2010-11-11 07:54:45
Nov 9th 2010, 15:51 by The Economist online | SINGAPORE
TAKING a flight may be a trying experience these days, but booking one online has never been easier. A few clicks, and travellers can scan a wide variety of websites for flight and hotel deals. Perhaps it s no surprise, then, that nearly half of worldwide travel bookings have shifted online, or that some of the largest internet travel firms are reaping heady rewards. Priceline recently earned the accolade of being the S&P s best performer over the last five years, its stock having risen more than 900%. On November 8th it announced a 55% rise in third-quarter profits after stripping out special items, and a 37% rise in revenues, which hit the $1 billion mark for the first time. Priceline s main competitors, Orbitz and Expedia, have also seen a rapid increase in bookings since last year.
Although the travel portals ascent has been smooth so far, the skies ahead are cloudy. The first sign of turbulence came in July when Google announced plans to buy ITA Software, a service that organises online flight information. ITA is the backbone of websites like Kayak and Orbitz, and its algorithm is used in two-thirds of online flight searches in the United States. Analysts don t think Google s goal is to grapple for low margins in the travel-booking business, but rather to use ITA s technology as a platform for advertising. All the same, the venture could displace meta-search services like Kayak, which spare travellers the effort of trawling several portals.
The $700m merger is likely to go through in the next few months, making it one of Google s largest acquisitions since it went public in 2004. The mortal threat to Kayak notwithstanding, the industry s response to the deal has been mixed. Priceline, which relies mainly on international hotel bookings for its profits, has expressed optimism that the deal will help to expand the online travel industry and make it more efficient. Firms including Expedia, TripAdvisor, and Travelocity, in contrast, have formed a consortium called Fairsearch.org to lobby Congress to block the deal on anti-trust grounds.
The industry s worries may be overblown. Not only is Google thought to be mostly interested in ITA s general data-sifting technologies, it will also be wary of disrupting its good relationships with the travel portals: A leaked memo revealed in September that Expedia is one of Google s biggest clients when it comes to advertising spending, so it might think twice about alienating it.
Cutting out the middleman
Perhaps more troubling for the industry was a separate announcement last week, when American Airlines announced plans to pull its flights from Orbitz, saying the existing arrangement isn t cost-effective. AA s goal is to lure more customers to its own website, cutting out the middleman. Analysts have long said that airlines business model of selling via online travel agencies is unsustainable, though there is a danger that the first airline to quit the portals will lose business to rivals, and thus wind up cutting off their nose to spite their face, says Douglas Quinby of PhoCusWright, a travel consultancy.
If airlines do start removing their flights from the portals, it may prompt the portals to put more emphasis on selling hotel rooms, which anyway is more profitable than selling flights. Jeffrey Boyd, Priceline s chief executive, argues that his company would not suffer much if the airlines quit his portal, because it already makes about three-quarters of its profits from hotel bookings. Expedia, likewise, already gets about two-thirds of its revenue from hotels and only 12% from flights. However, whereas airline bookings do not make the portals much money, they do lure in customers, some of whom then make lucrative hotel bookings.
The online travel industry is growing strongly worldwide, but I don t see it being a peaceful industry over the next five years, says Henry Harteveldt of Forrester Research. He says that hotels, as well as airlines, will try to cut out the portals and get more direct bookings from travellers. This should mean a wider choice of online offerings and thus be good news for consumers, even though it may be tough for the travel portals.
To keep flying high, in the face of rising competition, the portals need to work harder at providing a distinctive service. At the moment, Expedia, Priceline, Travelocity and the rest all offer travellers a pretty similar experience and do little to build long-term relationships with them. Yet Forrester Research has found that 17% of travellers in America, and 30% in Europe, haven t actually decided where they want to go when they start searching for trips on the internet. What this shows is that there is great scope to win customers not just by selling travel, but by inspiring it.