Recently, there has been a lot of retaliation from the hotel industry in the United States, which is urging the US government to reject the proposed merger between online travel agents Expedia (EXPE) and Orbitz Worldwide (OWW). XPE forms 0.52% of the Consumer Discretionary Select Sector SPDR (XLY). Let’s look at the reasons behind this opposition.
Orbitz: A brief background
Orbitz Worldwide is the third-largest shared booking platform in the domestic market used by a number of airlines, including Delta Air Lines (DAL), Northwest Airlines, United Airlines (UAL), and American Airlines (AAL). The company derives almost 75% of its revenues from the domestic market and is the key player behind Priceline and Expedia. It has suffered from numerous ownership changes, internal conflicts, a lack of direction, and poor strategic decisions.
Orbitz has a more advanced airfare search technology than Expedia and is also more adept than Expedia at displaying results in line with consumer preferences as against those with the best payout to the booking engine. Orbitz and Expedia combined would have a 75% share of the hotel, airline, and rental-car bookings space among all online travel agents. This would also narrow down the competition to two players in the industry: Priceline and Expedia.
Reasons to oppose
The hotel industry fears that the narrowing down of competition in the OTA market would mean the two major companies having total control over the online booking market and able to impose higher costs on the industry. Currently, OTAs account for about 17% of US hotel bookings, and with the growth in mobile technology and changing consumer preferences, this is only expected to grow higher. Wotif Group, after its acquisition, is already increasing commissions from 12% to 15%. Smaller hotels and independent hoteliers feel they will have little power to negotiate and that they will end up losing more on commissions.