ONLINE TRAVEL AGENCIES: The Power of the Other

Call them the biggest survival story of the dotcom era. Or call them the big
guys in the making in corporate America. Online travel agencies like Expedia,
Travelocity, and Orbitz have shown extraordinary (no, one is not at all
generous, they deserve it every bit) resilience in surviving not one, but three
challenges-one after another.

As online players, the first challenge was the tech meltdown of 2000. While
many other dreamy dotcomers fell, these companies did manage to hold on. That
itself was an exception at that time. Hardly had they settled in, came 9/11
resulting in an agoraphobia (a fear of travel) never before known in America.
And the final (and ongoing) challenge is from the very suppliers whose services
they distribute-the hotels and the airlines.

These have themselves have become tech savvy and are challenging these
independent agencies aggressively in the online marketplace. The jury is still
out on who will win this round, though most market observers feel it will not be
a straight one-or-the-other judgment.

Travel Shines

While challenges have definitely strengthened them, what has helped them
survive and grow is the American consumer's increasing reliance on the Web for
making their travel purchases. The figures are telling. According to
JupiterResearch, which tracks consumer commerce on the Net, 23 percent of all
consumer travel purchases in the US, in 2004 were transacted online. This
figure, according to the forecast, will increase to 33 percent in the next four
years. In other words, in 2009 one-third of the total consumer travel spending
on travel will happen via the Web. That may sound a little optimistic at first,
but it is anything but surprising.

One
out of four Americans already visits online travel destinations, according to
Nielsen/NetRatings. In November alone, , as many as 68 million unique visitors
flocked these sites, out of which Expedia, Travelocity, and Orbitz-the three
top online agencies- put together received 36 million.

In fact, travel accounts for majority of total retail commerce happening on
the Net. As much as 43.3 percent of the $117.4 billion, which American retails
spent on the Web in 2004, was on travel according to comScore Media Metrix.That
is a whopping $51 billion. The growth was even more impressive at 26 percent.

That is by and large good news for all stakeholders in the online travel.

So Far, So Good

The online agencies are not relaxing, however. While the impressive growth
forecast-of reaching $91 billion in next four years-in online spending is a
reassuring factor, their concern is that slowly but steadily suppliers have been
taking away online market share from them. Till 2002, the industry was almost
equally split between the suppliers (like airlines or hotels), websites, and the
online agencies. In a global economy that is moving more towards specialization
in services and outsourcing, it is natural to expect that the balance of power
should increasingly tilt towards the independent agencies.

But it is not.

In 2003, suppliers started surging and had built a significant lead by 2004.
They accounted for 56 percent of the total online sales in 2004. And according
to Jupiter, they are expected to increase that to 60 percent by 2009.

How They Compare!

It looks a little surprising, it is not difficult to explain. The agencies
came to the forefront riding the Internet wave. Since travel sales are more
about managing information than anything else, technology had a great role in
removing the inefficiencies. Says Ram Badrinathan, analyst at specialized online
travel business research firm PhocusWright, "It is all about how you
customize information and how you push it. Technology adds a great value to
it."

It is through the power of technology that online players built their
presence and challenge. And they snatched market share from the traditional
travel agencies, which were either small or too dependent on the corporate
travelers to react fast enough.

However, Internet is open to all. While suppliers could not compete with the
traditional travel agencies, because of lack of physical penetration, the
Internet suddenly gave them a platform.

As most online agencies were struggling to cope with one challenge after
another, in the wake of the tech meltdown, the suppliers quickly built their
technology capabilities to neutralize the agencies and challenge them as equals.
Other factors like customer service and fulfillment capability already being
their strength areas, a solid Internet presence allowed them to take away market
share from the online agencies.

The Second Innings

For a long time, these agencies had just one differentiator-the Internet
and its associated technologies. And they almost took it for granted, as if they
owned it. As business flowed smoothly and traditional agencies never seriously
seemed to catch up, the travel dotcoms were busy competing with each other.

But if Internet can be the differentiator on one day, it can also be a
leveler on another. That is what the online agencies realized a little-and
fortunately for then, only a little-late.

With their most important differentiator no more a differentiator, it was
time for them to look for a new strategies to compete and survive. The answer
was very clearly in two things, scale and innovation in technology.

They were comfortable with the technology, though they needed some money.

But scale? For these companies, which grew on the strength of their
nimbleness-and never failed to boast about it-thinking of scaling up for the
sake of scaling up was a total U-turn in strategy. And, of course, it was not
easy.

And then, there was this man-a phenomenon, according to some-called Barry
Diller. A man who saw the online consumer as too important to be cared for by by
just a handful of old timers in this game, such as: Yahoo!, Amazon, and eBay.
And who, by that time, owned Home Shopping Network, TicketMaster, America's No
1 ticket seller, and thought, as Fortune quoted him, online travel booking was
not the "future of travel" but "future of everything". He
bought Expedia in March 2003 for $3.3 billion. Expedia was a Microsoft spin-off.

That changed the game forever. Travel had proved itself, by that time, as the
biggest thing people bought on the Net. This started an M&A phase that is
still continuing. As Expedia's market shared continued to rise, Orbitz was
losing out. In September 2004, it was acquired by Cendant, which followed this
action by acquiring European agency, eBookers, in December (which, incidentally,
prompted us to research the area and end up with this story).

The consolidation streak of America was now spreading to Europe. True,
Expedia Europe was doing quite well. Yet, it had done so mostly organically,
with only small acquisitions and JVs. Now, mergers were becoming a
trans-Atlantic, if not a global phenomenon.

And then, Cendant also bought Ramada International (the hotel chain)
resulting in analysts debating whether all these companies would go for backward
integration. Though, that is still a little far fetched. Badrinathan of
PhocusWright says, "I do not see that becoming a trend yet. There may be
certain cases, where this may make sense, but (it is) too early to call it a
trend."

Today, after a spate of almost two dozen deals (see list...), there are three
major players left in the game-Diller's IAC, which has since then decided to
separate travel business from other business and spin them off as Expedia;
Cendant, with its Orbitz, ebookers, and CheapTicket brands; and SABRE with its
Travelocity, which has made some acquisitions such as ShowTickets,
TravelChannels Germany etc. Major independent companies with considerable market
share include lastminute.com in Europe and Priceline in America, which have
themselves done some acquisitions, but on a much smaller scale. A logical
possibility of either Travelocity or Priceline joining with lastminute is a
topic of discussion at present.

The O-level Test

With scale, access to newer markets (both sub-categories and geographies)
and access to technology have clearly driven the spate of mergers and
acquisitions. Question is-now what?

Consolidation drives up scale. But it increases competition as well. As
competition among themselves from the suppliers increases, it decreases margin.
And add to that the potential threat from search engines, with all the biggies-Yahoo,
MSN, Google-getting into it. After all, it is the biggest category where money
changes hands online.

All that means more pressure on margin for the online agencies. They must do
something to take off that pressure.

Options are limited. They cannot go to the airlines and demand a bigger slice
from them. Airlines, despite seeing a surge in traffic, are facing the heat
because of the increasing fuel prices. Yes, hotels expect both better rates in
2005 and more occupancy. But hotels accounted for only one-fifth of the total
travel sales online in 2004, according to JupiterResearch. Airlines, accounted
for 43 percent, i.e., more than double of hotel bookings. And there is no reason
to believe that this will change drastically this year.

The only way out for the online agencies is to keep a tight control on cost-direct
and indirect. And one logical solution is outsourcing, both business processes
and technology solutions and applications. Says Prashant Sahni, CEO, Teconavte
(the offshore delivery subsidiary of ebookers (now Cendant)), "This is a
low margin, high-volume game where being successful means continue to remain
agile by the right use of technology. That is a great incentive to
outsource."

Adds Kaushal Mehta, CEO of Motif, Inc, which is based in Ahmedabad, Gujarat,
India and serves clients such as Priceline and Expedia, "Driving down the
cost is of extreme importance. What adds to it is that their competition-the
suppliers like airlines and hotels have already offshored." British
Airways, Delta Airlines, and a host of other airlines have outsourced a number
of business processes to India.

With Cendant acquisition of ebookers, Prashant Sahni, CEO, hopes he will have access to other potential clients such as Orbitz

Says an industry person, not wishing to be named, "While cost and peer
pressure are drivers, what one expects is that consolidation would use the
experience that individual units have gained in outsourcing to them, to try it
as a more integrated strategy at the corporate level."

Simply put, a hotels.com now has access to the know-how obtained by Expedia.
Or Orbitz can use the experience of eBookers.

"That is definitely something that I would imagine. Today, potentially I
can target work from the entire Cendant," says Sahni, adding that
practically, however, it is not going to be that easy. Many of these brands
operate quite independently. "I will have to sell to each CEO
individually," he adds.

There are two hurdles before him and his tribe. First is a big one: it may
take some time to change. Offshoring as an idea is still not too familiar to
these companies. Second is-there are existing suppliers for say, Orbitz.

"It is not an agenda item yet," says Badrinathan. He believes
though there are some incentives to outsource/offshore, the industry has bigger
challenges. "I can tell you it is not number one, two, three on their
minds," he adds.

The reason is understandable, at about $24 billion this whole industry is
fairly small. Just to give a perspective, it is almost same as the combined
revenue of a couple of airlines like AMR and Delta. All major industries that
have taken to outsourcing-insurance, mortgage, telecom, technology-are
several times bigger.

The Online Travel Market in the US

Yet, that itself is no reason not to outsource. Industries like research and
consulting have reaped the benefits of outsourcing. And this industry has all
the other ingredients like high-volume, low-margin work; lot of customer
interactions; and a lot of dependence on technology.

All the suppliers believe that the market will grow significantly this year.

Then, there is a bigger challenge. With consolidation, while factors like
pressure on margins and the experience in the group companies act as positive
drivers for outsourcing, the fact remains that the universe is getting smaller.
For example, five independent sites control almost the entire market in the US.
In Europe-still not as consolidated, thanks to smaller individual markets with
different languages-the top three companies account for 56 percent. But these
are 2003 figures from PhocusWright and the market must have consolidated a
little further. The trend will continue.

Does it mean that the target client base is shrinking? "To some extent
yes," says Ravi Agarwala of Lawkim (a Godrej company that bought US-based
Upstream last year) a contact center focused on the travel space. He believes
that the existing service providers would have an opportunity to look at
additional businesses from these consolidated groups.

However, there are many who question the theory that one big group will go
for only one supplier. Even pre-consolidation, most companies depended on
multiple vendors. For example, ebookers, which set up such a big subsidiary in
India, still continues to source from other vendors, most notably Atlanta,
Georgia-based TRX, Inc.

Defends Sahni of Tecnovate, "Apart from redundancy, it gives the
companies ability to benchmark and thus improve efficiency." And then, of
course, it helps them to source multiple languages skills.

Service Providers Will Have to Change Too

What is happening is a big change. As the online agencies try to look for
newer strategies, outsourcing will become more important. Though it is not top
on the agenda, as Badrinathan of PhocusWright puts it, every company seems to
have given it a thought.

The Big Boys of Online Travel (2003 Market share) USA

Their call centers have been outsourced for long, though remaining onshore.
So they have crossed the first level. In fact, Upstream, now Godrej Upstream, is
a travel-focused contact center company. With the merger, it would definitely
like to offshore to become cost competitive.

In February 2004, Travelocity announced its plans to outsource a part of its
customer services being delivered from the US to WNS, based in Mumbai, India. It
also announced that it would close its call center in Clintwood, Virginia.
UK-based Vertex delivers some ticketing-related support for lastminute out of
its delivery center in Gurgaon, near New Delhi.

The latest market grapevine is that TRX, the best-known travel outsourcing
company, is opening a contact center in Bangalore, India. So, as an idea, though
none has gone too far on the path, it is on the radar screen of most.

So does that mean online travel is emerging as a big segment. "Travel is
certainly emerging as a big segment," says the CEO of a large outsourcing
company based out of India, which handles a couple of airlines clients. He,
however, maintains that there is no such thing called online travel. "Yes,
you need to understand travel, online or offline," he states.

Europe

Leading players agree that travel will emerge as a bigger segment this year
but it will not be big enough to attract the big guys of outsourcing. Also, as
Sahni of Tecnovate says, it requires a lot of understanding of the domain.

Companies like WNS have identified it as a big vertical and have managed to
get contracts. There is no reason why Wipro Spectramind, Daksh, or 24/7 customer
would not look at this opportunity.

The lead at this stage hardly matters. "It is definitely not too
late," says Badrinathan.

As online travel becomes more mainstream-few will see the distinction
between online and offline. Also, suppliers will get hooked to the Net more
aggressively. That will create an opportunity for both kinds of companies.

Time will decide who wins.

It will probably not be who has got experience or scale but who has got the
ability.

The buyers will look for a few attributes.

First is broadening the offering portfolio. According to PhocusWright, people
are steadily moving to buy holidays as a package. The agencies will require
service providers who understand the entire travel chain-hotels, airlines,
rentals, events, and the activities.

Also, once the experimentation stage is over, the expectation from
outsourcing suppliers will be an ability to provide multiple processes.

Ability to serve customers in foreign languages would be crucial -especially
those planning to serve the European market.

And finally, there is one trend that may affect the outsourcing service
providers significantly and that trend is: the increasing tendency of corporate
customers to buy online. That will require different skills and levels of SLA.

In short, the action has just begun. The game is still wide open. And the
suppliers of outsourcing have to keep pace with the fast changes in the online
travel industry.

Good news is: most suppliers today agree on that point.

Shyamanuja Das