Following the lead of their US counterparts, Europe's online travel agencies see a bright future for their sector. As the market takes shape, different strategies are emerging in the dash for growth
With the e-business and airline industries both generating record losses and company bankruptcies, there is a touch of irony to the fact that businesses bridging the two are among the few still confident of growth in today's rough economic climate. Still a relatively new arrival on the European scene, online travel agencies are taking stock of themselves and putting their different business plans into action.
Although travel in Europe remains down, the online travel agencies all are posting impressive growth rates. This owes as much as anything to the rising rate of Internet penetration in the region. Jaap Favier, research director for European consumer markets with Forrester Research, says there is an 18-month lag in Internet usage levels between northern Europe and the USA.
However, he says, while Europe has been slower to develop, it is likely to become a larger online travel market than North America, explaining that European consumers are presented with a greater number of travel choices and more complex tariff structures, both of which are easier navigated online.
Dinesh Dhamija, chief executive of the UK-based online agency ebookers, agrees. He says that the growing realisation by European consumers of the benefits of purchasing over the Internet saw his online agency record 5% growth in sales last year, even as travel slumped. The losers, says Dhamija, are the traditional travel agencies, which saw their sales drop by 10% in the same period.
David Scowsill, head of Opodo, the online agency owned by nine European airlines, and in which Amadeus recently took a 19% stake, agrees. "As with most things in life, what happens in the USA - where about half of all airline tickets now are bought online - occurs here a few months later. This is certainly true of online purchasing in general and of travel in particular."
Scowsill attributes much of the growth in online travel buying to the aggressive marketing campaigns of Europe's low-cost airlines. "Three years ago, easyJet did about 85% of its business over the phone. It now does about 90% over the web," he says, explaining that the marketing efforts behind these results have introduced large numbers of people to buying travel online.
So, even in an era when e-business promises of future profitability are viewed with scepticism, most feel the sector's prospects are bright. Forrester's Favier, for instance, believes the potential market is big enough to support three to five players and he does not think any serious consolidation is needed. Indeed, he predicts in five years time the region's major players - ebookers, Expedia, lastminute.com, Opodo and Travelocity - all will be enjoying financial health.
Even with future earnings large enough to support all the current participants, there is no cosy relationship between Europe's major players. Essentially a high-volume/low-margin business, it is critical that a successful online agency be able to entice travellers to its website.
While by no means ignoring the cost side of the equation, the industry's real focus is fixated on revenues, of which volume is the key component. As well as being the key driver of income, Favier explains that volume plays a critical role in maintaining a low cost base, as airlines and other suppliers will reward the agencies that channel the most business to them with preferential prices. Also, through increased volume, the online agencies can spread their IT costs across a wider range of revenue, making for vital efficiency gains.
Revenue strategies
There appear to be two schools of thought as to the best way to acquire the necessary volume, with some agencies opting for organic, marketing-intensive growth strategies - often including expansion into new markets - and others focusing on acquisition of competitor and complementary businesses.
Whichever course they choose, the end goal remains to drive as much revenue as possible through the website. This makes it vital to develop a unique offering that attracts customers and compels them to return to your portal. Expedia head of UK sales Chris Roe contends that focusing on flights as a distinguishing feature no longer works. "Every site now sells the same flights at the same prices and on the same airlines," he says, equating air tickets to "the milk at the back of the supermarket".
Accordingly, Expedia, the US-based online agency that became Europe's first purely online vendor of travel services when it initiated operations in the UK in 1998, focuses on the benefits customers reap from its plethora of hotel and car options and its advanced, user-friendly technology. "Expedia consistently has more product offerings and more dynamic packaging than the competition," Roe says.
Dynamic packaging is the ability to bundle all components of a trip together in one transaction. Lorraine Sileo, analyst with online travel strategy firm PhoCusWright, says that packaging is an important growth area for Europe, perhaps because holidaymakers in the region are accustomed to having every elements of their trips planned by a central source. Expedia, which launched its packaging program in mid-2002, says it has become its fastest growing offering.
Co-founder and chief executive of lastminute.com Brent Hoberman also plays up his site's dynamic packaging ability. He explains that, in addition to being a big marketing advantage, lastminute.com's "Breakbuilder" dynamicpackaging tool helps the site generate more lucrative transactions.
With airline commissions in Europe at about 5% and moving inexorably lower, he says, lastminute.com aims to appeal to customers that want to plan a whole holiday online. "At 32% for cars and 15-20% for hotels, those commission rates are much more desirable than air fares." Hoberman adds that, thanks to Breakbuilder, the site's sales now break down more or less equally, with air, car and hotel transactions each accounting for 20% of revenue, package holidays 30% and gifts and activities the remainder. He predicts that in the long term, online agencies will only offer air tickets to bring traffic to their websites.
Buying volume
Like others, lastminute.com is also using acquisition to accelerate its volume growth. Hoberman points to the recent purchase of holidayautos.com as one that will enable it to make inroads in Germany and other European markets.
Ebookers, too, has used acquisition of other travel companies to gain the desired volume increases. Key among its recent purchases has been the Travelbag group of up-market holiday-planning consultants. Among other benefits, chief executive Dhamija says such acquisitions combined with its aggressive cost-containment efforts have lowered company expenses from 32% of sales to 12%. The company says outsourcing backoffice, call centre and technical support functions to India achieves labour savings of 70%.
The Travelbag purchase is also consistent with another tenet of the ebookers strategy, which is to separate itself from the competition by being the tool of choice for the higher-end customer. As such, the company - which has also expanded its presence to include customised web offerings for 11 European national travel markets - claims an average transaction size of £580 ($910).
Opodo, like Expedia, is pursuing a course of organic growth. Its centrepiece is customising its offerings to new markets, having already launched dedicated sites in the UK, Germany and France. It also plans new marketing campaigns, as well as product enhancements aimed at increasing its look-to-book ratio.
Chief executive Scowsill claims his firm's airline parentage endows it with a halo effect in the eyes of consumers, which tends to make Opodo the first independent site visited. However, he also sees the danger in relying too heavily on one industry for income and plans to diversify his revenue source. Currently 85% of the site's income is generated by air tickets, a figure he aims to shrink to 50% in the next five years.
Which of these strategies is likely to garner the most market share? Both Forrester's Favier and PhoCusWright's Sileo seem to favour the organic approach. "I'm not sure the benefits of buying volume, especially in the form of bricks and mortar travel companies, will be evident in a few years," says Sileo.
Favier believes one of the most important things an agency can do is concentrate on its website, ensuring that it is easy to use for the first-time buyer, but also "slick and businesslike in presentation for those who use it often".
He also points to such marketing techniques as "regular and relevant" e-mail updates about future offers that build on analysis of historical buying patterns as a way online agencies can build customer loyalty and generate volume. The firm that wins, he says, will be the one that "understands what makes customers tick or rather click."
Source: Airline Business
