Why this lockdown could be the best thing for Online Travel since the Internet.

If this is what the leaders of the free World are saying, then it means it’s even worse and in other markets. It’s bad, really bad. No sector has been more affected by the outbreak than the travel sector in the short term

I mean, thinking long term is what the upcoming leaders for the probably-not-so-free World, are doing, and it seems to be working pretty well for them.

The Internet was supposed to democratize the World, enforce free speech, change the levels of convenience in our life by an order of magnitude. As a bonus, we got more or less hidden monopolies, echo chambers, and fake news. Monopolies can be good though, and especially in the Online Biz. Sometimes you need to become a monopoly to deliver the value you promised. Social Media, instant messengers, or mobile wallets only work when your friends also use them. For “high scale low margin” ride-hailing or food delivery business, the more drivers and clients use one platform, the better their AI predictions work. If you’re better at predicting demand (figuring out when and where your clients will need you in the future), you will be able to plan the supply efficiently, and always put just the right amount of couriers/drivers in the right place and right time. With scale, clients get faster service, drivers are never idle, don’t make empty trips, so they make more money in the end, etc.

When you book a hotel or a flight, it really doesn’t matter if you’re one of a million or thousands of clients on that day. The most important user experience is pretty similar between global behemoth Booking.com and much smaller Nigerian Hotels.ng. You want to find a hotel according to your budget in the right location, you skim through the reviews, make a booking, and get a confirmation. That’s it! That’s the Pareto’s 20% of the features responsible for 80% of the revenue. Everything else is a distraction and works more in the benefit of the platform to get more money out of you, than making your experience better. Not everyone needs a team analyzing the impact of color and size of the font on the “book now” button to see how it changes the click rate. You have to be really big to make any decent money on that 0,0001% move of the needle. In general, the bigger the travel company, the more complicated is their website, because it heavily invested in A/B testing, growth-hacking, upselling, cross-selling, time-and-social-pressuring (“100 cool people just like you are looking at this hotel now”, “Your’ neighbor has been there already, and you’re saying can’t afford it, you punk??”).

In 2016, 85% of all online bookings were made either by Expedia, Booking.com, or any of their numerous brands (Priceline, Agoda, Kayak, Orbitz, Trivago, Hotels.com, to name just a few). The percentage share has in the recent years dropped to around 75% due to increased activity of Amazon and Google in the sector (more giants — great!) but the 2 original powerhouses still totally control the Online Travel Agency (OTA) world.

Online Travel has become a “high scale, high margin” business and you can really make tons of money if you know how to acquire and retain clients. So how do you become a leader in this sector if the user experience difference is not that much of a game-changer (although AirBnB might disagree)? You throw all the money you make into client acquisition, so any new potential competition has almost no chance of growing in the channels you’re in. Such a huge budget chokes not only direct competition (smaller, up and coming OTAs and other travel startups) but also hotels, who would like to start acquiring clients directly. And if you’re a hotel, and you have one or two partners who bring you a total 50–75% of all your bookings, guess how strong is your negotiating position when you talk about the commission you have to pay for each client? Your position is shit, and the more you play, the more money your partner has to compete with you for your potential client in this vicious circle. Which is the essence of the love-hate relationship between any merchant and a marketplace? Hotels don’t pull punches either and lobby in their favor. There’s no better way to explain a complex issue like that, then the Aussie way:

In short, a GDS is a travel agent of the travel agents. The Travel sector has so many stakeholders (agents, booking platforms, hotels, airlines) you simply can’t allow everyone talking to everyone. It would be a catastrophe (otherwise called “Twitter”). What is especially complicated is the airline ticket processing system, and the airlines, in particular, have been following for years the major trend of outsourcing and dedication to core business only. Airlines have progressively surrendered ticketing to specialized players — mostly offshoots of airline information technology departments. Recent industry consolidation left basically two major players in the market: Sabre and Amadeus. When you look at each company’s 2018 third-quarter results (I did, so you don’t have to) you realize that both these players control over 75% of all airline tickets processed in the World. If you’re any startup trying to build anything in the flights’ sector and want to sell the tickets, you have to go through one of these guys.

This Duopoly is even worse than the OTA ones. There are more ways for hotels to limit inventory to specific channels and prices, making the marketplace more price competitive with plenty of options for consumers. No player has as much power in lodging as the GDS do in airlines. Those carriers, trying to learn from Hotels’ mistakes with OTAs, and from the success of Amazon or Google, are tailoring travel options based on a passenger’s individual travel habits. Basically they sell the bare ticket very cheaply, and then they charge you for anything else (including peanuts, wifi, and boarding pass print out). This is similar to what many OTAs are doing — they drive the scale of ticket sales (many times selling at a loss), because they know they will make it up with upselling of hotels, car rentals, visa processing services, and others.

But coming back to airlines, their efforts of dividing flights into bare “fare + extras” are being opposed by a GDS duopoly that has long dominated the distribution of airline services to travel agencies. So if you are an air carrier and you sell via GDS, you can only sell just the ticket, and you have no chance of upselling anything since the OTAs own the client now and they will do their own upselling. Our favorite Sabre & Amadeus duopoly continues to insist that airlines use the outdated distribution approach and pay exorbitant fees to do so, which drives up the cost of travel for all. A key reason for this is that GDS technology has not yet evolved to enable the kind of customer-focused and customized shopping that other industries have embraced. Smaller players would try harder, but big duopolies? That’s a rhetorical question. But this one is not: Do Airlines have a case for GDS not treating them fair? European Commission is on a quest to find the answer.

The common knowledge is that crises support consolidation, the smallest guys with little cash reserves and no access to additional investment capital or credit facilities die out like flies. The medium ones are usually acquired by the bigger ones who smell the blood. And soon more of the market share is being moved to the few. And the big guys are really arming themselves. Expedia has just borrowed almost 2bln USD, so did Amadeus. On top of everything, the travel Oligarchs have immense lobbying power, since they were lobbying for ignoring the Duopoly problem (just like Google was always lobbying to ignore the search Monopoly issue) for so long and most likely will win bailouts for themselves, probably claiming they are “too big to fail”. Which I believe is one of the most unfair approaches to economic disasters in general. Not everyone big is too big to fail, but there are many too small to fail, who are growing by doing something better and providing value to the end consumer, not by protecting the status quo, and who pay proportionally more local taxes without “international optimization tactics”. Anyway, let’s look at arguments against the common concept of big guys always getting bigger during crises, remembering to zoom out a little.

This is of course just a joke, it’s obvious that this Dinosaur theory doesn’t hold water and it can’t be compared to an economic situation. Of course, It was God that put their fossils on Earth for us to find them to test our faith. Let’s do however look at our big friends’ actions in the wake of COVID-19 a bit closer. COVID most likely came too fast and lasts too long for the classic playbook reaction to a typical crisis to work.

“We were a bloated organization, I mean not because people were lazy or whatever, but over the years, just chasing the tail of growth and all that, we’re just adding people and people and complexity and all this stuff until, frankly very few people could figure out what the hell they were supposed to do during the day.” Expedia Chairman Barry Diller, 2019’s fourth-quarter earnings call in February.

That part about “laziness and whatever” — I think he meant exactly that. Duopolies members are slow in making changes, used to big revenue and bigger cost structure. Booking Holdings had almost 8 bln USD in the long term and convertible debt in 2019. Expedia was already in 4bln USD debt, before taking that additional 2bln USD I mentioned earlier. OTAs, who charge the guest at the time of making the booking, are used to using that capital as free credit, now not only no new bookings are coming in, Expedia had to give that all back.

Both the behemoths and the smaller players rely almost solely on revenue based on commission from bookings. This is all has gone to zero now for everyone, it doesn’t matter the size. But the big guys have proportionally way more “inflexible” overhead costs, than the small players. While other OTAs have been outsourcing their Tech or Marketing to 3rd party players (those contracts are usually way more flexible and easier to scale down, modify or suspend). When a lot of smaller travel businesses can quickly go into hibernation mode and launch again very fast when this is over, Booking.com has been building its own tech to support most of its operations and marketing. According to LinkedIn more than a third company staff are engineers on long term contracts. Which brings us to the layoffs topic.

Similar to Google, Facebook and Apple so have Booking, Expedia, Sabre, and Amadeus draining the talent pool and hiring the best of the best, offering terms almost impossible to match by startups, excluding shares maybe. Expedia has announced to lay off 3000 staff, the rest will follow suit, probably in a slightly smaller form. There will be thousands of talented people with tons of industry insights, well trained and skilled, pissed off that they were the ones to go. That has just realized that stable work at a stable employer is just another illusion. They will be the ones motivated to kick ass prove their old bosses wrong. Just read what legendary Lee Iacocca did with Chrysler after he was ordered to resign from Ford.

Google could never properly enter the space directly because of the conflict of interest with its top clients, Booking and Expedia holdings. But this might not be the case anymore as pointed out earlier.

Amazon, on the other hand, has already twice attempted to enter the online travel space with its ill-conceived Amazon Local and short-lived Amazon Destinations. It failed both times. ‘Third time’s a Charm’? Maybe this time acquisition? Maybe Expedia? Barry Diller (who I mentioned earlier and who is a freaking legend btw — check his podcast with Reid Hoffman) has already enough problems in his portfolio. Dating sites: OkCupid, Match.com, and Tinder are not particularly saved by this lockdown either.

Who knows, maybe even Facebook will come forward with some product suite designed specifically for travel space stakeholders. Google and Facebook, and even Amazon ecosystems seem to be more open than the big OTAs, GDSes, give hotels & airlines more access to insights about users, and allow more collaboration between many small players. A startup can build its product designed for a hotel or airline, and easily connect it to a much more open Facebook or Google API. Good luck doing that with a GDS.

Travel is such a sophisticated sector, with millions of stakeholders, partners, tools, systems that need to seamlessly work together to provide the service the traveler needs. You can’t avoid connectivity platforms dominance here, but you want dominance that is built on inclusivity and sticks to it.

I want to believe that what is awaiting us after the lockdown is over, is something similar to the post WWI/Spanish Flu “Roaring 20’s” when society became more thrill-seeking and adventurous for a time. That may be true again, especially for young folks, especially the ones who think it’s their last chance before the Climate Change Armageddon.

Long-distance travel may decline as people instinctively may wish to go places closer to home in the awful advent of another out of the blue threat. Airlines will be mostly very well supported, just like they have been for years. Turkish Airlines, Ethiopian, Emirates, Qatar, Singapore Airlines and many many other amazing airlines are considered a strategic asset for the governments of the country they come from. It’s one of a few positive examples of asset nationalization. Cruise ships will also get a huge hit (remember Princess Cruise?), but they won’t get the same kind of love as airlines. They kinda earned it. You never know where they pay taxes, and a single company from this sector, Carnival Corporation (one of the Big Cruise 4: Carnival Corp., Royal Caribbean, and Norwegian Cruise Lines), emits 10 times more air pollution than all of Europe’s cars. And if that wasn’t enough, Carnival has been caught illegally dumping oily waste into the ocean for nearly a decade, which cost them 40mln USD in a plea deal.

Regional travel could get a huge bump as a result of all that mentioned above, first from cabin fever, then from the “comfort zone” factor. People may want to stay away from big hotels with many people inside and lean into a more home-like experience, renting out whole apartments, houses, or staying in more cozy and smaller environments. OTAs have been aggressively trying to enter this type of inventory to compete with AirBnb and others, but it’s all been just scratching the surface yet. This sector of “side gig hoteliers” is far from being penetrated yet. This can be their time.

OTAs are kings of PPC and Search. Both channels are extremely expensive. Booking.com has for years been Google’s biggest advertiser which tells us a bit about their scale. Kayak (part of Booking), and Expedia with its sister company Trivago were also in Top 10 Google spenders. These times (as well as TV ads) might be over for the big guys in post-Corona World. With budgets being tightened up, the marketing focus needs to go to exotic (for them) strategies like Growth Hacking, Content Marketing, Experiences, Destination Marketing, going higher in the Customer Funnel, smart Influencer Partnerships, User Generated Content, Snapchat, Tik Tok, and many many new platforms designed for Millennials and Gen Z. You need to change to survive, and you need to innovate to thrive.

Let’s not forget that Uber and AirBnB were launched in the midst of the 2008 crisis.

This is a totally new playground. And startups are the bullies now. Every travel startup CEO is a wartime CEO. And duopolies have been in a sweet potato peace state for a tiny little bit too long. Younger founders, faster decisions, leaner structure — that startups’ DNA is the strength here. Corporations can’t innovate like that, they have to buy innovation by the acquisition of startups, because they can afford that, oh wait…