Expedia Finally Acquires Orbitz: Are Concerns Justified?

On September 17th, Expedia (NASDAQ:EXPE) completed its Orbitz acquisition for $1.6 billion, after receiving the regulatory go-ahead. Following its Travelocity acquisition, Orbitz could help Expedia gain almost three-fourths of the U.S. online travel market share.((Expedia Will Pay Orbitz $115 Million if Antitrust Complications Scuttle Acquisition, Skift, February 13, 2015)) (Tourism currently constitutes a $960 billion industry in the U.S. ^[1] ) Given Expedia’s potential dominant position, various representative groups were concerned about the Expedia-Orbitz merger and had written to the Department of Justice about further scrutiny. Were these groups justified in their fear of a rising monopoly? We don’t believe so. Below we explore the reasons why competition is likely to remain healthy, at least for the next few years. 

Our  price estimate of $117 for Expedia’s stock is below the current market price.

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Expedia Orbitz Merger Roadblocks And The Reasons For Concerns

Expedia’s CEO had tried to underplay the increasing dominance of the company in the online travel arena by stating that it owns only 5% of the $1.3 trillion travel market, and its share will still remain in single digits following the Orbitz acquisition. In fact, OTAs together account for 16% of total gross travel bookings from the U.S. ^[2] However, online travel is increasingly becoming the chosen method for travel bookings. For example, in 2014, 44% of the 766 million U.S. flights were booked through OTAs. ^[3] In a Power List published by Travel Weekly, Expedia and Priceline ranked 1 and 2, respectively, with gross bookings of around $50 billion each in 2014. Hence, Expedia’s increasing power was indeed a valid reason for worry among the various stakeholders in the travel market.

The concern was that if due to consolidation, Expedia then raises commission for hotels, not only will the hotels suffer but they would also try passing a part, or whole, of the increased cost on to consumers. (Expedia had erstwhile increased commissions in Australia post its Wotif acquisition.) The Department of Justice received several letters from various parties who are concerned about the Expedia Orbitz merger and the consequent demise of yet another competitor from the U.S. online travel space. This includes the Senator of Minnesota, Consumer Watchdog, and The American Hotel and Lodging Association. However, we explain below why competition in the online travel space is growing stronger by the arrival of newer players and by certain measures taken by the suppliers, as well.

Oh, The Irony!

It seems that another emerging rival OTA might have played a crucial role in determining Expedia’s fate in the Orbitz ruling. The Department of Justice has been investigating the relevance of TripAdvisor as a competitor in the online travel space. ^[4] TripAdvisor introduced its Instant Booking feature in the first half of 2014. Instant Booking requires partners to pay a commission for each completed transaction. This commission based model is similar to most of the OTAs’ pricing process of a fee per transaction, charged after the completion of a stay. ^[5]

• Can Instant Booking Pose Competition To Expedia And Priceline?

Instant Booking, which recently became available across all platforms in the UK and the U.S. ^[6],  gives users the freedom to book directly from the TripAdvisor platform, instead of being directed to the hotel website. In Q2 2015, TripAdvisor partnered with 10 leading hotel chains for the Instant Booking Platform. Presently, Instant Booking is available for almost one-third of the e-commerce enabled properties (roughly, 235,000 properties) on the TripAdvisor platform.

Some chains like Marriott have entered into agreements with TripAdvisor, wherein, some of their rooms can be only booked through the travel review website and the commission which it pays to TripAdvisor is almost half of what Expedia charges. ^[7] Hence, TripAdvisor’s low commission strategy with the Instant Booking platform might help it to provide tough competition to Expedia and Priceline.

(Image Source: tripadvisor.com)

And Other Players Are Rising, Too

Recently, Google tied up with Sabre for 20,000 properties, that will enable customers to book accommodation through Google search, Google maps, or Google+. ^[8] In April, Amazon launched its Amazon Destinations, a travel reservation service focusing on weekend retreats in the Northeast, the Pacific Northwest, and Southern California. Currently, available on desktop and Amazon’s mobile applications, the site offers published hotel rates as opposed to only discounted deals which it had so far been offering through Amazon Local. ^[1]

Hotels Aren’t Sitting Idle, Either

Some hotels have started getting active with loyalty points and other benefits in order to bypass customers booking through the OTAs. The rate parity clause prevents hotels from charging a lower price for direct bookings through the hotel website. Consequently, benefits like digital checking, free wifi, and complimentary meals are becoming a familiar feature when customers book directly through hotel websites as opposed to OTAs. Hilton’s digital check-in option prevents waiting in line. Hilton’s mobile application has become so popular that it is being used by over a million people every month. The higher commission rates charged by OTAs put pressure on hotels’ profit margins and hence, using these direct measures are becoming more popular with the hotels. ^[9]

In conclusion, Expedia might not be able to gain a monopoly power, after all. Besides TripAdvisor, there are players like Google and Amazon gearing up to provide more hotel and flight options to customers. And, there is a lot of scope for competition from hotel suppliers too, in the $960 billion U.S. travel market.

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1. Amazon Launches Amazon Destinations: Here’s What It Offers, Tech Times, April 23, 2015 [↩] [↩]
2. Expedia Will Pay Orbitz $115 Million if Antitrust Complications Scuttle Acquisition, Skift, February 13, 2015 [↩]
3. Delta infuriates travelers by withholding data from booking sites, but sites band together to fight back, Road Warrior Voices, May 20, 2015 [↩]
4. TripAdvisor Is a Key Focus of the Expedia-Orbitz Merger Investigation, Skift, September 15, 2015 [↩]
5. What TripAdvisor’s instant booking means for hotels, tnooz, November 2014 [↩]
6. TripAdvisor’s Instant Booking Now on All US & UK Platforms, NASDAQ, September 15, 2015 [↩]
7. Hotels Fight Back Against Sites Like Expedia and Priceline, The New York Times, August 31, 2015 [↩]
8. Amazon Travel Doubles Hotel Coverage and Appoints Former Expedia Exec as GM, Skift, July 30, 2015 [↩]
9. Hotels Fight Back Against Sites Like Expedia and Priceline, The New York Times, August 31, 2015 [↩]