May 17, 2004 | E-mail article link | m-Travel.com
Text of speech by Opodo CEO David Scowsill
David Scowsill, CEO of Opodo.com, gave the opening keynote address at EyeforTravel's European Travel Distribution Summit, attended by 1,000 managers and executives from all sectors of the travel industry. Opodo is owned by nine of Europe's leading airlines: Aer Lingus, Air France, Alitalia, Austrian Airlines, British Airways, Finnair, Iberia, KLM and Lufthansa and by leading Global Distribution System (GDS) and travel industry technology provider, Amadeus.
Opodo.com offers travelers online travel service for world travel, with access to flights from 400 airlines, 34,000 hotel properties, charter flights, city breaks, package holidays and a worldwide fleet of hire cars, as well as travel insurance and airport parking.
Here is the full text of David Scowsill's speech:
Good morning!
It’s hard to believe that a year has past and once again I am here discussing with you some thoughts and observations on the distribution trends happening within our industry.
I’d like to take the next 20 minutes to consider some of the key developments which have occurred over the last 12 months, and look at a few of the issues we are likely to see going forward. There are 4 main areas I would like to focus on today:
1. Consolidation & acquisition
2. Changing business models
3. Growth of online travel
4. Advances in technology
Consolidation, for both the leisure and corporate travel players, has been the name of the game over the last 12 months, as we have seen a spate of acquisitions and mergers in Europe and the US.
On the Corporate travel side, after months of rumours, Carlson Wagonlit finally acquired Maritz Corporate Travel (MCT) in March this year, to add to their purchase of ProTravel in France in December 2003. At the same time MCT’s former US partner TQ3 Travel Solutions has formed a new joint venture with Navigant International, which combined with last year’s American Express-Rosenbluth deal, reduces the number of U.S. mega corporate travel agencies from six to four.
On the leisure side, Barry Diller bought Hotwire in September 2003, along with the remaining shares in Expedia and Hotels.com that he did not already own. InterActiveCorp now has an online stable of companies with a market capitalisation of $19 billion, and a marketing budget that has doubled in 2004 from $450 million last year to $950 million.
In Europe we have seen several of the online agencies follow an aggressive acquisition strategy. Lastminute has been one of the most prolific. Following the purchase of Holiday Autos last year, it has acquired four companies in the last 3-4 months; Med Hotels, First Option, Gemstone travel and now Online Travel Corporation. This time last year, Expedia was very clear that it was sticking to a strategy of organic growth and that it saw no need to make acquisitions. This has now changed with the purchase of Anyway and Egencia in France.
In gross sales terms in 2002, the online agencies in Europe account for €3.6 bn compared to the €14.9 bn accounted for by the US online agencies.
In US the 3 top agencies (Orbitz, Expedia/Hotels.com, Travelocity) account for 84% of sales, however the European online travel market is much more fragmented. According to PhoCusWright the leading 5 online travel agencies together account for less than 50% of total sales
Further consolidation throughout the industry is inevitable and increasingly in Europe it will be Pan-European players who will take the lead – pure nationals will operate in niches, but cannot play globally.
A second trend has been around the re-engineering of business models, as companies and product suppliers look to further cut distribution costs and increase ROI.
As predicted last year, the European airlines followed the trend set by the US carriers, and in January this year reduced commission fees down to 1% in the UK. This move, led by BA, was swiftly emulated by more than a dozen other airlines and looks set to continue on the Continent. KLM, Iberia and Alitalia have made their positions clear. Lufthansa have already announced they will be taking commissions in Germany down to zero in September this year, and Air France are seeking to do the same in January 2005
This squeezing of margins has resulted in the widespread introduction of service fees by many travel agents, fees - which until recently had been predominantly the domain of the Corporate travel agencies. Having been the first ones hit by declining commissions and incentives, over the past 5 years these Corporate agencies have been moving away from reliance on supplier fees, towards charging customer service fees.
In 2002 only 28% of AMEX’s US Corporate revenues came from airline, hotel, rental cars and other suppliers, whereas 72% came from customer fees. A few years ago the mix was the reverse.
With the shift from high street purchasing to online buying, and ever-decreasing margins, the traditional off-line leisure travel agencies have been forced to do the same, with the introduction of consumer fees and the rise of “proxy” online bookings – where a high street agent charges a customer a booking fee to purchase a low-cost flight that they book online for them.
Charges for telephone booking handling and for paper ticketing, where an e-ticket is available, are becoming the norm for airlines and agencies alike.
Therefore it was only a matter of time before the online agencies followed suit.
In the USA in December 2001, Orbitz introduced a consumer service fee of $5 per booking; Expedia waited nearly 12 months before doing the same, and were criticised by analysts for not taking advantage of this new revenue stream.
Here in Europe since the beginning of the year, all of the major online agencies have introduced booking fees of around £5 per ticket, on certain fare levels.
I can only speak on behalf of Opodo when I say we have seen no decline in our sales figures or volumes, because of the introduction of this fee. Consumers in the UK are used to paying a service charge when they purchase tickets for the theatre, sporting events, and other forms of entertainment.
The service charges from the low-cost carriers are sometimes more expensive than the fares themselves.
Disintermediation is increasing and consumers increasingly understand that they have to pay for value-added services. Service fees are here to stay.
The key question for the next 12 months is whether the large network carriers will start to treat their own web-site businesses as true profit and loss operations. They have all invested tens of millions of pounds in creating, developing and maintaining this direct channel, backed by large advertising campaigns to promote their own site. If they did run these businesses as a P&L centre without subsidy, they would also be charging consumer fees on their own sites. Iberia do this in Spain and Lufthansa have stated that they will do this in Germany from September, possibly charging as much as €30 per booking.
BA, Virgin and BMI have shown no sign of wanting to charge fees on their sites, as they have been concentrating primarily on reducing call centre costs by driving customers for online bookings onto the Internet. Easyjet and Ryanair charge fees, so why should others also not benefit from this income stream?
Reducing agency commissions has been one technique by which the network carriers have sought to cut costs – the other has been by aggressively taking on the GDSs.
Once again the US led the way, with the public debate last year between Worldspan and US Airways, forcing the Department of Transport to agree to a de-regulation of the GDS environment. This will allow flexibility of pricing for the GDS and provide airlines with the capability to choose which GDS they use to display their products.
GDS deregulation in Europe is coming.
Here in the UK, BA made the first concerted move to reduce their GDS costs in January this year, by signing a contract with Sabre and Galileo, which reduced their booking fees by an estimated 25 -- 30% in return for guaranteed access to all fares and a 3-year commitment to participate in these GDSs.
Furthermore, BA threatened the other GDS’s – Amadeus and Worldspan, that if they didn’t sign a similar deal, they would surcharge the fares processed by these systems by £3 each way in the UK.
At the 11th hour both Amadeus and Worldspan signed an agreement and it is widely anticipated that other airlines across Europe will follow a similar strategy over the coming months.
Each of the GDS companies will have struck a slightly different arrangement with BA, but all of them will be looking to claw back all, or some, of the extra costs from the travel agency community. Losing or reducing GDS incentive payments will have significant impact on agency economics, unless they can raise consumer fees to compensate.
On the corporate travel side, the GDSs are also moving toward vertical integration and a ‘direct to corporate model’, effectively competing with the big Travel Management Companies, who have traditionally aligned with multiple GDSs to provide the breadth of choice required by their clients.
GDS companies also have ownership in and/or partnership with the online agencies, fuelling, even further, the growth of online booking.
Distribution is getting more complex.
Which leads me neatly to the next trend – the continuing growth of online travel.
Over the last 12 months we have seen the continued growth in the European online travel market, as consumers move away from high street purchases to online buying. Around 6% of total travel is now booked online, with the largest markets being the UK (34%), France (19%) and Germany (19%). Estimates are that gross bookings will nearly triple from €9.9 bn in 2003 to €26.9bn by 2006.
In Europe, of the 6% of travel booked online, around 47% is booked through the online travel agencies and 53% via direct supplier channels.
The online sales mix is still heavily air dominated by the strong presence of the Low Cost Carriers who now sell around 95% of their tickets online. Their growth is predicted to continue, particularly on the Continent, although there is some speculation that the UK and German low cost carriers are particularly vulnerable to a price war, which may lead to consolidation, acquisitions and mergers over the next 12 to 18 months.
Potential over-capacity in no-frills sector means that many are keen to diversify their business models and expand into new areas. Ryanair has recently launched a separate website offering themed weekends and events, whilst Easyjet is expanding its offerings of hotels, car rentals and travel insurance on their site.
Air is still a major part of online travel bookings – according to Air Transport IT specialists SITA, globally 16% of all air tickets now sold online -- up from 10% in 2002 and just 6% the year before.
However there is no doubt that the fastest growing sector over the last 12 months has been in online hotel bookings. Once again we can look to the US, where online hotel bookings are thriving, for an indication of what is likely to happen in Europe within the next couple of years.
In the US, online hotel sales reached 6.3 billion dollars in 2002. Although a 42% increase over 2001, this still only represents 9% of all hotel sales -- underscoring the sectors continued growth potential.
And online hotel bookings are indeed predicted to dramatically increase, with latest forecasts indicating that by 2005 15.2 billion dollars, or one, in every five, hotel bookings will be made online.
In the US to date this growth has been led by the online travel agencies who now represent over half of the 6.3 billion dollars in online hotel sales, with the remaining 3 billion dollars booked directly through hotel own Web sites.
However recent very public clashes between Hilton, Intercontinental, Accor and InterActiveCorp indicate that issues such as brand control, price transparency, yield management and commission payment levels need to be addressed if the relationship is not to deteriorate
The European online hotel market, in comparison to the US, is much more fragmented, with fewer chains and more independent family owned hotels.
However the future is just as bright! In the UK online hotel bookings are forecast to grow from 2.2 billion Euros in 2002 to 7.3 billion by 2007, whilst latest research from Forrester shows that over a half of online Europeans explore leisure travel on the Net and accommodation is the most-researched item.
Over the next 12 months we will continue to see the growth of online car hire bookings, package holidays, dynamic packaging and further development of more specialist online sectors such as trains, cruises and ferries.
The trend towards dynamic packaging is putting the traditional tour operator model under threat, as consumers become more independent in their requirements, and seek to package their own holidays online. This will particularly impact the city breaks marketplace in the next 12 months, and increasingly start to eat into the long-haul arena.
The initial success of the Internet was in its appeal to the leisure market. This has caused a dramatic channel shift in the US, where traditional agency share has dropped from 75% in 2000 to 45% in 2003, and predicted to go to 32% by 2005. The market is moving to the online agencies and direct to supplier websites.
In the corporate travel market, web-based booking tools have been historically slow to penetrate. However indications are that this is slowly changing. Forecasts show that in the US from 2003 to 2006, the online agency channel will experience the biggest channel growth of 10%, followed by supplier direct online -- at the expense of the traditional travel management agencies.
Latest research from PhoCusWright shows that in the US in 2003, online corporate travel reached $18.8bn or 23% of total corporate travel market. Predictions are that this will increase to $36.5bn by 2006 -- 38% of total market.
Once again Europe is behind the US, but recent research shows that European Corporations have achieved around 8% adoption of online self-booking tools and all the indications are that online corporate travel will start to take off in Europe over the next 2 to 3 years.
A central driver to the growth of online travel have been the recent advances made in technology.
Staying connected is vital in today’s world and the advent of the Internet has seen a dawning of a new era of cheap, flexible and effective technology.
A key development has been the emergence of Web Services, which are a network of protocols and standards that enable companies to share information and integrate disparate web-based applications within an organisation, across processes and between partners.
In the travel world, Web Service enables multiple connectivity of different inventory and serves it up to the customer in a user-friendly fashion.
This dramatic shift will put real pressure on legacy systems used by tour operators and GDS companies, as intermediaries find faster/cheaper ways of getting inventory direct to the market.
Web services will change all our distribution systems.
The next 12 to 18 months will see further convergence of technology standards, enabling software applications to be used across multiple platforms.
What a customer used to do on a PC, they can now do on a PDA, or a mobile phone – thus shaping the way people keep in touch both at home and at work.
The merging of contacts, diary management and email has happened across a variety of devices. The only reason to carry a PC these days is for visibility of all those spreadsheets and PowerPoint presentations, which are too large and complex for small mobile devices.
Business people need to stay connected.
Allied to this will be an increased deployment and adoption of wireless technology (WI-FI).
Dozens of WI-FI hotspots are being rolled out every week. Current forecasts predict that the number of hotspots is forecast to grow from 9.3 million in 2003 to 30million by the end of this year (Gartner)
Internet penetration of Western European households is predicted to increase from 44% in 2003 to 52% by 2007, whilst according to Oftel, broadband penetration in the UK is currently 18%, which in itself is fuelling the growth of online purchasing.
There is no escape anymore from the relentless demands of corporate life, as business people inevitably start to remain connected during their leisure time.
Our leisure and business lives are converging.
So to finish -- over the next 12 months we will see the acceleration of a number of key trends throughout our industry.
The US has led the way with reducing air commissions to zero and the consequential introduction of consumer service fees. The UK is now following, and it will only be a matter of time before airline commissions also reach zero and there is a widespread adoption of the service fees model across the Continent.
The charging of service fees is also likely to expand into the network carriers, as they start to introduce fees on their sites over the next 12 months. Having taken down their call centre costs, why would they not take this income stream? It would probably prove less controversial than fuel surcharges.
As we have seen, airlines are aggressively looking to further cut costs, and the next area to be seriously tackled will be the GDS fees. Agencies will lose these incentive income streams and will need to look to new revenue models to compensate for these losses.
Deregulation of GDS in Europe will mean that agencies will probably need to be promiscuous and connect to multiple GDS to cover the entire product range. However, doing this will make absolutely sure that they do not receive further incentive income from this source, which they might have received from a monogamous relationship.
The further growth of dynamic packaging will mean that traditional tour operators will start to lose share to the online self-package model, as independent customers get accustomed to the ease of use and cost savings available by booking all the components online.
Underlying all of this will be the continued advances in technology and the dramatic change of lifestyle, as people become more technically savvy and better-connected -- shaping the way they stay in touch at home and in work.
In the US, online agencies will increasingly expand into the corporate travel market over the next 12 to 18 months and in Europe over the next 2 to 3 years.
My final prediction for the next 12 months is that many of the low cost carriers will allow wider distribution of their product through the online agencies, as competition increases and they have more capacity to fill.
Perhaps you would like to ask Stelios for his views on this -- we will see.
One thing is very clear. Technology will complicate the distribution picture even more, as all the players seek to get to the market even faster and even cheaper.
If you invite me back in 12 months, we will find out how many of these trends have come to pass.
Thank you
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