Competitive Landscape Of The U.S. Online Travel Market Is Transforming

The U.S. online travel market is growing at the slowest pace compared to other economies such as Europe, Latin America and Asia-Pacific. Nevertheless, with estimated revenues of $157 billion in 2013, it remains the biggest market in terms of online travel sales and is expected to maintain its lead for at least the next few years. ^[1] Research firm STR Global forecasts that in 2013 and 2014, average daily rates on hotel rooms in the U.S. will increase by 4%–5%, occupancy rates will increase by 1.0%–1.5% and revenue per available room will increase by 5%–6%. ^[2] Online travel agencies are keen to grab a chunk of the market since the outlook is largely positive. PhoCusWright estimates that the share of online channels in travel bookings will rise from 41% in 2012 to 43% by 2015. ^[3]

Just four brands—Expedia, Priceline, Orbitz Worldwide and Travelocity—control about 95% of the U.S. OTA market. Expedia (NASDAQ:EXPE) has for long held the lion’s share. The company has over 40% market share of the country’s OTA bookings. However, its leadership is challenged by Priceline (NASDAQ:PCLN), whose Booking.com brand had a formidable 31% market share in Europe in 2012. Priceline’s U.S. market share stood at just 11% in that year. The company is pulling out all the stops to penetrate the market which helped it boost its share to 16% in 2013. ^[4] Although the incremental share has not come at the expense of Expedia, we expect the latter to concede some share to Priceline in the future. In this article, we analyze how intensifying competition is transforming the landscape of the U.S. OTA market.

Pricline Is Trying To Pare Expedia’s Lead In The U.S.

Rapid international expansion helped Priceline to overtake Expedia as the world’s largest online travel agency by sales in 2010. The company is now taking different routes to compete aggressively with Expedia in the domestic market (U.S.). It launched the first offline advertising campaign (Booking.yeah) for Booking.com in the U.S. last year. It entered into a partnership with NYC and Co. to power bookings on New York City’s official tourism website. It also completed the acquisition of Kayak, a leading meta-search engine in the U.S. with over 50% share of the travel search market. These initiatives helped the company to accelerate domestic gross bookings growth to 26% in the final quarter of 2013, and we expect the growth to accelerate further. ^[5]

Orbitz Worldwide’s Growth Is Also Accelerating

Orbitz Worldwide (NASDAQ:OWW) is right next to Expedia in the U.S. with about 21% market share. The company grew revenues by 8% in 2013, the highest in four years, on the back of increased investments in its global technology platform. Orbitz also recently entered into new multi-year agreements with three global distribution systems (GDS) —Amadeus, Sabre and Travelport— which will help it sell more air tickets. Its ability to work with Travelport competitors was earlier limited due to certain exclusivity provisions. ^[6] We think that Orbitz’s top line growth could accelerate further with these efforts.

Expedia Might Have To Compromise On Domestic Growth To Capitalize On International Opportunities

To counter heightened competitive activity in the U.S., Expedia entered into a marketing agreement with Travelocity last year. The deal will not only eliminate competition for Expedia to some extent, but also create an additional distribution channel for the company. The increased scale of operations will further help the company to negotiate better terms with inventory suppliers and enhance efficiency at the same time. (Read: Expedia Is Better Positioned For Growth After The Travelocity Deal)

A more imminent concern than increasing competition is that Expedia’s business is highly concentrated in the domestic market (55% of company gross bookings), due to which the company has lost out to Priceline in the international race. Regions such as Latin America and Asia-Pacific are growing much faster than the U.S., and therefore Expedia needs to penetrate deeper into these markets if it wants to add more juice to its operations. This will require the company to divert more resources towards these markets, which could weigh negatively on its domestic operations.

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1. Online Travel Sales Explode in Latin America, eMarketer, November 2012 [↩]
2. STR releases updated 2013, 2014 forecasts, Several online travel agencies, September 2013 [↩]
3. Suppliers Build Lead Over OTAs In Online Sales, Travel Market Report, December 2013 [↩]
4. PhoCusWright: Online travel spending on the rise in Europe, Travel Weekly, January 2014 [↩]
5. Priceline.com Reports Financial Results for 4th Quarter and Full-Year 2013, Priceline Investor Relations Website, February 2014 [↩]
6. Orbitz Worldwide Management Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, February 2014 [↩]