Comment: Are OTAs eating each other’s profits?

Tough trading extends online, says Steve Endacott

I often flippantly describe online travel agents (OTAs) as “parasites living off the misery of others”.

Ironically, this is actually a positive description of their asset-light, non-risk model, where they buy flights and seats to package into holidays.

This lack of commitment allows them to exploit drops in flight and hotel prices in a market where customer demand is weak. These lower prices attract customers, so demand gradually matches supply price.

Unlike traditional tour operators’ committed models, OTAs do not take a hit to profits from unsold seats or being forced to sell seats below cost to fill aircraft.

The pain being taken by major tour operators Tui and Thomas Cook is clear in their recent financial reporting.

Cook has clearly decided to throw the kitchen sink at this year’s financials with a £1 billion write down, increasing winter losses to an eye-watering £1.5 billion. But a deficit of 12% on summer sales shows how tough summer 2019 trading is following a hot summer in 2018 and Brexit lingering in the background.

Historically, OTAs’ profits appear to have been relatively immune to downturns in demand and UK OTA On the Beach’s recent 12% rise in winter profits to £11.9 million strikes a positive note.

However, On the Beach’s strong growth in low-cost ‘brand’ traffic, driven by growth in repeat bookings and effective above-the-line advertising campaigns, hides a worrying underlying trend.

This trend is the 20%-plus price inflation seen on most Google pay-per-click (PPC) travel terms.

As search demand has declined by 10% in line with general UK market demand, OTAs which have been brought up on continued upward growth in turnover and passenger numbers are competing even harder to maintain growth, pushing up bid prices.

The impact on profits are further inflated by having to replace low-cost SEO traffic, which naturally declines in line with demand, with more-expensive paid traffic in order to just stand still.

This is why most OTAs are currently naval gazing at their process and customer care, as customer retention and positive brand building have never been more vital to continued profit growth.

After years of summer relaxation, confident that the pain of others will balance the books against lower demand, it may be that OTAs have now joined low-cost airlines and tour operators in fearing a hot summer and a continuing Brexit hangover in the UK.

Leave a Reply

Your email address will not be published. Required fields are marked *