Death of online agencies exaggerated; new models lead to profits, report finds

Proving Return on Investment (ROI) on the Internet has been a struggle for most e-commerce businesses - but not for travel suppliers.
Cost savings from agency commissions, GDS fees, call center labor, even paper, total in the hundreds of millions of dollars. A little more than half of all online travel spending - $7.5 billion - goes direct to suppliers, such as airlines, hotels, car rental companies, vacation packagers and cruise lines. Never before have they enjoyed such a direct customer relationship. And there are no signs of slowing down, as suppliers of all types are putting their greatest efforts into building comprehensive, personalized Web sites in the 2001-2003 period.
But do suppliers really have an advantage over travel agencies, and are agencies doomed from the start? The answer is a resounding “no,” according to The Online Travel Marketplace 2001-2003: Forecasts, Business Models And Best Practices For Profitability, a new report published by PhoCusWright Inc.
According to the report, the greatest opportunities in online travel are in retailing - packaging inventory of all types - air, hotel, car rental, vacations and cruises - and reselling to consumers at a margin. Successful online travel agencies are those that have adopted all the trappings of a retail operation - customer service desks, multiple ordering mechanisms, member discounts, promotional flyers (e-mail/print). The largest online travel agencies have just reached profitability - and they keep getting bigger. This is good news, because when its comes to America’s retailing preferences, it’s “the bigger the better.” How many neighborhood hardware stores have crumpled under the new Home Depot in town?
Americans have embraced travel in much the same way - preferring the vast offerings only the largest travel agencies can bring, such as and Expedia. And they usually go to the sale rack first, keeping low-priced alternatives like Hotel Reservations Network, and Cheap Tickets humming.
It would be difficult for suppliers to offer the one-stop shopping that so many travelers crave. Yet, motivated by ROI, they continue to try.
now offers hotel and car rentals;
, air and car bookings; and, air travel and hotel rooms - all examples of travel companies striving for a larger share of each customer’s annual travel spending. Meanwhile, Hotwire and Orbitz hope to put a dent in the Travelocity and Expedia armor.
All travel businesses are vying for an ever-expanding marketplace - online travel will grow from $14.5 billion in 2000 to $40.1 billion in 2003, according to The Online Travel Marketplace. Roughly 51% of the market is generated from supplier Web sites, while online agencies, consolidators, wholesalers and other intermediaries make up the remaining 49%.
In the near term, however, the online travel scale does tip in the suppliers’ favor. Due to their success at attracting frequent travelers, the percentage of the market controlled by supplier Web sites will grow to 53% in 2003, according to the report. Meanwhile, few online agencies have survived the ongoing commission cuts and frenzied marketing spend that made others go broke, and only those that successfully adopt the new retailer model will thrive.
Airlines hold the cards for now, as air represents more than 60% of the U.S. online travel business, according to the report. Hotels and car rental companies are investing heavily to emulate the airlines’ successful Web efforts. But they simply don’t have the clout to succeed in the same way. By pulling inventory for an online venture, airlines can destroy it (American significantly damaged when it removed discounted TWA inventory after its acquisition of the beleaguered airline.) No hotel, car rental company, cruise line or vacation packager has that kind of influence.
Yet, airlines continue to recognize that online agencies are efficient channels for moving discounted inventory while allowing them to maintain some brand or price integrity. Consider the recent deal Delta struck with Cheap Tickets, where the airline is providing the online agency with special inventory in exchange for warrants.
There are no signs of either the online agency segment, or the supplier-direct segment, slowing down considerably - both segments will see double-digit annual growth for the next three years, according to the report. Growth rates will never match those of 2000 - a record year in online travel retailing. But, new business models and product diversification will continue to lure travelers to the Internet when it comes to planning - and booking - travel.
Consolidation and new competition can be daunting. Only those travel businesses adept at marketing, packaging, and earning customer confidence will really thrive on the Internet. And that does not necessarily mean bigger has to be better.