Disintermediating the Disintermediators


How The Travel Trade is Fighting Back against Online Travel Agencies and Other Intermediaries

Three interesting new developments in the travel trade caught my eye last week. Airlines have benefited substantially from the internet which has dramatically reduced distribution costs vs 20 years ago. Now one is seeking to reduce its GDS costs while another airline is thought to be seeking to capture some of the intermediaries business; meantime a hotel chain is fighting back against the online travel agencies (OTAs).

First development was a broker suggestion that Ryanair was to launch a fare comparison service on its new website, due for launch in the autumn. Understandably not much information was available and it could conceivably be conjecture. But it makes sense: Ryanair has for many years been by far the cheapest carrier, and offering other airlines’ products on its website would not necessarily cause much leakage of custom.

Ryanair is the largest carrier in Europe, and its website obviously attracts a huge number of visitors, and it clearly has the muscle to pose a threat to opodo, skyscanner and other flight specialist intermediaries. How the incumbents would fight back is as yet unclear so this could represent a threat to their business, albeit perhaps marginal. And if Ryanair were successful in such a venture, it has the opportunity to augment its valuation significantly – a high return, low capital intensity, stable income flow should be valued much more highly than the cash flows from an airline, even a low cost carrier.

Lufthansa, in contrast, made an interesting defensive move last week. Shares in Amadeus fell 10 percent (its largest drop in five years) on the day that Lufthansa announced it would impose a charge on tickets not booked through the airline’s own website. This is an interesting development, because the current power and success of the GDS players (Amadeus, Sabre and Travelport) was not anticipated when the airlines sold off their stakes in Amadeus. The airlines’ focus was on disintermediating the travel agents using their own websites and they must have hoped they would not only eliminate most of their travel agency commissions but also the majority of the lower GDS fees.

Yet the GDS systems are thriving. Amadeus is capitalised at €16bn and is a favourite of Terry Smith who looks for high cash return on capital investments with multiple small ticket transactions and low volatility of sales. Lufthansa is seeking an extra couple of hundred million euro cost saving and is proposing a €16 charge for using the GDS systems.

The GDS systems will seek to discourage other airlines from following Lufthansa’s example by highlighting the risk to their volumes, but the profitability of the GDS systems relative to their airline counterparts is unlikely to remain as wide as historically. There is a potential impact on the online travel agencies here too, as they use the GDS systems to price airline tickets.

In a similar but unrelated move on the same day, Accor, the French hotel group, announced that it would open its online booking services to independent hoteliers. The move could treble the number of hotels available on its website, and they propose to offer the hotel owners attractive commission rates, with commissions likely to be two-thirds of that charged by the OTAs.

This is an entirely logical move – the distribution platform behind a hotel chain’s website and the links to external providers is becoming increasingly expensive, and the opportunity to create an incremental income stream to fund that investment is an attractive option. Perhaps even more important, there is also an opportunity to create a more attractive shopping destination, by increasing significantly the amount of inventory, with the customer aware that the chain’s own site will be the cheapest place to buy one of its rooms.

I met with the CEO of a small independent hotel chain recently and the OTA is clearly seen as a major issue for the hoteliers. The OTAs can charge commissions of up to 30%, and even larger chains can be forced to pay away 20% or more, as the OTAs have become increasingly powerful and are now an essential distribution channel.

The investment case for the OTAs is straightforward – they have an oligopoly among themselves; they have a significant share of the market still to go for; and they make excellent returns on capital. Yet their multiples do not appear stretched, especially against some internet comparables. Last week’s developments help explain why the stockmarket has not been more generous in the ratings of these stocks.