FT journalist David Stevenson, City Insider columnist for Travolution sister website Travel Weekly, turns his attention to online travel’s big hitters from the US and says European competitors had better watch out as they develop new technologies to grab a bigger slice of a lucrative market
If you were an investor you could be forgiven for thinking that the only prominent initial public offering (IPO) during 2012 was social media giant Facebook.
Its new issue of shares has been a disaster of truly epic proportions with investment banks scrambling for cover amidst the blame game – and it’ll probably get much, much worse before it gets any better.
But Facebook was just one among many IPOs in the US this spring and summer, with one of the most interesting actually coming out of the travel sector.
“Interesting travel company”, “fast growing travel segment”, “well received IPO” and “investor enthusiasm” – these descriptions all sound slightly peculiar when you first hear them but Kayak’s IPO has been a relative success compared to Facebook.
It shows that online travel is still the ‘in-thing’ among American investors, although recent numbers suggest that some caution is in order.
The US online sector is slowing rapidly and that means that the big US giants are going to turn their attention to Europe and Asia for new growth prospects.
KAYAK’S SUCCESFUL IPO
But first Kayak.
Last time I looked this travel technology company was trading at about $27 a share which is actually above its initial listing price of $26, valuing it near to $1 billion.
Kayak’s fund raising was modest (it raised just under $100m) and its founders (ex Travelocity and a host of other travel start-ups) have a fine pedigree.
Crucially despite having Google on its tail, Kayak has managed to prove the doomsayers wrong and produce hard profits from meta search.
Second quarter results came out a few weeks back and Kayak churned out $76m in revenues, a 36% year-on-year increase from the second quarter of 2011.
Adjusted EBITDA (one of those slightly odd terms beloved of tech firms) was at $20m (up 93%), and net income hit $7m.
Looking at operating metrics, Kayak clearly shows there’s a lot of growth left yet in meta search, with a 33% year-on-year increase in queries, while revenue per thousand queries (RPM) was also up by just 2% to $253.
But it’s mobile where Kayak has really powered ahead, with a 95% increase in mobile queries, and a 42% increase in mobile RPM (to $46).
Kayak’s impressive numbers (par for the course when it comes to a new IPO it must be said) shine some light on the US online travel segment.
Kayak is certainly growing fast but that’s not necessarily the case with its peers, many of whom are beginning to feel the pinch.
SLOWING US ONLINE TRAVEL MARKET
To understand the challenges, let’s start with the poster child of the US online travel sector, Priceline.
Recent Q2 numbers looked impressive at first glance with gross bookings at $7.3 billion for the quarter, and operating cash flows at $3 billion.
But dig deeper into the operating metrics and one can see that in the US at least, growth is slowing fast – as is the European segment for rather more obvious reasons connected to its politicians.
Overall bookings might have grown by 33% in Priceline’s International segment but only increased by 5% for the US (although, to be fair, Priceline derives 78% of its revenues from international operations including Agoda.com).
Hotel room bookings showed 39% year-on-year growth, which sounds impressive except that this is the slowest quantum of growth since Q2 2010.
Ditto for car hire bookings – 29% growth in rental car days and also the lowest growth rate since Q2 2010.
Priceline is currently the second largest online travel company in the world after Expedia but it has been closing that gap across a whole range of metrics including higher revenues and gross margins.
Priceline has even been catching up with Expedia in the core US market – while Expedia accounts for 14.2% of the US OTA market, Priceline has increased its market share to 11.6%.
But these recent second quarter numbers remind is that the only game in town now is international expansion.
Recent numbers from travel research firm PhoCusWright confirm that after years and years of growth, the US online travel segment is now lagging behind the overall global growth rate.
According to PhoCusWright , online travel booking in the US is currently running at around 39%, with forecast growth to just 40% by 2013.
The PhocusWright report also reminds us that where there is growth in the US market, it’s mainly shifting towards direct bookings via the suppliers’ websites (especially airlines).
HERE THEY COME
If Priceline and Kayak want to grow, they need to shift their focus to Asia and Europe.
Asia is obviously everyone’s great white hope but this is still a relatively immature, low margin market especially when compared to the rich pickings on offer in Europe.
Our markets are full of fragmented, smaller, independent hotel chains for instance, all of which are key targets for Priceline.
One recent report suggested that core European markets currently represent 60% of Priceline’s total booked room nights, with hotel booking kicking in 90% of the group’s market value.
Not unsurprisingly, lacklustre growth in Europe as a result of austerity has spooked many US investors.
In fact things are so bad that Priceline took the unusual step of lowering Q3 guidance because of problems in Europe, even though its Q2 numbers had far exceeded most analysts’ estimates.
And Priceline isn’t alone in its caution – shares in Orbitz also crashed 20% in the last few weeks after it issued a weak outlook based on macroeconomic fears, for which read Europe.
Given this miserable backdrop, who can blame Priceline for trying to dig even deeper into China via a tie-up with Ctrip – Chinese customers will now be able to access Booking.com through the dominant Chinese travel portal.
Weaker-than-expected demand is also the name of the game among the second tier travel online players based in the US.
Witness July Q2 results from US quoted Travelzoo, where revenues rose a rather restrained 5%, although operating income was up 36%. North American travel revenues increased by just 4%, while Europe grew by 7%.
TROUBLE IN EUROPE
What do all these conflicting trends mean for the European and specifically UK travel segment?
The first big issue is that there’s a disconnect between the recent trading numbers reported by big US travel online giants and our own integrated travel companies such as Tui and Thomas Cook.
Our national champions are still reporting relatively strong demand from the core continental markets but the likes of Priceline suggest that this could all change very, very soon as the German consumer market in particular sours fast.
Given that the German market has been the ace in the hole for both Tui and TC’s, this could mean a huge amount of turbulence in the next two quarters.
The weakening US market will also make their online travel giants even more determined to deepen their footprint in Europe and Asia.
Obviously Asia and the emerging markets are much more attractive at this point but they are still immature markets by comparison with Europe and margins are likely to be lower.
Greater Europe is still a must have for the US giants, and one can bet that they’ll fight tooth and nail to kill their competition with even sharper pricing and better technology.
With both TCs and Tui betting the bank on their growing online travel businesses, I’d expect a price war as well as an escalating technology battle, with more capex ploughed into new tools, technologies and partnerships.
And remember that extra capital will be thin on the ground at Thomas Cook as it pulls together any spare cash to pay back the banks.
TRAVEL TECHNOLOGY TRENDS
Last, but no means least, all the key players in the online market – American and European – will have to think much longer and harder about how they use technology to woo customers.
It’s clear that new technologies such as mobile, social media or even the use of video represent a huge opportunity set for the major travel groups, American and British.
A recent press release from US based travel and gifts company FunSherpa helpfully pulled together a series of key US online travel industry facts into a fun and entertaining graphic.
Funsherpa Travel Technology Facts – Top online activities for travellers
More details online at – http://www.funsherpa.com/skin/frontend/funsherpa/funsherpa/images/online-travel-experiences.jpg
Key online travel statistics include the following:
– 45% sourced initial trip idea based on online travel
– 70% of social media influenced travellers update their Facebook status while on vacation
– 30% have used mobile apps to find hotel deals
This overview reminds us that travellers are increasingly making use of social media as part of both their decision making and their archiving of the experience (via video and photos).
And recent numbers from Priceline – a major player in this space – also confirm some big new trends centred on mobile.
Their successful Hotel Negotiator and Rental Negotiator apps have been quietly logging key trends, including the observation that 41% of rental car bookings made through priceline.com apps were same-day. Of those bookings, 48% were made within 2 hours of pickup.
Looking at hotels, Priceline reported that that more and more mobile users are choosing to buy into more luxurious hotels – but at a low cost online.
According to Priceline “customers with mobile devices chose 3-star or higher hotels 82% of the time… iPad users are still the pickiest, choosing 3-star and above hotels 69% of the time”.
Who said that online travellers only pick the cheapest and nastiest destinations and hotels?
Perhaps the biggest takeaway here is that more and more online consumers want affordable Luxury at prices that may just be uneconomic for many suppliers?
But there’s also a note of caution needed with all this excited talk of new technology. American traveller’s use of technology differs markedly from their European equivalents.
Another recent PhoCusWright survey suggested that although smartphones are well on their way to ubiquity, not everyone in Europe is as keen to use these all-singing devices to commit to transactional activity.
According to the PhoCusWright’s European Consumer Travel Report Third Edition: “when it boils down to mobile web activity specifically related to travel, growth is nowhere near as robust.
“In fact, in Germany, despite the increased appetite for smartphones, the percentage of mobile web users who engage in several travel-related activities, such as mobile check-ins and mobile booking, fell substantially.”
The key for PhocusWright is that the first wave of iPhone and Android users were tech savvy and affluent whereas “now however, smartphones are conventional technology, increasingly in the hands of a mainstream audience with less inclination to explore complex mobile functions.
“Compared to the early adopters, consumers who have waited this long to connect are nowhere near as eager to transform their smartphone into a boarding pass, or book a nearby hotel on the spot, for example.”
The big US travel technology giants should take note – we Europeans really are different.