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Ticketing margins shrink
and airlines edge out middlemen
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Global
low-cost carriers, Ryanair and EasyJet, sell over 90 per cent of air tickets
directly through their own websites. Back home, earlier this month, SpiceJet
managed to sell on its own portal nearly 70 per cent of the 1 million
discounted tickets it had put up for sale for three days, though buyers
complained the site had crashed frequently. Therein resides an important
message for online travel agents. In order to protect the wafer-thin profit
margins, low-cost airlines will seek to edge them out of business. At the
moment, these agents sell over 24 per cent of all airline tickets booked in the
country. That number will come down. So, they need to look for new revenue
streams.
The
agents have been hit by a double whammy. They are competing with their main
partners, the airline companies who, confronted with the economic slowdown and
intense competition, want to grab a larger slice of the ticketing pie, instead
of conceding it to travel agents. It helps them reduce costs (they don’t have
to pay commissions) and create customer loyalty, besides generating future
revenue streams. At the same time, the steady fall in passenger growth (it fell
12 per cent last year) and a tough aviation market are forcing airlines to
squeeze the agents’ margins. This has seriously impacted their bottom-line.
hat
is why the smarter agents are already changing track to ensure survival. Deep
Kalra, founder and CEO of Makemytrip.com, the largest player in the online
travel business in the country, says: “We had anticipated this trend. Margins
are under pressure in air travel, so we are diversifying our business model and
moving aggressively into hotels, holidays and packages which provide better
profit margins.” He concedes it is a global trend. The most valuable online
travel agency, priceline.com (with market capitalisation of $33 billion), gets
over 97 per cent of its revenues from selling hotel rooms. It is much the same
for expedia.com (market capitalisation of over $8 billion) with 73 per cent of
its revenues coming from hotel bookings. Also, globally the share of online
airline ticketing is increasingly shifting to portals run by the airlines
themselves; from 30 per cent a few years ago, airlines now account for 50 per
cent of all tickets sold.
But
does it make sense for airlines and the online travel agents to battle in the
same market? Airlines say their portals give customers cheaper fares and
transparent prices, unlike the agents. “It is cheaper for the customers as they
don’t have to pay commissions to travel agents. Budget carriers in the US and
Europe do this and the regulator, and the consumer forums encourage unbundled
fares so the customer knows what he is paying for. The portals are travel
agents and they charge commission which airlines don’t,” says an executive of a
domestic airline. He also says it creates loyalty of the company to the brand.
Changing dynamics
The skies ahead are cloudy
for Indian portals as well. Kalra says before his company came out with its
initial public offering, 90 per cent of its business was from air travel; that
number is now down to 70 per cent. He says the ratio would become 50-50 in next
few years. It’s a similar story at the other large travel portal, yatra.com.
The share of its air travel business has fallen from 85 per cent two years ago
to 70 per cent now. Sharat Dhall, president, Yatra.com, says: “In the next
24-36 months, we want the non-airline business to be 50 per cent of our
revenues”. The change is being impelled by the new business reality. Profit
margins in selling air tickets have fallen from around 7 to 8 per cent to
around 5 to 6 per cent. It is expected to fall further with most airlines
struggling to stay afloat in a slowing economy.
For
travel portals, selling hotel rooms is definitely more profitable than selling
flight tickets. Hotels pass on margins of 10 to 15 per cent, which makes it a
very attractive proposition. “The more fragmented the landscape, the better is
the margin. There are as many as 20,000 to 30,000 hotels in the country, most
of which are smaller independent hotels, which cannot advertise to book rooms.
We act as their marketing arm by hosting them on our site;so they are ready to
offer us better margins” says Kalra.
Makemytrip,
for instance, has tied up with over 10,000 hotels across the country and wants
to add another 5,000 in few years. It is also tying up with guest houses across
the country to offer consumers an alternative to hotels at budget prices.
Yatra’s Dhall says that increasingly consumers have become more comfortable in
booking hotels online. Two years ago, only 30 per cent of its hotel bookings
were done online, the rest was through phone-ins where consumers asked for more
details. But now, he says, the numbers have exactly reversed. Dhall says he
plans to double the number of hotels, homestays and lodgings on offer on his
website in the next 24 months.
Makes business sense
Holiday packages are also attracting attention of the the online travel agents
because of good profit margins. Agents can hope to get around 15 per cent on
holiday packages when air travel is not included and about 12 per cent when it
is included. Portals are already opening up to this new possibility. Makemytrip
is introducing a service that would let travellers put together their own plan
for a trip. Hotels or travel companies who want to list their products would
have to pay an advertising fee to the portal — another stream of revenue.
Domestic
airline portals are even going a step further— IndiGo and Jet have now started
selling holiday packages, taking on the online travel agents in their new line
of business. But the top executive of an agent says he is not worried. “Their
offers will always be limited to places where they fly. And they can never get
the kind of prices we get with hotels, as we are aggregators and offer large
volumes to hotels and get better rates,” he says.
Online
travel agencies say it does not make business sense for airlines to get into
distribution of air tickets in a big way. Marketing costs of the website, money
they pay to payment gateways, amongst others, could cost an airline two to
three per cent of their ticket revenue. “The point is that what they spend on
the service is no different from what they pass on as margins to us,” says
Dhall.
But
airlines are clearly not impressed. And online travel agents know that
diversification of their business is the key to their survival.
http://business-standard.com/taketwo/news/stung-by-airlines-travel-portals-change-track/499670/
