The future according to Hollywood

by Charlie Leocha on November 22, 2004

Last week the creme de la creme of the online travel industry met at the PhoCusWright Executive Conference in Hollywood. The presidents and CEOs of hundreds of companies who are involved with online travel gathered to learn what to expect in the coming year and to wheel and deal in marathon networking.

Wall Street analysts began the conference with an assessment that growth in the online travel segment is beginning to slow down. This slowdown is caused by the previous growth in the industry and broadband penetration. Though dollar-and-cent increases are large, percentage change will be mitigated. External factors have also impeded travel in general, such as terrorism, the war in Iraq, SARS, hurricanes, airline instability and the price of oil.

The general prognostication is for steady continued growth and consolidation in the industry. Interactive now owns Expedia, Hotels.com, Hotwire and more. Sabre owns Travelocity, GetThere and Site59. Cendant, which already owns Galileo, Lodging.com and CheapTickets.com, just purchased Orbitz as well.

Together with the inevitability of consolidation, the consensus was that business travel penetration and the growth of the international markets will be the keys to rapid growth in the coming few years.

Another theme was the need to find some way to generate customer loyalty. Today, customers compare prices across different Web sites. They check out the online agencies – Expedia, Travelocity, Orbitz and so on – and they look directly at hotel, airline and rental car sites. The customer who purchased once on Expedia or another site may return, but only for the same price. There needs to be other reasons to return.

Sam Gilliland, President and CEO of Sabre, noted that as important as online travel has become, sales through traditional channels such as travel agents is still far larger. He said that today, airlines make twice as much money from travel agents as from online sources.

Gary Loveman, President and CEO or Harrah’s Entertainment Inc., bluntly stated that customer relation management should be used to create repeat business and loyalty. At Harrah’s, he has created a business that is focused on gambling income and has found that steady scrutiny of their customers needs pays hefty jackpots for his stockholders. He mused about the apparent lack of customer focus in the airline industry.

Loveman noted that one of the airlines’ best customers could have his flight cancelled and his baggage lost on two successive flights and that the airlines have no system in place to respond to this passenger’s plight. He also suggested the need to reexamine airline frequent flier programs to make them more efficient and target the most valuable customers.

Jeffrey Boyd, President and CEO of Priceline.com Inc., explained that the continued growth of Priceline.com was spearheaded by a renewal of proven advertising themes, the ongoing relevance of the opaque sales model as a means of selling distressed inventory, and the expansion of Priceline.com into the traditional online travel realms. Today (or shortly), Priceline.com users have the choice of bidding for travel, or purchasing air, rental car and hotels with full disclosure.

Meta-search was another buzz at the conference. Yahoo purchased FareChase and AOL bought Kayak. Daniel Rosensweig, COO of Yahoo!, and Jonathan Miller, Chairman and CEO of AOL, both look at these purchases as a means to provide searching capabilities for the best prices in the field of travel. They say customers want this information and they are merely responding to customer requests. Again, this development is step toward the commoditization of travel.

Here is my overall impression of the direction of the online travel market after listening to the PhoCusWright conference speakers:

* The major online players will continue the growth in business and international areas of Web commerce. In the domestic market there will be a growing need to provide some added value in order to create customer loyalty. Perhaps travel sites will begin adding more editorial content rather than concentrating solely on transactions.

* The difference between business airfares and leisure airfares will decrease. Pricing transparency and simplicity is coming. The low cost carriers learned this lesson years ago. It is a key to higher rates of Internet sales, hence lower distribution costs. Now, finally, the major airlines are beginning to see the light.

* More and more first-class cabins will be eliminated. I just heard a statistic that on Las Vegas flights only one percent of the first class seats are sold for first class airfares. I’d dare to venture that system wide payment for first class seats is less than 10 percent.

* The next successful series of travel Web sites will focus on specialized travel niches.

* Customer relation management will become more and more important in order to strengthen loyalty and generate more repeat business. Companies with good solid double-opt-in lists with detailed demographics will make a bundle.

* The days of battles between GDS systems (such as Sabre and Galileo) and online agencies (such as Expedia, Travelocity and Orbitz) are past. The new approach with common owners will be one of tailoring the distribution model based on customer need.

* Expedia, Travelocity, Orbitz and their various surrogates will take more and more of the business travel market and will continue the push into Asia and Europe.

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