June 2018, London
Headwinds for online travel's big guns
Sally White reports on how the online travel agents (OTAs) and metasearch engines are facing intensifying pressure with competition from the tech giants
Wall Street prefers the term ‘headwinds’ to ‘problems’, and there are an awful lot of them in the travel stories coming out of brokers at the moment. The numbers show that the Big-Three, but especially Expedia, are being hit heavily by marketing and technology costs at a time of rising fears of the threats from the major tech groups - Amazon, Airbnb and Alphabet.
The ‘headwinds’ include that the vast major OTA chains are deemed to be approaching hotel market saturation points, while the major hotel groups are increasingly working on avoidance tactics and direct sales to their guests. Another is that Alphabet, the parent company of Google, recently shut down an airfare data tool used by the OTAs. Also, Amazon is expected to follow Alibaba’s lead and tie-up with bigger hotel chains to sell hotel bookings and Airbnb is spreading its interests across the travel industry.
The Big-Three-Expedia, Priceline and TripAdvisor – are spending something over a billion dollars a quarter each on marketing and ads and the numbers are rising. So, while this is bringing revenue growth (albeit at a slowing rate) it is not enough to maintain a rise in profits. As industry commentators at the website Seeking Alpha say, “return on advertising spend has been noticeably down across the industry”.
Taking a look at Expedia, Seeking Alpha comments that the company has warned of “increased sales and marketing spend, which will continue to ramp up in 2018, without any evidence of association growth…” The warning, which came with less detailed guidance on future trading than comes from the other OTA’s, did not go down well.
In a quick run around the numbers at Expedia, which seems to be under the most pressure of the Big-Three, operating expenses were around 65% of sales in Q4 2017, compared to 51% in the previous quarter. That fall brought operating profits down by 43%. Looking ahead, management expects the cost of marketing and technology – investment across the industry in cloud is heavy - to rise faster than sales. It forecasts 2018 profits growth of 6-11%, but Wall Street is a bit sceptical.
Expedia’s seems to be having most trouble at Trivago, run as a separate company, that accounts for around 10% of its revenue base. Trivago is experimenting with a new booking system which, it is hoped, will drive ‘higher-quality’ referrals to partner sites like Expedia, but this is still work-in-progress. System change is also on going at HomeAway, another Expedia company.
While Expedia promises benefits already by Q2 or Q3, says Seeking Alpha, this may be the case. “…without solid evidence to back this claim, investors have to take management’s word on faith – which is something the market does not have too much of right now.”
TripAdvisor too, has been facing mounting expenses due to new initiatives and investments, which have hurt the company's profits. Management has also incurred heavy expenses for acquisitions to boost visitor numbers – which it has done successfully. However, brokers say, very cautiously, that though these continued investments could boost the top line, knocks on profits will no doubt continue.
Investment website Motley Fool comments much more brutally: “The online travel-booking giant's last few quarterly reports have hit with a thud as its turnaround plan fizzled.”
There are slightly more positive feelings about Priceline, yet ‘headwinds’ are also buffeting this, the largest of the OTAs. Much of the great recent growth record here, too, has come from buying out other companies, but it has the protection of a wide international business spread.
Now, however, its very size makes it hard to tell a persuasive growth story to investors and especially when the bulk of revenues come from hotel bookings. “The company is trying to diversify into other segments of travel, but none of the initiatives are big enough to deliver revenue growth of scale,” says Wall Street broker Zacks.
Other threats to future growth are seen as coming from the major tech giants, who are not only going to be selling hotel rooms, flights, etc, but also have the benefits of their huge customer data banks to grow their businesses.
“A tie up with a few major hotel chains can allow Amazon to have billions of booking with minimal requirement for advertising”, comments Zacks.
Wall Street has started to revive rumours of a Priceline bid for TripAdvisor
In its insatiable quest for growth, Wall Street has started to revive rumours of a Priceline bid for TripAdvisor. Priceline would gain over 400 million active users, and all of its user-produced reviews. While Priceline's big platform, booking.com, is popular in Europe, it lacks traffic in the US, and with TripAdvisor, its marketing potential and presence in the US would be significantly boosted. Yet with so many others in the industry likely to be hurt, say NASDAQ market commentators, the US Ministry of Justice response is most likely to be a ‘No’.
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