This is the first of a 2-part series analyzing the place of OTAs in the online travel ecosystem.
- Part 1: The Relationship Between Airlines and OTAs
- Part 2: What Does the Future Hold for OTAs and Airlines?
In 2018, digital travel sales worldwide are expected to be a whopping US$676.45 billion. Airlines were one of the the first industries to embrace online sales, but over time online ticket sales for flights have been taken over by Online Travel Agencies (OTAs).
Airlines were some of the founders of OTAs. For example, American Airlines created Travelocity through Sabre, and 4 major US airlines were the founders of Orbitz.com. Despite this, the relationship between airlines and OTAs has soured over time. What happened?
A Bit of Background on OTAs
OTAs are websites that let people search for and book travel products such as flights, hotels and car rentals. They connect to third party global distribution systems (GDS) such as Amadeus, Sabre or Travelport to access real-time info on availability and fares. Unlike metasearch sites, they don't scrape airline websites for fares and then send you to the airline to buy your ticket. OTAs directly handle the actual bookings and customer service themselves. Their revenues come primarily from booking commissions, with some OTAs also earning revenue from ancillary services and advertising referrals and placements.
OTAs are an important distribution channel for airlines. According to IATA, OTAs account for 1 in 5 flight bookings. OTAs take on some of the marketing burden for airlines by spending a lot on online advertising, which gives flights more visibility. However, this has the effect of commoditizing airlines as they are unable to differentiate their products and services. Additionally airlines must pay GDS fees for each booking which are usually about US$12 per round trip.
Since airlines already have single digit margins, GDS fees can be the difference between profit and loss. For this reason, airlines have been adjusting their strategy toward OTAs by shifting away from this channel and encouraging direct bookings.
We noticed 3 trends for OTAs, which we'll dive into soon:
- OTAs continue to make a lot of money.
- Airlines are re-evaluating their relationships with OTAs.
- OTAs may eventually lose customers.
1. OTAs Continue to Make a Lot of Money
The 3 biggest OTAs are Priceline (including Booking.com), Ctrip and Expedia. Their profit margins for Q3 2017 were each bigger than the top 3 airlines - a clear sign of their success in the market.
Priceline Dominates the OTA Landscape
In the travel/tech scene, the companies which usually get the most attention from investors are Airbnb and Uber. However the real giant in the travel industry is Priceline, an American-based OTA with a higher CAGR (compound annual growth rate) than Apple, Google, Amazon and Netflix.
Priceline’s dominance is driven by its smart acquisition strategy. In 2005 it paid just US$135 million for Booking.com. Today the Netherlands-based company accounts for two-thirds of Priceline's revenue, which in 2016 was US$10.74 billion. Priceline also owns metasearch giants Kayak, Momondo and Cheapflights.
As opposed to its rival Expedia, Priceline tends to focus on hotels, which is much more profitable for OTAs. The Economist reported that commissions on flights are only 3-4% of airfares, whereas hotels give 15-18% of the booking price.
Priceline's main focus isn't on being the most innovative company - instead it focuses on being clever with its technology spending. Booking.com runs over 1,000 tests per day to figure out what makes users most likely to convert. It has implemented many of these results in its booking funnel, such as rankings by WiFi strength for hotels. Priceline as a whole spent US$3.5 billion on performance advertising in 2016, and Booking.com is reportedly the largest spender of Google advertising.
Distribution in China Is Almost Entirely Through OTAs
China is the fastest-growing market for OTAs. When compared to other regions, Chinese OTAs have a much larger share of bookings than other distribution channels. In the US, around 30% of online airline bookings are done through an OTA. In comparison, this figure is 77.5% in China - and it's even higher for bookings through an app.
The biggest OTAs in China are Ctrip (which is in the top 3 OTAs globally), Qunar and Fliggy (formerly Alitrip). At the end of 2016 Ctrip acquired Skyscanner, one of the largest travel search platforms in the world.
Unlike in Western countries, Chinese airlines have struggled to increase direct sales. In 2015 the Chinese government set a mandate for 50% of airline tickets to be sold directly through airlines by 2018. China’s major airlines formed a boycott of Qunar in 2016 to help boost direct sales. But Chinese consumers remain attached to OTAs, partly because of their preference for booking trips on their mobile phones. Ctrip has invested heavily in its mobile platform and is reaping the benefits.
Latin American OTAs Are Growing
Although the company might be a bit unheard of for most people, Despegar is the largest OTA in Latin America and one of the fastest-growing OTAs globally. It's Latin America’s first “unicorn” company - that is, a startup valued at over US$1 billion. The company recently raised US$332 million through an IPO on the New York stock exchange.
Installments are a very popular payment method with Latin American consumers. To take advantage of this, Despegar has partnered up with local banks to create payment plans for travel. 54% of the company's bookings are paid for this way.
Latin America is the second-fastest growing market (behind Asia-Pacific) and has a lot of room for growth. Only 1 in 5 airline tickets are bought online in the region, and brick-and-mortar travel agencies remain common. As internet access and incomes grow, Despegar and other Latin American OTAs are well-positioned to take advantage.
2. Airlines Are Re-Evaluating Their Relationships with OTAs
In a partnership where one side benefits more than the other, something's gotta give. That's why we've seen airlines rework their relationships with OTAs. So how are they doing this?
Surcharges for GDS Bookings
IAG (parent company of British Airways and Iberia), Lufthansa Group and Air France-KLM all introduced surcharges for GDS bookings in recent years to recover costs. These surcharges work out to around US$11-19 per booking.
OTAs pay this fee unless the booking is done with an NDC connection. NDC is a technology that stands for New Distribution Capability. IATA introduced it to modernize the way air products are sold. NDC communicates information such as ancillaries, rich content (pictures and video of products) and seat selection, which makes it easier to generate more revenue per booking.
The movement towards charging for GDS bookings shows that airlines want to shift distribution towards their direct channels. It also puts pressure on OTAs to undertake NDC connections with airlines.
While the distribution charge isn't likely to be introduced in the American market just yet, it's slowly becoming a trend in Europe as smaller airlines begin to follow suit - Ukraine International Airlines introduced a similar charge in April 2017. IAG partially backtracked on this move though, removing the GDS charge for Expedia and the Egencia corporate booking tool.
Non-Profitable OTAs Dropped
Late last year, low-cost carrier JetBlue Airways (USA) stopped selling its flights through smaller OTA websites. The move follows other American carriers such as Delta, who also removed its flights from various OTAs. Why? Smaller OTAs are unable to show bundled fares or sell ancillaries, and they tend to attract customers only searching for the lowest fares. This all hits the potential profits of airlines.
While the move itself isn’t hugely significant, it does highlight a few interesting points about OTAs:
- OTAs often cater to the lowest fare passengers (at least in the US market).
- OTAs will get left behind if they can't innovate by selling bundled fares or ancillaries.
- It's not only the large full service carriers who want to take on OTAs (such as Delta and American) - smaller budget airlines are entering the battle too.
Disputes That Made Headlines
OTAs and travel providers have had rocky relationships over the past 15 years. Here are some of the major battles between US airlines and OTAs:
- 2002: Northwest Airlines flights were removed from Priceline and Expedia
- 2003: US Airways left Expedia due to raised fees
- 2010: American Airlines flights were removed from Orbitz and Expedia over GDS disagreements
- 2013-2014: Delta removed its flights from OTAs and metasearch sites
For a more in-depth look at what went down, check out Skift's coverage of these events.
Thanks for reading. Stay tuned for Part 2, where we'll discuss how OTAs could eventually lose customers, and what it all means for airlines.