Opodo to a Franco-Spanish combine. One way that they compete in corporate travel is where the GDS contracts directly with the agency customers and passes the fees onto the customer directly.

And interestingly some of the largest incentive fees go from the GDS to (drum roll please) their own subsidiaries/affiliates. One of the lawsuit arguments between AA and Travelport is that the latter (and there is documentation in Travelport filings that illustrate this) is paying a "super" incentive to Orbitz in which there is effective control (by Blackstone companies) of 55%. You can be sure that if the incentives are to be slashed - then these subsidiaries and affiliates will be among the last to feel the cut. Which means that the regular agencies will feel the chill first.  And this is already happening. In several markets today - GDSs cannot pay full incentive fees on all carriers equally. Some airlines simply tack on the GDS fee to the cost of the ticket. Others either prohibit or significantly reduce the payment of incentives in their home markets. Some airlines and GDS contracts have specific clauses in which the payment of fees is expressly prohibited.

In my view there is an inevitability of the axing of GDS inventive fees by the legacy players. However there are broader and bigger issues which are starting to separate the traditional GDSs. The amount of pure R&D is making a difference. Those who are investing will likely see benefits. The cash paid out in incentives is a double edged sword. It has become a drug for quite a few agencies who in turn have to work harder to make the GDSs work for them at a time when the investment in real new technology has declined across the board. The agencies are having to pay more and more for "ameliorating" technology to cover these inadequacies.

The demand for new services are being driven by three factors

• by the needs of the suppliers 
• the emergence of new technologies particularly in mobile and social - and of course big data
• and of course by the changing generational dynamics of the consumers

These changes make functionality and personalization critical. That is not something that these "bribes" (NOTE this is my term and no one else's) can cover.

Cheers

Online Travel Drags Down ARC August Numbers

Oh dear... after recovering strongly from the depths of the 1st quarter when Expedia and Orbitz suffered without the AA content, the post summer blues seem to have hit the US market for Online Travel Agency sales.

While the $$$ numbers still look good - the transactions of the OTAs are down This is starting to look like the market is going soft. While traffic growth was modest for the earlier part of the year - the GDS powered ARC transactions were down in totality. I believe we are in for a soft late 3rd and all of 4th Quarter. Next year will start soft for sure. With fuel still stubbornly high despite the significant drop in the price of oil. So hold onto your seats everyone - we are going to hit turbulence. Airlines are cutting flights. Cheers

OTAs Headed For Stormy Weather

Nomura analysts have released a Tome on the OTA marketplace that is probably one of the most in depth studies done on the market in a while.

While I have not read the report - I have followed the news reports.

Specifically Nomura is cautioning on the value particularly of Priceline and Expedia which it has a bearish outlook.

According to Forbes the situation is not looking promising. With the marketplace maturing particularly in the USA. They cite the following specific concerns

They have three specific concerns:

Disintermediation: The Nomura analysts note that Google and Microsoft Bing continue to build out their online travel products. “This is a threat to the OTA’s traffic and value propositions and a benefit to large hotel brands’ efforts to drive more traffic to their sites,” they write.
U.S. Suppliers Strike Back: Larger hotel brands and airlines are working to decrease their use of the online travel agencies.
Asia-Pacific Expansion Costs: “We are wary of the near-term margin pressure for U.S. OTAs as they invest to grow in APAC,” they write. “In essence, we expect the region to be highly competitive and expensive to grow in.”

For the the big 3 (remember that Sabre's Travelocity is not included as its private)

Priceline: They think earnings beats will be increasingly difficult from here, “impacting the company’s lofty 18x forward earnings multiple.”
Expedia: “Given the U.S. pressures, uncertainty in Europe and the company’s required APAC investment spending, we struggle to find material incremental upside in the core Expedia business.”
Orbitz: “We are bearish about the company’s asset mix and forward prospects and believe there are better risk-reward opportunities in the Internet space.”

This position demonstrates that there is a general concern about the OTA model which challenges the somewhat high valuations.

This analysis will obviously trickle down into the mini-bubble of Travel services - particularly online. It also puts the Kayak IPO into a less favourable light. The ripple out effect that the Professor and others have commented on with regard to the whole intermediary space from GDSs to Travel Agents shows we are in for some storms ahead.

However in this I see a silver lining. The challenge of the big players represent an opportunity for niche players. Further the rather large cash piles at some of these players is likely to be freed up to invest in new start ups as these mature players struggle to maintain growth which of course is what powers their stock values.

The forces are aligning for change. Here is just more evidence of that

Cheers

PSST - Wanna Know Why Expedia Settled With AA?

OK I did say that I thought this would come out in the end and that March would be the tell tale month for the online agencies.

Have a look the latest numbers from ARC.



The green line is the one....

The dragging down of the whole Intermediary market in the USA has been driven by the falling traffic from the OTAs. Now down more than 10% for 2 months in a row.

This shows you why Expedia realized that the removal of a key airline partner destroyed the consumer proposition of neutrality. I believe we will see these numbers moderate and the loss of share by the OTAs go a little higher next month but still negative in comparison to last year. Thus the kiss and make up session was bound to happen.

HOWEVER - there has been some permanent damage done. The overall share loss by the OTAs as a whole may be lost for ever to the direct channels.

I wonder how Orbitz are feeling right now.

Cheers

US OTA Transactions decline in January

There will be a fair amount of spin going on about this news.

ARC's January 2011 detailed breakdown of transactions shows a decline in Online Travel Agency activity when compared to last year.

After the significant jumps in 2010 over 2011 - we can expect a moderating level of activity but the fall was unexpected.

Clearly something is going on.

One can expect that with Orbitz and Expedia both making up a high percentage of the US OTA market and both having lowered or reduced activity on AA that there would be some effect. But I think that the fall is higher than I would have anticipated when compared to the over sectors of the market. (Corporate and general retail).

I think that the impact of the OTA's battle with AA and the resultant shift to meta search traffic sites such as Kayak and of course to AA direct is now becoming apparent.

Next month's traffic with things becoming stabilized will be an interesting statistic

Cheers

Is There A Bully In The Playground?

or perhaps the statement should be - Bullies In The Playground.

My first encounter with Sabre was in 1979 when I was working for Western Airlines at McCann-Erickson. In those days the whole notion of the power of the CRS (as we called it) was just a convenience nobody thought of the possible power they would wield.

A year later I was in New York working for Mary Wells on the Pan Am account and for the first time saw the unbridled marketing information that Sabre gave to American Airlines. A copy of the sales reports that AA salesmen used to cut deals with Travel Agencies accidentally fell into my lap. It was mind boggling the information that a single airline had on its competitors.

From the other side of the fence - the power of an AMR owned Sabre became a thorn in my side when I ran automation for a large TWA focused travel agency which had PARS in the front and Sabre ADS as its back office. They really didn't like us messing with the system especially after I opened a back door to Sabre.

However I have always had a healthy respect for both AA and Sabre. They were so joined at the hip as to be inseparable even after various government probes into their somewhat dubious market behaviour. Yes they did believe in throwing their weight around.

AA/Sabre at this time was the undisputed market leader and acted as such. In April 1992, American Airlines launched "Value Pricing" -- a radical simplification of the complex pricing structure that had evolved over more than a decade following deregulation of the U.S. domestic airline industry. American expected that the new pricing structure would benefit consumers and restore profitability to both American and the industry as a whole.

Did it work? Nope - within weeks the airline had back-tracked and was back offering normal complex fair structures. But the net impact was not that great and AA emerged unscathed and stronger for understanding the dynamics of the market.

AMR proceeded with the divestiture of Sabre in 2000 - the now named GDS player was the largest Data Processing facility in the world and produced 3 out of 5 airline tickets worldwide. (Source: Annals of Cases on Information Technology By Mehdi Khosrowpou).

However since then the emergence of the Internet and the fragmentation of the distribution system - the dominance of the GDS has declined. Share shifted directly for a lot of reasons.

The emergence of the large OTAs and the decline of the Mom and Pop agency were synonymous. The travel distribution pyramid narrowed. But other factors have emerged. The decline in functionality footprint of the GDS, the emergence of valuable third party applications that made the GDSs work better... I could go on but I think you get my point. The GDSs lost their position as technology leaders. And worse the customer base stopped drinking the CoolAid. But that was compensated by the GDSs shoveling cash at the travel agencies. The bigger the intermediary the more cash you got.

Now we have battle royal. But who is the bully boy(s) ?

It would seem that the numbers make American actually the small player here. With the approx numbers as follows:

50% of all travel is bought online
50% of all travel is bought via supplier direct. Mostly via Airline.com and call centres.

50% of travel distribution in USA via intermediaries is on Sabre. They are a little ahead of Travelport and Amadeus is a small player in the market with approx 10% market share with the various other players making up approx 1%. Note that these numbers are not public so I have to "normalize" them.

In the space of a few weeks in the latter half of 2009 American walked out of Sabre's PSS business See my blog for that event. And then they started their noise about Direct Connect saying that they would make all connections go through their advanced functionality gateway.

AA CEO Gerald Arpey said at the time: "...maybe I'm dreaming here," he said envisioning a future "where those folks who are the intermediary between us and our customer have to pay for access to our product rather than us paying them to distribute our product." Arpey called that shift a "long-term vision," rather than a near-term reality. Within days Delta CEO Richard Anderson followed with a similar statement saying, "Over time, the industry has to evolve to the model of other industries, where people pay us for our content rather than us paying them to take our content."

I am not so sure that those words are coming back to haunt him. With AA controlling no more than 15% of the total air market - they are dwarfed by Sabre and the OTAs.

So who are the Bully Boys in the playground?

It would seem that Sabre (who is still under DoJ investigation for its treatment of Farelogix in 2009) might have now regained its stature as the big Kahuna in the playground. Or this could be the last gasp.

I will still say - be careful what you wish for - if it comes true you might not like the result. After all the Internet so far has become a Bully Free Zone (certain players excepted).



One thing is for certain - all those people who have been arguing for the GDS based neutral model - their bets are looking a good deal shaky right now. The GDS has been shown finally to be not neutral - ditto the agencies especially the OTA players. So the myth of neutrality in a web transparency world has finally been busted.

How smart with the intermediaries be? I think that will rest with the consumer. So far he is showing himself to be a very savvy player. If he feels that the value proposition of the intermediary has been eroded - which early indications seem to demonstrate - then the ease of switching will easily match the difficulty of searching in more than one place. Since the consumer looks in multiple places and buys where he is happiest - these days increasingly direct - then that becomes learned behaviour.

And over in the corner - Google is quietly rubbing his hands going - YES!


Cheers


Cheers

ARC October/YTD Very Nice for Airlines - Not So Great For OTAs.

So everyone can stop moaning - for now anyway.

ARC numbers show a boost in both transactions for probably now the 18th month since the historic lows in Feb 2009.

The latest data shows a strong increase in transaction (Up nearly 11%) and value (up 19%) year to date. As ARC is showing almost negligible ancillary revenues for the agency channel - we can be assured as we have seen from the Q2 numbers that Q3's numbers will be a bumper crop revenue wise. If there is any airline showing less than 20% sales growth year to date then they are clearly falling down on the job. But the trend is downward for growth. This should be taken into historical context that the end of the year the growth tapers off. This is why we should always look at the first part of the year for significant growth in the USA market.

However there is an interesting anomaly. When one looks at the segmentation of the data. Have a look at the total traffic. Growth for all sectors except corporate has slowed to almost nothing. Corporate Travel as represented by the mega agencies (Amex, CWT, BCD and HRG etc) is the only segment with monthly transaction growth.



That should spell further bad news for Expedia and its generalist OTAs and further distance Priceline from the pack in market value terms. As we can see from the chart immediately above. The OTA share of growth started the year well but has dropped to almost zero in the 10th month.

Cheers

Florida to OTAs - See You in Court

So the simmering battle between the OTAs and the States and other jurisdictions on Taxes just went up a notch.

The State of Florida has now formally filed suit against two specific OTAs - Expedia (who is licensed in Florida) and Orbitz (Both LLC and Inc) which are described as foreign corporations in the suit.

Go here to down load the entire filing. (Courtesy of STR).

This is going to be watched and watched. And then this one could even end up on the high court.

Patience by the States seems to be exhausted. I have a feeling this one is just another battle in a very long war.

Cheers

Despite Fee Cuts OTAs Still Face Defections

As an analyst - I spend a lot of time explaining the travel market place to Financial and Wall Street types.

One of the common perceptions amongst the general public (is that an archaic term yet) is that everyone is an expert in travel to some form of degree. Everyone is opinionated that is for sure.

As experts one question I always ask an external analyst is how they do their own booking. The vast majority always state that they book the majority of their travel particularly airlines on the airline.com website or via the call center. (The latter is for International reservations).

The OTAs are pretty much in the same situation as meta and regular search companies if offering a service that provides context to the search and selection process of a trip. In my own case - and it would seem there are many who do the same thing - I always look in the generic places first (at least 1 OTA and meta search site) but rarely do I book via that OTA. The only time I do is if I find a lower rate (without any corresponding loss of value).

PhocusWright has done a study on conversions. Here is the interesting part of their release:

"The fee cuts have not eliminated the defection of OTA air shoppers to airline Web sites. Despite the removal of most service fees on airline tickets, OTAs still lose over half of their air shoppers to supplier Web site for booking. This signals that there is more to the switching behavior than just the fee element. OTAs lose more bookings to air suppliers than they do car or hotel shoppers."

While much of this is obvious - the very facts speak volumes. Car and Hotel shopping is a dark art and the car.com and hotel.com sites are still not doing as good a job as the airline.com sites. Air Shoppers are commodity buyers.

I think its safe to say that the opaque models don't stay opaque very long. Suppliers know this and are acting accordingly. OTAs who managed to show some value here are losing that advantage.

Bottom line - chaps the search process is changing and the OTAs better wise up and do a better job of showing value or they will continue to lose share of conversions.

Cheers

We're Not Going To Take It...

Never did and never will...

OK so call me an old WHO fan - but I find the news that Travellers are pissed off with Travel Booking Sites a revelation of stunning proportions (not).

I have great respect for Forrester's research and for a mere $499 you too can get a copy of the study.

http://www.forrester.com/Research/Document/Excerpt/0,7211,47562,00.html

For once common sense seems to prevail and the world can now rest easy that Websites are still very much a 1.0 product, and in need of a major uplift. I concur with Henry's findings that the GDS should evolve but the technology is too old and creaky to do so. Not to mention that the GDS vendors are not investing nearly enough in addressing this. Further there is a nasty underlying issue that is the (one of many) issue(s) on the table as an elephant in the room.

The captive GDS model ties the OTA players to the GDS based systems. Thus the ability of the online systems to provide a decent technology service is inhibited and will be until the commercial model is displaced that today incentivizes the OTA to continue to use these old legacy systems. The same is true for the Airline direct systems that in many cases are still based on GDSs.

Fortunately change is coming. However not quite fast enough, just don't hold your breath - this will not occur until the airline/GDS contracts start to come up for renewal - look for this in 2010.

In the mean time - the smart airlines are actually prepared to do something about this state of affairs and are moving away from GDS based systems. Solutions from Farelogix, and ITA etc are making sense and are now mature enough to be implemented in high transaction volume environments. The OTAs must step up and bite the bullet to wean themselves off the GDS based model first commercially then technically. The latter is very easy - it is the GDS incentive fee meth that they have the problem with. The OTAs however are seeing their transaction value proposition decline in favor of more ad based models. This puts them in direct conflict/competition with what used to be called Meta Search engines such as Bing and Skyscanner etc. Surprise, surprise the OTAs are not necessarily winning that particular battle, at the same time - the consumers are using more and more the supplier direct sites - thus the OTAs are fighting a multi-front war.

But, dear sisters and brothers, let us not forget the traveller who has become MUCH smarter and is decidedly not happy with the tools in place at the moment, nor is he happy with the way he is being treated by the suppliers, the intermediaries and their technology solutions. Fair notice, he/she will move to where he is treated better. Loyalty counts for now't (nothing) in today's economy.

You have been warned.

Cheers

Etailing Grows BUT....

Emarketer is reporting studies from Forrester and Citi group that etailing is the bright spot in the current US economy. "According to a survey by Forrester Research and Shop.org, US online retail sales rose an average of 11% in the first three months of 2009."

Go here for the study outline: http://www.emarketer.com/Article.aspx?R=1007058

However there is an ominous sign in the numbers for travel. Pure etailers are performing significantly worse than hybrid players. And not just by a small statistical variation. The numbers are pretty significant.

With airlines being able to stabilize their Q1 numbers but with a radically reduced yield - this bodes ill for the pure web based OTAs.

I think we should brace ourselves for some bad Q1 numbers from the big 4.

Long term - the move to a multi-channel environment is the direction of the market. That has significant implications for how the technology and the strategy of both suppliers and intermediaries play in the market. I will say again. Emerging from the other side of the recession will be a whole different world. Species evolution!!!

Cheers

OTAs Lose Hotel Tax Battle in Mouse's House

In a landmark ruling which is the clearest to date - the big online travel agencies - Expedia, Orbitz and Travelocity have lost a major battle in taxation war with Cities throughout the USA, in this case - the City of Anaheim, home to Disneyland and several other theme parks.

Up until now the courts have been divided in the issues with rulings on both sides. The Anaheim case was much clearer as the ordinance was better written.

At issue is the collection and retention of taxation due to the city for prepaid (net) hotel rooms.

There are two issues.

Issue 1 - the taxable amount collected on the gross rate by the OTAs has not been transmitted to the City of Anaheim. What was transmitted was the taxable amount based on the net. So despite the wonders of transparency on the web - the OTAs we retaining the difference.

Issue 2 - the taxes collected for rooms not taken have not been transmitted to the cities. While not an issue in this case this has been part of the legal battle between the taxation authorities and the OTAs.

In the Anaheim case after a two-week evidentiary hearing, the Hearing Officer found that the online travel companies were both "operators" and "managing agents" as defined by the city's ordinance, which is key in establishing their responsibility and liability. The ruling therefore means that the OTAs as a class have to fork over $21 million. Multiply this by the number of other municipalities and the money could be significant to all 3 companies.

This battle which has been simmering for years will see the OTA's having to find a way to handle taxes now in a clearer and more open way. This in turn will lead to enough transparency to figure out how much the profit per room booking they are making.

Isn't the law a wonderful thing...

Expedia restructures - big changes for OTAs

Uh oh.... not happy news at my neighbor's place. Expedia is restructuring.

Gone are heavyweights like Paul Brown. A restructuring build around brands not geography will signal significant upheaval at the Bellevue based company.

For those who provide supply to Expedia this cannot come at a worse time. It means that the company will be in some degree of turmoil at the very time when product merchandising and short term deals dynamic to the minute are being worked out.

All of the US major markets are in decline - Vegas, Hawaii, Orlando, California, New York and the nearby international markets are also seeing rapid falls - Canada, Mexico and the Caribbean.

Couple this with reductions of 10% at Orbitz and Travelocity must also be looking to cut staff. The one bright spot - Priceline seems to be doing quite well on the strength of their EMEA based business.

There must be some very unhappy people. Barry Diller, Blackstone and TPG boys to name but a few.

Tough times are not going to be short lived either.

What's in your wallet?
c
Cheers

OTAs to get reprieve for another year as Hotels hurt

You would think that with the airlines cutting back on flights that the OTAs will be in a world of hurt. Well apparently not so.Humour me here!

The value of the OTAs to the airlines whether content or zero content based has been diminishing over time. Now with capacity in the Domestic US market headed for a major cutback then the airlines "Don't Need No-BODY!!!!"

So they are not going to play ball on giving deals. This is rumbling in contract negotiations throught the market.

However the hotels are in a completely opposite situation. As the airlines cut back they need to fill the vacant rooms. It is a heck of a lot harder to handle cutting back capacity in a hotel than for an airline.

So the hotels will be desperately seeking new channels of distribution... headed straight for the arms of the willing OTAs.

For sure the period from the days immediately after Labor Day are going to be a lot different for the Hotel market than in prior years. First up - lets see what the rates are for Fashion Week in New York. Sure as heck anyone charging like last years rates will look a little silly. (If you are being asked those astronomical rates than contact me and I will give you some options you may not have thought about.

However what happens when capacity comes back in the airline market?

This is going to be interesting as we enter another phase of the evolution of travel distribution

Cheers

Timothy