By: Lauri Brunner, Senior Equity Research Analyst, Thrivent Asset Management September 14, 2017
The online travel wars have been heating up in recent years as new players muscle into the lucrative web booking market. About 50% of all travel accommodations are now reserved online in both the U.S. and Europe.1
The behemoths of the online travel agency industry are Expedia, with revenue of $8.8 billion in 2016, and Priceline, with revenue of $10.7 billion. Priceline states that it has about 545,000 hotels in its booking network worldwide, while Expedia has about 365,000.
Related online travel sites are also continuing to gain traction, including several well-known subsidiaries of Priceline and Expedia. Priceline owns Kayak, Booking.com, Agoda, and Rentalcars.com, while Expedia owns Travelocity, Hotels.com, Hotwire, and Orbitz, and it has acquired a significant stake in German-based Trivago, which is a publicly traded company.
Priceline and Expedia earn the lion’s share of their revenue through commissions derived from driving travelers to hotels, airlines and car rental companies. For consumers, the companies offer comparison shopping on a broad basis, displaying prices for a multitude of hotels and other travel services that are vying for your business. Both Priceline and Expedia have operating margins in the range of 40%.
Kayak, Travelocity and Trivago have a different and less profitable business model. They are known as “metasearch” sites which funnel users to a variety of travel sites in order to provide more options to compare prices and accommodations.
The online travel companies seem to have borrowed a page from Amazon’s marketing strategy by focusing on price, selection and convenience. Consumers are able to book an entire trip for themselves or their families through a single web site, including flights, rental cars and lodging.
That focus on price, selection and convenience has contributed to extremely fast growth for the online agencies. For instance, in 2009, consumers booked 60 million hotel nights through Priceline. By 2016, bookings had grown by nearly 10-fold to about 557 million nights, representing about $68 billion in total revenue collected.
As the bookings of the online travel industry have climbed, so have the stock prices of the industry leaders. Priceline and Expedia were both up about 25% through the first eight months of 2017.
In spite of its growth, the online travel industry has faced some turbulence recently from two primary sources – Google and Airbnb.
At one time, promotions from the leading online travel firms popped up for free on Google searches. But Google ultimately put an end to the free listings, and now charge the travel agencies for their search engine placements. The additional Google costs have put pressure on the profit margins of the travel firms, who continue to rely on Google to reach customers through paid placements.
While the change in Google’s policy has sliced margins for online travel agencies, the growing popularity of the sites has more than made up for the new charges from Google. Earnings for both Priceline and Expedia have continued to climb as travel bookings have increased.
But the online agencies still face another growing obstacle, as Airbnb continues to expand its presence in the travel industry. Airbnb is a privately held company that focuses on booking bed and breakfast reservations worldwide. The company collected an estimated $2 billion in revenue in 2016, and booked about 144 million nights of lodging.
Millennials and other travelers on a budget have helped bolster the growth of Airbnb, where travelers can book accommodations in shared homes at a lower cost than most hotels. Airbnb has been aggressively expanding its list of accommodations – and its customer base. The company management has stated that they hope to increase bookings by about five-fold by 2020.
As Airbnb increases its presence in the travel market, it could cut into the growth of Expedia and Priceline. Currently, we believe that bed and breakfasts account for about 2% of all paid accommodations, and that could increase by three- to five-fold in the coming years.
Airbnb has also been expanding beyond bed and breakfasts to vacation rental properties, which could become its leading growth segment. Only about 10% to 15% of vacation rental properties are currently available for booking online, leaving a vast untapped market.2
However, even Airbnb may face some resistance as it tries to increase its base of accommodations. A number of cities are considering enacting laws that would block homeowners from using their homes as bed and breakfast sites unless visitors stay for at least a month at a time. One of the concerns of the cities is that these mom and pop bed and breakfasts may be operating under the radar and skirting taxes.
In fact, Airbnb may also face some growing competition for bookings in the vacation rental market. Priceline recently started a site called villas.com that focuses exclusively on vacation rentals.
As the travel agency heavyweights begin to reach saturation in their primary markets, other side markets may emerge. In 2014, Priceline acquired a site called “Open Table” that is geared to consumers who are looking for restaurant reservations or dining bargains. The next frontier may be consolidating bookings for day trips or entertainment events.
Despite the fierce competition among the major players in the online travel agency industry, if the economy remains stable, the shift to web-based bookings by both pleasure and business travelers should continue to expand.
All information and representations herein are as of September 14, 2017, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management associates. Actual investment decisions made by Thrivent Asset Management will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
This article refers to specific securities which Thrivent Mutual Funds may own. A complete listing of the holdings for each of the Thrivent Mutual Funds is available on ThriventFunds.com.
1 Piper research
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