What Does the Future Hold for OTAs and Airlines?

This is the second of a 2-part series analyzing the place of OTAs in the online travel ecosystem.

Welcome back to our study about the trends we noticed for online travel agencies (OTAs). In Part 1 we talked about how OTAs continue to make a lot of money, while airlines are re-evaluating their relationships with OTAs.

In Part 2 we discuss how the success of OTAs might diminish and what it all means for airlines.

3. OTAs May Eventually Lose Customers.

With everything that's happened over the years, it's clear that it's time for a change. We noticed some interesting things that hint towards a consumer shift away from OTAs.

Consumer Satisfaction Up for Airlines; Not for OTAs

According to the American Consumer Satisfaction Index for 2017 (ACSI), people are becoming more pleased with airline services. Overall satisfaction has grown 4.2% to an ACSI score of 75. Airline website enhancements boosted overall satisfaction and consumers are impressed with the ease of booking tickets.

Although Internet Travel Services (including OTAs) ranked higher at 79, the score didn't actually improve from 2016. In fact, consumer satisfaction dropped for the categories “loyalty programs”, “usefulness of site-generated recommendations of other travel services” and “helpfulness of customer support”.
Consumer satisfaction for OTAs did not grow in 2017.

Customer support presents one of the greatest gripes with OTAs. Since it's done through them instead of directly with the airline, it gets problematic if, for example, a flight is canceled and the booking needs to be changed. Most consumers don’t know that they need to contact the OTA at this point, which causes confusion and has built distrust in OTAs.

Google Disrupts the Travel Industry

Google remains a huge threat for OTAs such as Expedia and Priceline, as consumer preference is shifting towards metasearch sites. The travel business has brought in US$14 billion for Google, and the Wall Street Journal estimates that Google’s travel business is worth as much as US$100 billion.

OTAs are the largest buyers of Google advertising. According to a Skift Research analysis, Google earned around US$12.2 billion in revenue from travel ads in 2016. Just over half of that revenue came from 4 advertisers: Priceline, Expedia, TripAdvisor and Airbnb. It's an interesting situation to watch, knowing that they're competing with Google’s metasearch engine.

Like other metasearch engines, Google makes money by charging airlines nominal fees for appearing in their listings. These fees tend to be lower than the GDS fees for OTA bookings. Google also links directly to the airline websites.

Additionally, Google has been hugely successful with millennials. 21% of millennials book trips through Google Flights - which is twice as much as those from other generations. Millenials are setting the new standard, so this trend is likely to continue.
Millenials have embraced Google Flights more than older generations.

Overall Growth in OTAs is Slowing Down

Despite the massive growth and revenues that OTAs have experienced, their success may begin to fade out.

The risks for the industry come from economic forecasts and the fact that the shift from offline to online sales is largely complete. Furthermore, the dominant OTAs have been acquiring their competitors to consolidate their power. This doesn't leave much room for newcomers to enter the game, let alone establish themselves as key players against the OTA giants.

What Does This Mean for Airlines?

We see 4 key action points for airlines to reduce their reliance on OTAs, improve direct sales, and increase profits.

1. Airlines in Emerging Markets Need to Act Fast

As travel bookings shift from traditional travel agencies to online channels in Latin America, there's a potential battle between OTAs and airlines to fight for these customers. Airlines in Latin America need to be proactive and strike hard and fast to prevent OTAs from dominating this space.
Additionally, airlines need to make significant investments to encourage more direct bookings from Chinese customers. The key challenge is localization - what works in Western countries doesn't work the same way in China. Both Chinese and international airlines need to reach this mobile-first market with tailor-made tech to pull them away from the hugely successful Chinese OTAs.

2. Airlines Should Invest in New Technology Such as NDC

The IATA NDC standard makes it easier for airlines to sell all of their products across all channels (direct and indirect), which will improve the booking experience and increase revenue per customer. This will level the playing field between full service carriers and low-cost carriers, as full service carriers will be able to sell ancillaries and cross-sell to their entire customer base.
There's a lot of future for NDC. However, it's still more of a medium to long-term change, as it will take time for all players to adopt the NDC standard.

The future holds a lot of exciting opportunities for airlines.

3. Airlines Can Take a Hard - and Collective - Stance Against 3rd Party Distribution

European airlines have already taken action to counteract GDS fees by imposing fees on third party bookings. This strategy funnels bookings directly with airlines, but it also increases the risk of missing out on bookings that would have had more visibility through OTAS. But if airlines collectively decided to charge GDS fees, the increased cost of OTA bookings would drive consumers to the direct channel. This would force OTAs to adopt new technology such as NDC.

4. Airlines Should Focus on the Customer Experience

While airlines won’t be able to match the huge marketing spend of OTAs, they can compete by leveraging their advantage in customer experience. By connecting their marketing channels with data that is usually siloed off (such as booking engines and revenue management, reservation, and CRM systems), airlines can push personalized content to travelers with the products and services they're most interested in. They can also remind customers of the existing benefits of booking with an airline such as direct customer service and loyalty programs.
By placing the customer at the center, airlines will be less like “traditional” travel companies and more like tech companies that consumers love, such as Amazon and Netflix. Airlines that combine well-organised customer data with a true understanding of their demand (outlined by Cambridge Group founder Rick Cash and Nielsen CEO David Calhoun in their book “How Companies Win”), will win back customers to their direct channels.

With these trends and movements for OTAs and in the overall online travel space, it's an exciting time with lots of opportunities for airlines.

Ryan D'Souza

Ryan D'Souza

Product Research Analyst