Shrinking frontiers for the online travel world

The online travel industry is bracing itself for consolidation and change following last week’s agreed &£209m bid for Ebookers by one of the world’s largest travel groups, Cendant.

In the past few years, online travel companies have revolutionised holiday bookings by introducing “dynamic packaging”: consumers have been able to buy flights and accommodation separately, often at knock-down prices.

But online travel is no longer a fledgling industry and established brands such as Ebookers, Opodo, Lastminute.com, Travelocity and Expedia are fighting to dominate the growing sector.

That fight is about to hot up: the bricks-and-mortar travel agents have at last recognised the importance of the online market and are trying to get in on the act. Tour operators such as Thomas Cook and TUI’s Thomson have responded to the upstarts’ challenge by creating their own dynamic packaging websites.

Other factors are also conspiring to make it harder for the online operators to turn a profit. Margins on European flights are getting slimmer, as carriers such as British Airways review their short-haul fare structures and realise the importance of the internet.

The hotel industry has also woken up to the fact that some online operators have been reducing their mark-ups on wholesale room rates, to undercut the chains’ own direct retail rates. Intercontinental Hotels and Hilton severed ties with Expedia over this issue.

Although there is significant potential for growth in the online travel market – only ten per cent of consumers book travel online in Europe, compared with 30 per cent in the US – the cracks are beginning to show at some online operators.

Ebookers has been the subject of several profits warnings and for the third quarter of this year recorded a loss of &£2m on turnover of &£20m in the UK. Its share price hit a high of more than &£6 prior to the Iraq war, almost double the &£3.20 now being offered by Cendant.

Ebookers has not been alone. In November, Lastminute.com announced a pre-tax loss of &£77.2m for the year to the end of September. Some predict that Lastminute.com could be the next big takeover target.

The world’s largest online travel operator, InterActiveCorp (IAC), which owns Expedia and Hotels.com, has been linked with a bid for Lastminute.com, as has Travelocity, which is owned by Sabre Holdings.

Lastminute.com remains tight-lipped about the takeover speculation, but the company claims a spate of acquisitions is to blame for the steep rise in its losses. In the past year, Lastminute.com’s purchases have included Gemstone Travel and the company’s German namesake, Lastminute.de.

One industry source says that, while Lastminute.com is a potential target, its owners may think they can turn the business around. The source adds: “There will also be shareholders who came in when the shares were at a much higher price than they are now and they will want to see value for money.”

The company has already taken steps to become more efficient and it cut more than 350 jobs in a business review earlier this year.

Plenty of investors are eager to snap up online travel companies and many believe the European market is ripe for consolidation.

On top of its bid for Ebookers and its recent purchase of Orbitz, the US’s second-largest travel site, Cendant is known to have built up a war chest for more acquisitions.

Barry Diller, the media mogul who controls IAC, said recently: “There will be more consolidation. That is the nature of things.”

Opodo UK country manager Neil Mott believes that the UK market will follow the US in terms of consolidation and that there will only be room in the market for three major online operators.

“In my view, Expedia will be one and Opodo will be another,” he says. “With the backing Opodo now has (travel technology company Amadeus took a 55 per cent controlling stake in June), we’re confident we’ll be among the survivors.”

Mott does not fear the bricks-and-mortar players, as the likes of Opodo are able to offer products from a range of suppliers. He adds: “They should have been on this bandwagon a long time ago – now they’re playing catch-up.”

Thomas Cook launched its own dynamic packaging website, flexibletrips.com, at the start of the month. It has been offering build-your-own packages on its main website since its relaunch last year.

TUI, which axed the 116-year-old Lunn Poly brand last month and rebranded its shops as Thomson (MW November 4), is promoting its dynamic packaging offers through Thomson.co.uk.

TUI UK sales and marketing director Miles Morgan admits the traditional players have been slow to embrace the online market.

But he adds: “The winners will be the companies with the brand names and the products. Online companies are trying to build their brands and it’s costing them an awful lot of money.”

However, Mott argues that there is a big difference between having brand equity on the high street and having it online.

“There is very little brand loyalty online,” he says. “Customers are promiscuous. On average, they go to seven websites before making a purchase. I think the traditional operators are going to find it very hard to get on that list of seven.”

Thomson claims that more than half its revenue will be generated online by 2008 (the internet currently accounts for 20 per cent of sales) and the other traditional operators admit they will be focusing more on their Web offerings over the next 12 months.

But with so much competition, the number of online travel companies in the market looks unsustainable. More consolidation is inevitable.