When Microsoft launched Expedia in 1996, nobody could imagine that the success the newly formed OTA (online travel agencies) niche could become a $1.3 trillion global industry in the next couple of decades. With the surge in the travel industry in the past few years and the growth in e-commerce, OTAs have witnessed tremendous growth in their top and bottom lines.
Acquisitions pressurize margins
Industry majors Priceline (PCLN) and Expedia have been fiercely acquiring smaller competitors, resulting in a consolidation of the OTA industry. However, these acquisitions have forced the companies to take on debt, putting downward pressure on their margins.
As the industry grows smaller, competition among the players should also grow rapidly. This leads to companies spending more on advertising in order to lure more customers. These higher expenses could lead to lower margins for the players.
Also, in the Airline Tickets segment, airline companies have forced the OTAs to cut down or remove their processing fees and cancellation fees, which have led to lower margins for OTAs.
US saturation, newer markets emerge
With the domestic market in the US approaching saturation, companies in the OTA segment have shifted their focus on growing in other external international markets such as Europe, Asia–Pacific, the Middle East, South America, and Africa. Spain, Italy, Mexico, Germany, India, China, the United Arab Emirates, Norway, and Brazil have seen growth in business travel due to economic growth. They also have a developed tourism industry. Both factors make such places a lucrative market for online travel agencies.
Digital advertising to garner traffic
Apart from developing attractive platforms to sell their services online via mobile platforms and full websites, companies in the OTA industry have increased their heavy spending on offline as well as online advertising. This is evident from the fact that Priceline’s spending on online advertising grew by about 22% year-over-year for the first half of 2015. This trend is likely to continue in the future as well.
The future of the OTA industry should be driven by the growth in digitization, mobile adoption, and international expansion to reach newer customers. High growth could benefit other OTAs like Expedia (EXPE), Ctrip (CTRP), Travelzoo (TZOO), MakeMyTrip (MMYT), and TripAdvisor (TRIP). Priceline accounts for 3% of the Top Guru Holdings Index ETF (GURU).