Sunday, April 22, 2007

Of India, Web and Online Travel

There is clearly a lot of enthusiasm in India regarding Travel. There are five big VC-funded companies, two large portals (India Times and Rediff), several international behemoths (Travelocity, Expedia, Mobissimo) coming in quickly, a rapidly rising LCC business model and gazellions of new hotel rooms being constructed. Its hard not to get excited about this industry, no?

But wait, hold on a sec. Let's dig a bit deeper -

a) Research reports suggest that the Online Travel Market in India was at $300MM in 2005. Phocuswright projects it at $2B in 2009. Evalueserve is more conservative and estimates it at $1.2B in 2010. The former is a travel consulting and research firm and has a clear interest in being optimistic. Evalueserve probably is a bit pessimistic at least to the extent it supports its report on an overheating VC market. Well, let's say it will be $1.6B in 2009. Lets also assume a healthy 25% growth rate after that until 2015. That pegs the market at 6 BILLION DOLLARS. Dr. Evil, are you listening?

b) Currently, OLTAs are 14% of online travel. Lets assume they garner 30% of total in 2015, which is quite optimistic, I think. For context, OLTAs account for 40% market share in the US, but have a slower growth rate than supplier-directs. With a popular and flourishing LCC market in India who love supplier-direct sales, the 30% expectation is quite generous.

c) The current split between Air and Hotel is 90/10. Air is just more attractive and appealing to consumers. Its the first thing they think about when they think of travel. Traditionally, Hotels pay higher commission rates, and the level of commission rates are inversely proportional to how full the hotels are. Now, in India, there is severe capacity crunch. Hotels in the top-5 metros are running at close to 80% occupancy rates (HVS). With the minimal need of additional distribution channels, a highly competitive OLTA market and no strong brand or traffic generation record, I can't imagine a Hotelier paying an Indian OLTA anywhere near that level. Air is equally grim, if not worse. Load factors are equally high and LCCs just don't use OLTAs.

In their latest filing, Expedia reported ~15% gross margins. Travelocity and Priceline are close. This, for a company that probably has a huge leverage with its suppliers, commands a 40+% market share and drives a significant portion of its business through Hotels and Packages that are higher margin businesses. With no volume, brand and power at hand, I'd guess the Indian OLTAs would be happy to take 6% home.

d) Expedia with all its benefits of scale, reported ~17% in operating margin, with sales and marketing accounting for the bulk of its costs. Given recent trends in the US travel market, I suppose Expedia is only trying to maintain its market share through its advertising. The Indian OLTAs are trying to create a market, then grow their share and then protect it through advertising. Ouch - their spends will be much much higher. At the same time, travel is a high-touch business and the infrastructure in India sucks and shit just happens - so good luck cutting down on customer care costs. Well, lets just say these OLTAs are sharp and super efficient and will in fact manage 20% operating margins.

e) So, fast forward to 2015 - and we have all OLTAs fighting for a $6B * 25% * 6% * 20% = a whopping 18 MILLION dollars per year in profits. And that will be split between 10 different agencies? At a P/E multiple of 30 (remember we are in 2015 now, when growth rates will slow down), the entire market would be roughly worth half a billion dollars.

Ouch... it seems like the real winners in all this will be the LCCs. The OLTAs are driving awareness of booking travel online through their beefed up marketing and focussing on price-based messaging. If price is king and online bookings make sense, then LCCs rock. And why would would I buy an Air Deccan ticket on Makemytrip. I am trusting Air Deccan with my life to fly me from Point A to Point B. Sure, I can trust them with my credit card.

Ah well, here are my predictions for 2010 -
1) Of the current lot, Makemytrip will succeed thanks to its strong start and dominant market share. One of Cleartrip, Yatra or Travelguru will be a distant second (think Elong in China) - thanks to their VC backing. The other two (my guess - Travelguru and Yatra will die or get acquired for cheaaaaaaaaap.
2) Travelocity and/or Expedia will do very well, very very well. It will provide differentiated value to suppliers by marketing them to the high-net worth business and leisure segment traveling to India. Both will grow organically like they did in other Asian countries.
3) A meta-search player will emerge big (possibly Rediff?) - and will give each OLTA a run for their money. Airlines will love it for driving traffic to their sites
4) A specialty vacation package business (like pleasant holidays) will realize that dynamic packaging is bogus and will focus on good-old pre-packaged vacations to leisure travelers online. It will offer great prices, rich content and excellent customer service. It will also succeed.


Anonymous said...

Umm.. whats an LCC? whats an OLTA?

Big V said...

Hey anonymous -

Sorry, my bad.
LCC stands for Low Cost Carrier, the ones that focus on keeping operational costs really low. Examples in US are Southwest and Jetblue, in India its Go Air and Spice Jet among others

OLTA stands for Online Travel Agency, also known as OTAs.

Peeks said...

Hi Big V,

I went through your calculations and all seems fine except the growth rate projections for OLTAs.

Dont you think 25% growth rate till 2015 is too pessimistic?

All OLTAs have seen 150-200% growth in the initial years. With the shift to online bookings from traditional methods coupled with increase in tourism by 20-30% YoY, shouldnt the growth be fantastic till 2011 (till the next yr of Commonwealth) and then about 30% till 2015?

I agree with the fact that it makes more sense to book airline tickets directly from Air deccan's website instead of Makemytrip. But with MMT's 5-10% cash discounts for using VISA cards, their position will be maintained for long. And the other OLTAs will also look towards such offerings as well.

Big V said...

Hi Peeks -

I agree that the 25% number is fuzzy, but economic theory and corporate strategy suggests it could not be higher. If OLTAs were indeed expected to grow at 50% rates or higher for the next 8-10 years, we'd see many, many more players entering into the market. Any business that returns 15-20% return on capital and grows at a double digit growth rate is considered to be a good business. If a 50% growth rate was real, I'd expect most companies to give up their core business and shift to the online travel business, there-by causing share shift and depressing growth rates for the current OLTAs

True, google defies all laws of economics and continues to grow at phenomenol rates. But google has an incredible lead and an almost ir-replicable asset in its traffic and ad-network that sets a very high barrier to entry. I just do not see such a barrier in travel.

Re: MMT's 5-10% discount, I view it as a short-term win. What is it about this offering that prevents other OLTAs or Airline directs to replicate? probably nothing...