Why Orbitz’s international strategy focuses on expansion in China

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Orbitz’s plans for China

Orbitz said in its annual filing that it’s focusing on expanding its international presence through both product innovation and new market expansion. The company said it generated 27% of its net revenue for the year ended December 31, 2013 from its international operations. In its latest first quarter 2014 earnings call management said that the company continued to see strong growth in hotel room nights internationally from the ebookers and HotelClub brands, adding that booked room nights were up 38% year-on-year in Asia.

Orbitz-Chine OTA marketshare

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Orbitz expects its HotelClub brand, which focuses on the Asia Pacific region, to play a significant role in new market expansion. HotelClub experienced higher year-over year hotel transaction volume and higher revenue per room night in 2013. Orbitz is keen to expand China via HotelClub, with a special focus on the rapidly growing China outbound market. It has launched HotelClub’s Chinese brand, Hàokèbāng. Orbitz has hired a VP and general manager for China who will lead the China expansion efforts. Ctrip.com International (CTRP), Qunar (QUNR), owned by Baidu (BIDU), and eLong Inc. (LONG), owned by Expedia (EXPE), are some of the players in the Chinese OTA space.

According to iResearch, Ctrip made up 49.7% of China OTA revenue in 2013, followed by eLong at 9.7% and 17u at 6.1% in the Chinese OTA market. iResearch said that the growth of online travel agents in 2013 in China was slower than that of the whole online travel market due to the ongoing and extensive price war. Since Q3 2013, OTA players including Ctrip and eLong have been involved in a pricing battle on mobile. These companies have invested heavily in mobile services to vie for mobile travel market share. iResearch expects the OTA growth to remain robust in the long run.

The company saw growth in hotel and vacation package transaction volume at ebookers in 2013. However, overall growth was affected by declining air sales as a result of aggressive price competition in the market, reflecting the ongoing challenging macroeconomic conditions in Europe.

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IDC has estimated that online travel bookings will grow 15% annually from $402 billion in 2013 to $714 billion in 2017 with annual growth of 10% in the United States, 12% in Europe, and 22% in the Asia Pacific region. In Europe, OTCs represent just 38% of the online market, but OTCs are growing faster than online supplier-direct bookings, Orbitz noted in its filing.

Like many of its peers in the OTA space, Orbitz continues to build on its strengths in mobile to drive growth across all of its global brands and product offerings. Orbitz said 30% of standalone hotel bookings were made via mobile devices across the company’s global consumer brand portfolio in the first quarter of 2014 up from 22% in the first quarter of 2013. It has launched Facebook and Google Plus social sign-in, Google Wallet, PayPal, and safe traveler profile features on its mobile apps to reduce friction in its integrated search to book experience.

Although banking regulations and other payment barriers continue to impede widespread mobile transactions in most regional markets, a recent PhoCusWright Global and Asia Pacific Edition report projects that aggregate mobile travel bookings in China, Japan, and India will jump from $4.6 billion in 2012 to $18.7 billion in 2015. China’s mobile gross bookings will reach $6.4 billion in 2015, representing 21% of the country’s online travel market.

For more on Orbitz’s OTA peer initiatives to drive growth from mobile devices, please read the Market Realist series Why Priceline expects mobile bookings to catalyze growth.

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The company said HotelClub’s hotel-only offering and strong loyalty program represents an extensible model that enables low-cost new market entry and is expected to expand its footprint into new and fast growing regions. Last year, the company launched the ebookers rail product, becoming the first OTC to offer booking functionality for the UK domestic rail network. Orbitz has invested in products and localization to drive its international business. Efforts around localization include the design and implementation of content, product features, interfaces, and services that are relevant for specific markets. These efforts are proving successful in driving conversion improvements and overall bookings growth, management said.

The hotel business is pressured by competitors’ agency models

Orbitz’s hotel business operates predominantly under the merchant model. It said that over the past few years, fundamentals in the global hotel industry have strengthened. It has generally seen rising hotel occupancy rates and higher average daily rates for hotel rooms. Plus, the company has seen a shift in the business model as some of its competitors make hotel rooms available to consumers under the retail or agency model.

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The agency hotel model is popular in Europe due to the fragmented nature of the hotel industry and it has boosted the business of Orbitz peer Priceline’s (PCLN) brand Booking.com. The widespread adoption of the agency model in Europe prompted Expedia’s (EXPE) acquisition of Venere.com in 2008. In 2012, Expedia introduced the Expedia Traveler Preference (or ETP) program in the U.S. that offers travelers the choice to either pay Expedia at the time of booking or pay the hotel at the time of stay. Internet media company Travelzoo (TZOO) said it’s also focusing on building its hotel booking platform and launched the first phase of its hotel booking platform at the end of March.

According to a new PhoCusWright European and Global Edition report, Priceline’s Booking.com and Expedia (EXPE) increased their share of Europe’s fragmented online travel agency (or OTA) market to 64% in 2012, up from 60% in the previous year. Booking.com commands over 30% of the region’s OTA market. The report estimated that after surging 16% in 2012, OTA gross bookings are projected to sustain double-digit growth through 2015, “driven by fierce competition among global heavyweights.”

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