Mirror, mirror on the wall…

Analysts are predicting no let-up in the growth of online travel. But how will brands continue to differentiate themselves and what will decide the winners and losers?

Travel, along with pornography and the flogging of unwanted Christmas presents on eBay, has become one of the undisputed success stories of the Internet.

Driven by our unsatiable desire to travel, online sales have exploded, with every company worth its salt using the Internet as a key method of distribution, whether direct through its own websites, through partners or intermediaries.

It is rapidly changing the landscape of distribution in the UK, Europe and US.

The web has become a 24/7 shop window wired directly into our living rooms. And it acts not just as a booking tool but as a travel agency and guidebook rolled into one.

Product range and price transparency is unrivalled, transaction processes straightforward and you never have to queue. Little wonder then that research companies and online analysts are forecasting no let-up in the growth of the online phenomenon.

US-based market research company PhoCusWright will forecast in a report due out this month that by 2006 the online travel industry in the UK will hit £9.1 billion, almost double the 2004 figure. By 2007 it will reach £11.4 billion, giving the UK a 29% share of the European market.

Analyst Ram Badrinathan, the report’s author, said the market will see the major online brands continue to differentiate themselves in a bid to capture the increasing number of computer users.

“The UK is the most mature and fastest-growing market in Europe with the low-cost carriers as its primary driver. But over the past two or three years online travel agencies have seen tremendous growth,” he said.

“What is interesting is the focus of some of these players. Expedia, for example, has focused on the package market whereas Lastminute.com, while selling holidays, has gone for events and lifestyle.


Total European online travel market (€m)

European online travel market share

“Lastminute’s rationale is that while people take three or four trips a year, they go to restaurants or the theatre far more frequently.

“It is diversifying and becoming a lifestyle brand. Then you have Ebookers which tends to offer mid to long-haul product. It is an interesting mix and that will continue.”

But while online agencies continue to prosper, one of the most significant developments, according to Badrinathan, will be the continuing emergence of the traditional vertically integrated operators with their depth of product and brand identity.

“They are getting their act together and this is where there will be the largest growth,” he said. But he added they could still struggle with some of the technology issues, pointing out Thomson’s lack, until very recently, of a dynamic packaging system.

“The likes of Expedia and Sabre [which owns Orbitz] have a head start because they come from technology backgrounds,” he said. “Traditional players have struggled with some of the back-office functionalities.”

That said, tour operators, with their extensive, big-budget e-commerce strategies, will begin to play catch-up over the next two years, according to PhoCusWright’s analysis.

Online travel agents are expected to rake in £2.46 billion in the UK this year and £3.14 billion in 2006. By 2007, they are expected to be worth £3.6 billion.

But having controlled 37% of the online market in 2003, their share is expected to dip to 34% in 2006 and fall further to 32% in 2007.

However, tour operators are forecast to amass sales worth £1.7 billion in 2007, more than triple the 2004 figure of £580 million. Their market share will increase in parallel, from 8% in 2003 to 13% next year and 16% in 2007.

Overall supplier market share – which includes tour operators, low-cost carriers, accommodation-only, car rental, rail and scheduled airlines – will rise from 63% in 2003 to 68% in 2007.

But Badrinathan said suppliers and online agencies could come under pressure from airlines if, as he expects, they begin to bolster their own product range and become a one-stop shop by adding more hotel content and car hire.

To underline the trend, EasyJet signed a deal last month with Europcar where a car-rental quote is now simultaneously calculated while the customer books a flight. That’s only the start.

According to research company Forrester, the package market will take off next year as consumers – even those yet to truly adopt the Internet – become more confident.

Consumer markets senior analyst Luca Paderni said: “People who started by buying flights have become comfortable doing so and will start moving into the package market. Quite simply, online consumers are becoming increasingly confident.”

Paderni said much of the growth will come from traditionally conservative holidaymakers – predominantly the package market – who will start to adopt the web as it becomes increasingly established as a booking mechanism.

“People who have booked a couple of EasyJet flights, and seen that everything has worked, will start to branch out,” said Paderni.  “The main growth will come from the package market.”

He predicted 23% of all leisure products purchased in Europe by 2009 will be booked on the web. However, the UK is expected to far outstrip that figure with 29% of total leisure expenditure forecast by 2006, rising to 34% in 2009.

In a survey of online clients carried out by Forrester, UK online customers spent an average of £417 online, the highest in Europe. More than six out of 10 consumers said price was a key driver in selecting which site to book with, with 56% citing the ease of ordering online as important.

Significantly, only 3% said they chose a particular site because it has a brand presence on the high street, indicating online-only brands have won the trust of the vast majority of the public.

Euromonitor is also forecasting growth. In its latest report, the research company estimated that the Internet will account for 12.2% of total UK agent and operator sales in 2006, rising to 14.7% in 2007 and almost 20% in 2009.

By 2009, the total value of hotel web transactions will hit £1.4 billion in the UK and air £5.4 billion. Total Internet transactions through travel retailers, including agents, operators and exchange rate providers, will be worth £5.9 billion.

Head of travel and tourism research Caroline Bremner said established high-street brands will begin to prosper.

“There will be continual investment in IT by direct suppliers and while TUI and Thomas Cook have turned things around in the past two years and embraced new technologies, they will be aware they also have a good connection with the high street that could work to their advantage,” she said.

“These are trusted brands and as such will be able to leverage this consumer trust to encourage consumers to book via their websites as they develop web platforms as part of their distribution mix.”

Bremner added traditional high-street agents will need to enhance the customer experience by adding in-store touch screens for information – possibly even for self-service sales – to create a more interactive booking experience.

Nielson/NetRatings, which analyses Internet use, predicted broadband could be a key driver in making the online industry even more competitive.

“It will be a big factor,” said European Internet analyst Alex Burmaster. “With dial-up, people tended to visit only one or two sites as it was slow. But broadband has brought speed which means people are spending more time on the Internet, looking at more sites and viewing more pages. They are viewing five or six sites before booking.”

As increasing numbers of Internet users adopt broadband, multi-media content will play a more important role as users download maps, videos and even TV shows online.

But perhaps more critical, according to Nielsen/NetRatings, is raw data – price.

“It’s important to be engaging and creative once someone gets to the site but there is definitely a trend to visit comparison sites,” said Burmaster.

In support of this, PhoCusWright, in a report on customer trends also due out this month, said the typical European surfer will visit 4.76 websites before making a booking.

The growing trend of searching more sites before consumers take out their credit card is also backed by Hitwise UK, which studies online behaviour.

Figures reveal 41% of visitors to travel agency websites leave the site and head directly to rival agents. On the flip side, agencies receive 27% of their visits direct from rivals.

“This indicates the competitiveness of the online industry,” said director of research Heather Hopkins.

“This natural flow of traffic through the Internet underscores the level of price sensitivity of consumers in that they will visit multiple travel sites to compare prices before booking.”

Of 16 industry sectors examined by Hitwise, travel was by far the most competitive, she added.

Furthermore, the volume of traffic leaving agency websites and heading straight to suppliers is also on the increase.

In its latest set of figures, for September, Hitwise reported how one in 10 lookers went from online agents to airline websites, a 12% increase over September 2004.

Likewise with hotels, with almost 16% of visitors searching an agency site only to leave it and go to destination and accommodation websites. This represents a 27% increase over 2004.

“This shows us that people are searching more and comparing prices,” said Hopkins.

To stem a possible loss of business to direct suppliers – particularly in light of best-rate guarantees being offered to direct bookers – Hopkins said agencies may begin to add links from their sites to suppliers and earn commission that way.

“We’ll see agency sites act not so much act as re-sellers as affiliates,” she said.

Euromonitor’s Bremner predicted that with such intense competition, and with consumers flitting about from site to site, loyalty programmes could be the way forward. “It is likely the industry will witness the emergence of loyalty schemes, as exemplified by Flybe which aims to launch its Frequent Flyer Programme in early 2006,” she said. “This move into reward schemes could also be extended outside the realm of direct suppliers and may well provide the opportunity for UK online travel agencies to forge closer relationships with their consumers and add value.”

Since the beginning of the Internet boom, much of the crystal ball gazing has proved wide of the mark. From virtually every piece of research, different forecasts emerge. But the one thing beyond question is that online sales will increase – and consumers will decide the winners and losers.

The UK online travel market