The Indian skies in 2019 saw 86 foreign airlines and 6 Indian airlines fly 203 million passengers from and within India. Overall there were 1012 city pairs that were connected. In addition to the operation of the flights, a key element of travel was travel distribution. That is, listing the inventory, options and prices to 4.54 billion travellers across the globe. The distribution was enabled by a variety of channels, a key one being the Online Travel Agencies (OTAs). But in a gathering storm, travel distribution specifically the OTAs are facing significant challenges. Some may not make it through. The ones that do will have to pivot significantly.
OTAs emerged as strong channels of travel distribution
Airlines sell the ability to transport you between two points in exchange for a given price. This information must then be conveyed to intermediaries and directly to the consumer. This is done via multiple channels including the airline’s own website and app, ticket offices, online travel agencies (OTAs), offline agencies, independent travel agents and global distribution systems.
With Indias market characteristic and price-sensitive travel behaviour, over the last decade, OTAs grew by leaps and bounds and commanded a significant market presence. The market was dominated by MakeMyTrip (MMT), Yatra and Cleartrip which grew exponentially. Some OTAs became so powerful that they could literally dictate terms to airlines.
By 2019 some airlines were dependent on OTAs to sell up to 55% of their inventory. In the travel trade, folks often recall an instance of one OTA calling up the airline to ask why they were selling a cheaper fare on the airline website. The airline was forced to retract the fare.
OTAs still command the market but the volumes have evaporated
The OTA business is dependent on volumes. The more folks that come to the site and book, the better it is. As long as an increasing number of folks book through the website or mobile app, the OTAs do well. And over the last decade, with travel becoming increasingly affordable coupled with the demographics for India, OTAs did very well.
For OTAs revenue streams include commissions on tickets, margins on wholesale inventory, technology fees, partnerships, advertising and packages. Over the years as the airlines scaled-down commissions, hotels and packages emerged as a key revenue driver. Even so, volumes remained critical to success.
In a refinement to the model, OTAs also made inroads into the high yield segments by virtue of their corporate travel programs, credit policies and enforcement mechanisms. But the segment has seen some new startups offering extremely customized solutions built for the purpose.
With the Covid-19 crisis, volumes have simply evaporated. And without the ability to get to a destination, the other aspects such as hotels, transfer, dining etc. are all rendered useless. Thus for OTAs, it is critical to see some semblance of demand return to the skies. If the volumes dont recover the OTA business is looking at grim outcomes.
An onslaught from all directions
Even when volumes recover, OTAs now have to deal with the fact that the nature of travel has changed. In the short-term, only essential travel may return. And the jury is out on what distribution channel they will use. Credit policies are also bound to have an effect and brick-and-mortar travel agents are often able to offer much better (read: relaxed) credit terms which the OTAs cannot match.
Some OTAs have already entered into adjacent segments such as food-delivery where they can leverage their existing client base and analytics. This is also a risk mitigation measure because some of the revenue dynamics are dependent on heavy traffic to the OTA website.
All this time, global technology giants like Amazon and Google are also ramping up their foray into travel and travel distribution. And other service providers such as PayTM and MobiQuik and Freecharge are also getting in on travel distribution often liking directly to providers (ironically in some cases the technology interface is provided by the OTAs themselves).
Finally, there are niche specialized travel distribution offerings that are gaining traction. On the supplier front, commissions and incentive structures are being revisited. Several suppliers are already rethinking ways to bypass OTAs and protect their yields. Overall the OTA business is facing an onslaught by all directions.
The nature of the business has led to profitability being elusive
For OTAs the largest expense item is marketing which constitutes almost 30% of total expenses. As a percentage of gross booking volumes, this figure ranges from 11% to almost 18% (this figure exclude payment processing, loyalty, personnel and technology expenses). And given the savvy, price-sensitive and deal-hungry travellers, OTAs are forced into a situation where the quality of data the speed of data and the price of the listed inventory all have to be very competitive. This reflects on the yield. As an example, for airline tickets sold via the OTA the yields realized can range from INR 10 per ticket to upwards of INR 200. Such a large variation does not augur well for managing profitability. For hotels, the yield is higher but not by a great margin. This also highlights why volumes continue to be central to the OTA business model.
The marketing spend is quite interesting because any cuts in that are immediately reflected in the gross booking volumes. Thus in spite of significant market power that some of the OTAs wield. Consequently, OTAs find themselves making significant investments of time and effort on A-B testing, analytics, understanding search patterns and also booking patterns. At the same time, transaction processing speeds have to be optimal, transaction failures have to be minimal and search optimization has to be extremely competitive (read: higher costs). All this while, new suppliers have to be continuously engaged with and global inventory listed via GDS systems. In such a scenario, controlling costs is akin to painting the fire-truck on the way to fight the fire.
The above challenges are reflected in profitability. Amongst the large Indian OTAs, none are profitable as yet. It was widely assumed that the countrys largest OTA namely MakeMyTrip would turn profitable by 2021 or 2022. This will likely now be pushed back. For investors and employees alike this means waiting a bit longer and optimizing costs further towards realizing returns. Layoffs and salary cuts have already been seen and the situation is likely to get worse before it becomes better.
What the future holds for the OTA
As the travel industry grapples with its greatest challenge till date, this will percolate down to travel distribution as well. It is not only the airlines but also the underlying fundamentals including the economic outlook, jobs and the perception of security that has to be addressed.
With lockdowns that were initiated across the globe post the Corona outbreak, folks have become more tech-savvy than ever. Which means user experience, loyalty and ease-of-use for technology businesses will be ever more critical. For OTAs this may be a perfect time to re-engineer these aspects and plan for pivots. To this end, OTAs that can successfully pivot may be able to weather the storm. Others may be forced to consolidate or shut down.
Disclaimer: The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.