Party Over for Online Travel Biz

Triple-digit growth in online sales of leisure travel services is probably over, but indications are strong that the business will continue to flourish, according to a new study from Jupiter Communications (Nasdaq: JPTR).

In the United States, consumers booked $6.5 billion (US$) of leisure and business travel online last year, nearly three times the $2.2 billion booked in 1998. In the study, which was released Friday, Jupiter predicts online sales of leisure and unmanaged business travel services will soar to $28 billion by 2005.

Though Jupiter characterized those figures as “dramatic,” the study results may dampen enthusiasm generated by more bullish reports released earlier this year. Jupiter said that online bookings may account for as much as 14 percent of total bookings by 2005 but cautioned that year-over-year revenue growth will slow from the triple-digit rate the industry is currently enjoying.

Note of Caution

“The increased growth of the Internet travel market has created winners out of all players but decreasing growth will make apparent holes in players’ strategies,” Jupiter senior analyst Melissa Shore said.

By contrast, a report released in early January by GartnerGroup put the industry’s near-term growth potential at $30 billion by the end of 2001 — which would exceed the revenue level Jupiter is predicting for four years later.

The Gartner study predicted that most, if not all, leisure travel companies will offer online services this year. Statistics from 1999 released in February by the Travel Industry Association of America fueled enthusiasm created by Gartner’s claims.

According to the TIA, the number of travelers booking airline flights and hotels over the Internet increased 146 percent in 1999, with 16.5 million travelers buying tickets and making reservations online that year. Another 35.7 million travelers made travel plans online but purchased tickets or booked rooms offline.

Airlines Move Ahead

Despite the increasing online activity for travel services, Jupiter maintains the increasing participation by all kinds of travel industry players may lead to a shakeout of the weaker entries, which could slightly slow the business’ overall growth.

“In their attempts to increase direct relationships, both agencies and suppliers are expanding their offerings beyond their traditional scope — resulting in continued consolidation and merger activity. This market shakeup mandates that all travel players assess the areas in which they compete most effectively in the long term,” Jupiter warned.

In this expected period of consolidation, the researcher said, airlines and other first-tier service providers are likely to fare best, because they have key assets — customer loyalty, long-standing brand awareness and large, well-run call centers. Online travel agencies that try to compete directly for travel sales lack those advantages.

As long as airline tickets are the dominant online travel purchase, “airlines will continue to dominate the travel space,” Shore added. Nevertheless, travel agencies have thus far managed to handle 51 percent of online bookings by fending off “aggressive marketing and development efforts” by airlines and other suppliers, Jupiter said.

The airlines “have yet to maximize those assets and offer loyal consumers value to move to the online channel,” she said. “Airlines, as well as other suppliers and travel agencies, must focus on leveraging their most loyal customers by giving them a reason to book online; traditional programs, recognition, and tiered servicing, not bonus miles, should keep frequent customers satisfied.”

Play to Strengths

As the service suppliers start to refine their online offers, travel agencies will have to become either “broad, mass market players” or niche players, the study says.

Companies that take the mass market approach will have to find a way to offer broad products and services while also catering to distinct segments of the population with targeted products. Companies taking the niche market approach, on the other hand, should focus on the targeted products, and by doing so, may become a compelling partner for both mass market travel sites and suppliers, Jupiter said.