Bear Stearns, a leading investment banking and securities brokerage firm, has initiated coverage of Internet travel, calling it an industry with great potential and unveiling a wide-ranging report on e-travel entitled Point, Click, Trip: An Introduction to the Online Travel Industry.
“There is no doubt there is tremendous growth potential in Internet travel,” said Bear Stearns senior managing director and leisure analyst Jason Ader. “The question is, Who will profit from it and who will be hurt by it?’’ The report identifies and dissects the categories and players in the e-travel space and provides a road map for investors hoping to profit from the expansion of the industry. In addition, it provides predictions on how the battle to succeed in the industry will shake out.
Ader said that as customers turn to the Internet to make their travel plans, the role of the travel agent will diminish. According to Bear Stearns’ analysis, 25% of all travel agents could eventually lose their jobs as Internet travel expands. “If I were a travel agent, I would be very worried right now,” Ader said. “Their commission fees have already been diminished and now the Internet is threatening to steal their customers.”
Bear Stearns cites industry research showing that in the first half of 1999 approximately 1,800 travel agencies went out of business due in part to their inability to generate revenue. According to the report, in order for traditional travel agents to survive they should fill a certain niche, such as luxury travel or adventure travel, and they must focus on customer service.
“People need someone to complain to when something goes wrong,” said Bear Stearns Vice President Marc Falcone, who also worked on the report. “And we all know it is much more satisfying to yell at a person rather than a computer screen.”
According to Bear Stearns, it will not be easy for e-travel sites to succeed. The report estimates that there are approximately 1,000 Internet sites related to the travel industry. Of those, the analysts predict, only 20% will survive.
Sites that have begun to establish brand identity, such as Travelocity, Expedia and Priceline, will be well positioned to succeed in the e-travel space. Other less-known sites will need to develop value-added content or obtain a unique customer base in order to survive.
The Bear Stearns analysts predict that the vast majority of sites in existence will either be swallowed up by larger more established players or just dwindle away. “The sites which are in the greatest jeopardy are low value-added, ‘me too’ sites that offer neither unique content nor customers and will therefore be cruelly bypassed in the consolidation process,” said Robert LaFleur, Bear Stearns associate director, who also contributed to the report.
It is only a matter of time before sites promoting huge discounts on the Web will be frozen out by the airlines, according to the report. Web sites such as CheapTickets.com will be in jeopardy as airlines develop ways to distribute inexpensive tickets through their own channels. At that point, the report predicts, many bargain-ticket Websites will lose their supply flow. “It will be difficult for sites to generate revenue if they can no longer obtain the product they are trying to sell,” LaFleur said.
Most airlines and hotels are developing partnerships within their industries to form consortiums designed to take advantage of distribution opportunities provided by the Internet. The analysts, however, are skeptical of whether these endeavors will be entirely successful. Questions are raised in the report concerning the ability of industries to band together to control supply without certain members undercutting the system.
As broadband technology develops and becomes widely available, the Internet Travel industry should get a boost, according to the analysts. Broadband will allow e-travel sites to enhance their content and provide shoppers with an unparalleled opportunity to virtually experience a trip before actually spending money. “We believe customers will value the opportunity to take a virtual tour of an exotic location, walk through hotel rooms and sit in their chosen airline seat from the comfort of their own home or office,” Ader said.
It is clear to the analysts that while there is a tremendous amount of growth potential in the industry, success will only be experienced by a few. The companies that do succeed, according to the report, must have a certain number of characteristics, including:
- A Successful Business Mode: Category killers such as Travelocity.com and Expedia, or companies with innovative business plans, like the Hotel Reservations Network, are in the best position to win the online travel battle. Companies that possess both characteristics, such as Priceline.com, are even better positioned.
- A Strong Niche: Specialized travel, such as adventure travel, safaris, student travel or senior travel will allow an e-travel site to stand out and become a valuable acquisition target or partner for more established sites.
- An Established Management Team - Strong Financial Backers