European online trends – What a difference an ocean makes

Booking travel via the web is a growing trend, but it is developing in different ways across the world. PhoCusWright’s director of research Caroll Rheem compares the European and US markets


Over the past few years, European online travel has bloomed with its own distinctive character, and the early practice of simply projecting North American strategy on to European business has been shown to be grossly inadequate.


Unlocking the potential of the complex and diverse European marketplace has proven to be more challenging for US firms than originally estimated. The best multi-national performers are able to understand the similarities and differences between various markets and are able to strategise accordingly.


This article highlights the key differences between the US and European online travel trends as presented in PhoCusWright’s US Online Travel Overview and PhoCusWright’s European Online Travel Overview.


While the US continues to drive a disproportionately large share of online travel versus Europe and Asia Pacific, Europe is steadily catching up and will represent 36% of online travel share of the three regions in 2008 (Figure 1).


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Within each region, online penetration of travel bookings continues to climb, with Europe currently growing the fastest. The US ‘crossed the chasm’ last year, meaning that over half of travel bookings were made online. Europe is expected to reach this milestone in 2010 (Figure 2).


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European online travel markets have developed distinct variations from the US market, despite following a similar overall growth trajectory (with a three-year delay). As Figure 3 shows, the European share of tour operator and rail online bookings is higher than in the US, where the share of hotel and car rental is higher. These differences are largely driven by industry trends, rather than online-specific influences, and by how the individual industries have developed differently in the respective regions.


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The hallmark difference between the US and European airline industries is the dramatic ascent of the low-cost carrier (LCC) model in Europe. In 2006, the percentage of LCC flights in Europe surpassed North America’s and by 2007, Europe reached 22% versus North America’s 18% (Figure 4).


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While US airlines such as Southwest and JetBlue continue to prosper with elements of the LCC approach, such as one-way pricing, the true no-frills approach of some of the European LCCs would be potentially disastrous if applied in the US, particularly for routes involving multiple flight segments. For example, European LCCs often change their schedules as late as one week before departure, with flight times up to 10 hours earlier or later than originally stated.


The short-haul, point-to-point nature of most pan-European flights lends itself well to the LCC model, and their aggressive distribution channel strategy has helped grow the airline sector of online travel faster than all other sectors. In 2008, European LCCs are expected to drive more than 60% of their revenues through their websites, as opposed to 18% for their traditional airline counterparts.


The European hotel industry is significantly more fragmented than its US counterpart. More than 75% of European hotels are independent properties, more than double the percentage of the US.


The relatively weak penetration of hotel brands inherently slows online European hotel product development, both for supplier direct websites and online travel agencies. Consequently, the hotel sector represents 21% of European online travel, versus 32% in the US.


For many independent hotels and small chains, it is infeasible to create a competitive supplier direct presence online because of the investment required. The online agencies in Europe benefit greatly from the industry fragmentation, and the agency share of the online hotel market is significantly higher than in the US.


As Figure 5 shows, in 2007, online agencies captured 58% of online hotel revenue in Europe, versus 41% in the US. These agencies are also faced with complicated supply-side operations in Europe, requiring significant resources for local contracting and inventory management.


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Therefore, although hotel industry fragmentation boosts their market relevance, online agencies are also hindered by the labour-intensive process of dealing with individual properties, slowing the pace of overall online penetration.


Industry consolidation is inevitable as hotel developers grow global chain footprints in Europe, and hotel owners seek the superior distribution network and revenues afforded by brand affiliation.


Although the US car-rental industry captures approximately double the share of total online bookings of its counterpart in Europe (7% and 3%, respectively), the overall market size comparison is not as dramatic at $20.6 billion and Euro 16.3 billion, respectively. The large share of online car-rental in the US is driven by stronger online penetration – 32%, versus 9% in Europe. Car rental is the travel segment with the lowest online penetration in Europe, and consequently a segment with strong potential growth.


Rail is significantly more important to the European travel market than it is to the US. In 2007, the total size of the European rail market dwarfed that of the US – Euro 33 billion versus $1.4 billion.


Not surprisingly, Europe’s rail industry commands a much larger share of online bookings, capturing 8% versus 1% in the US. Of the Americans that do purchase rail, a larger percentage do so online: 44% of 2007 rail revenue was booked online in the US compared to 12% in Europe.


Europe’s tour operator giants were better prepared than their fragmented US counterparts for the effects of online travel. While the largest US tour operators were quickly outpaced by online travel agencies, tour operators in Europe have retained a relatively strong grip.


Tour operators represented 19% of 2007 total online travel bookings in Europe and only 1% in the US. The consolidation and vertical integration characteristic of the leading European operators afforded them the ability to invest in the creation of competitive consumer websites and adapt strategies to prepare themselves for the online erosion of their traditional distribution channels.


In 2007, 23% of packaged travel was booked online in Europe, 15% by operators and 8% by online agencies. A third of US packaged travel was booked online, 29% by online agencies and 4% by operators.


The relative strength of European tour operators does not place them out of the firing range, however. The popularity of LCCs and online travel agencies has taken its toll on the industry incumbents, and online agencies will continue to grow their piece of the total travel market.


As Europeans steer away from traditional pre-packaged holidays in favour of dynamic packages, operators will have to build flexibility into their consumer offerings and the infrastructure to support it.


Traditional benefits of owning supply could potentially become burdensome as travel patterns become flexible, and it will be interesting to see if the recent rapid horizontal consolidation seen in Europe’s tour operator segment will also be accompanied by divestiture or spin-off of vertical businesses.


In looking across the various segments of travel, it is clear that Europe and the US have distinct characteristics and trends. While online trends in the US are often a prediction of things to come in Europe, it is shortsighted to assume that strategies that work well in one market will translate to another, even between various markets within Europe. National trends can vary widely, and a colonial view of global expansion can cost a company dearly.


Caroll Rheem is PhoCusWright’s director of research. More detailed insights into critical current and upcoming trends in the US and Europe will be in PhoCusWright’s Online Travel Overview, available later this year.

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