Travel distribution

Section 1: Roles and actors

There are two types of distribution : direct and intermediated. Direct distribution is when suppliers, or owners of the product (airlines, hotels, etc.), sell their products directly to consumers, whether on the phone, in person, or over the Internet. Intermediated distribution involves a third party, such as a travel agency, tour operator, travel management company, or online travel agent (OTA), which sells the travel product to the consumer on behalf of the supplier. Travel agencies, OTAs, and other intermediaries often (although not always) access that supplier content via one of the global distribution systems (GDSs).

In hotels, large multi-brand chains (e.g. Hilton, IHG, Marriott, etc.) typically get two-thirds to three-quarters of their online bookings on their own Brand.com websites. Meanwhile, for independent hotels, these ratios are likely to be reversed in favour of the OTAs.

 

1.1: Travel suppliers

Travel suppliers are airlines, hotels, car rental companies, cruise lines, rail companies, etc.

 

1.2: Reservation systems providers

Travel suppliers’ systems need to be very performant given the high number of queries. Also, they need to be able to communicate to the systems of GDSs and OTAs. Some producers of GDSs also provide reservation systems to travel suppliers.

 

1.3: Global distribution systems (GDSs)

GDSs function as the primary distribution source for inventory across all major travel supplier segments. Airlines are a core product: More than 550 airlines and the overwhelming majority of airline fares and inventory are accessible via the GDSs. Also, more than 90,000 hotel properties, the world’s largest car rental companies, hundreds of tour operators, and the major cruise lines all distribute their products to travel agencies via the GDSs.

GDSs are central to travel distribution because they enable travel suppliers to reach an expansive global marketplace
of retailers and their millions of customers more efficiently than if retailers had to do so on their own. Suppliers do not necessarily need to maintain commercial relationships with travel agents. The GDSs manage contractual, commercial,
and technical relationships with travel agencies. GDSs receive commission and traffic fees from the airline, and subscription fees from the travel agencies for whom they provide services (often, a GDS will pay commission or bonuses back to the agencies in return for booking. GDSs’ fee per transaction, can for instance be on average $7.50-17 (per round trip) – this relatively high fee is also the reason why some travel suppliers (especially some low cost carriers) refuse to work together wiht GDSs, and prefer to distribute tickets directly to end-users and without intermediation of GDSs (or OTAs).

Examples: Amadeus, Sabre, Abacus and Apollo, Galileo and Worldspan (all three from Travelport), Axess (Japanese market), Infini, Topas and TravelSky (Chinese market) and Sirena-Travel (Russian market). Sabre is owned by Silver Lake and Texas Pacific Group. Travelport is owned by the Blackstone Group, One Equity Partners, Technology Crossover Ventures and the Travelport management. Amadeus is publicly listed and traded – but BC Partners, Cinven, Air France, Iberia and Lufthansa have substantial stakes.


 

1.4: Online travel agents (OTAs)

OTAs may source their inventory from GDSs or from travel suppliers directly, or from a combination of both. In case of suppliers directly, the OTAs enable suppliers to present their products and services to millions of travellers without investing heavily in local market advertising and selling infrastructures. Travel suppliers pay a fee or commission to the OTA for each sale, or they may provide a lower net rate and allow the OTA to add a mark-up for resale to the consumer.

Examples: Expedia & ebookers (Expedia), lastminute.com, Booking.com & Priceline.com (Priceline Group), and Opodo & eDreams (Odigeo)

Each GDS also has or had an ownership interest in one or more OTAs. Sabre Holdings owns Travelocity and lastminute, Travelport has a stake in Orbitz Worldwide and, by extension, ebookers, and Amadeus has a majority position in Opodo.

North America and Europe are dominated by the virtual duopoly of the two leading firms, Priceline Group and Expedia. There are, however, some significant players in individual national markets, like HRS in Germany or Ctrip and eLong in China.

 

1.5: Metasearch sites

Metasearch sites offer travellers a maximum of possibilities when searching flight routes, hotel stays, packages and car rentals, but no facility for booking. Thus, when customers click on an item, they are sent to the website of a travel supplier or another intermediary – typically an OTA. Such sites make money from advertising and pay-per-click revenue. Some examples of dedicated metasearch sites include: Trivago (Expedia affiliate), Kayak (Priceline affiliate), Hipmunk, Sidestep, mobissimo, Skycanner, TravelSupermarket and HotelsCombined. In reality, Google and TripAdvisor are increasingly dominating the metasearch space and the big OTAs like Expedia and Priceline are also used for metasearch purposes to a large extent.

Metasearch sites have various business models, ranging from advertisement-driven, to CPC (cost-per-click, for the OTA that received the redirection) and CPA (cost per acquisition, for the OTA that receives the booking).

With no fanfare, also Google stepped in the domain. First with Google Hotel Finder, which was quietly launched in mid-2011 as a metasearch platform for hotels. There were initial hopes that the site could provide hotels and chains with a channel that would increase direct online bookings. However, the search engine giant seemed to put little effort into promoting the site, which is still not well known – either to the general public or industry players. It now seems that Google launched the platform as a sort of experiment to be followed and observed. The key distinguishing feature of Hotel Finder is Google’s Hotel Price Ads (HPA), which allow hotel marketers to engage in CPC (cost-per-click) bidding for rate placement on the individual hotel pages of the platform. Hotel Price Ads (HPA), Google’s most important hotel booking platform, are sponsored price listings that usually appear on Google Maps, Google+, and Google Hotel Finder. Google HPA is a game-changer in many ways, as Google caches all the rates on their database and requires at least 95% accuracy from all suppliers. Also Google was the first to introduce real-time bidding in metasearch. A supplier can bid the cost of a click based on many factors like room rate, length-of-stay, user country and more. There is the option to bid manually on a tool or use a programme through an API (Application Protocol Interface). Google sends daily reports via email or an API, which includes detailed information like clicks, cost, impression, position and other important attributes.

 

1.6: Traditional travel agencies

Traditional travel agencies are storefront or office-based retail businesses, generally selling a mix of business and leisure travel products to consumers, although some models are based on an exclusive focus on either business or on vacation travel.

Twenty years ago a travel agent in Europe and the U.S. could have received up to around 10 per cent commission on the sale of airline tickets, varying by airline, but since the mid-90s these directly earned commissions from airlines have been declining to almost zero. Travel agents now make most of their profit through charging customers a booking fee, for instance a $36/ticket fee, and this will often be bundled into the price of the services sold.

 

1.7: Travel management companies

Travel management companies (TMCs) are a type of travel agency that provides management and consulting services for corporate travel programmes, which may include contract management and procurement, expense reporting, and programme development and oversight, as well as more conventional travel agency services such as booking and fulfillment of travel.

 

1.8: Tour operators

Tour operators usually both span the travel supplier as well as the intermediary role

 

1.9: Industry coordination bodies

International Air Travel Association (IATA) is the most well-known coordination association. In 2016, they have committed the global roll-out of the New Distribution Capability (NDC). This system will provide an improved information system from airlines to agencies, including the capability to account for ancillary options (i.e. luggage, on-board amenities, and seat maps) in flight comparisons.

 

Section 2: Size of the market

The European travel industry’s size exceeds €250 billion in revenue. For that European market, about 300 million travel transactions are processed every year through global distribution systems. More than 10% of the sales take place through Online Travel Agents. (Merlino, Quinby, Rasore, Sileo, 2010)

 

Section 3: Macro economic drivers of change

The Internet has reshaped travel distribution and consumer shopping and buying behaviour. Technologies and services offered by independent travel distribution provide low barriers of entry for all types of suppliers and intermediaries, including small and independent travel agencies, as well as new entrants to the market. This enables suppliers to sell into global markets at a low, variable cost, and allows travel retailers to access and book an expansive array of travel content.

For travel suppliers, it’s a challenge to bypass global distribution systems and online travel agents. Especially because they try to upsell their standard services through value added services – and those are not always reflected or bookable through global distribution systems or online travel agents. For low cost carriers (who for this reason often choose to sell directly instead of via GDSs), this applies even more as their business model often relies on securing commissions from its customers from acting as an agent or introducer for ancillary services (hire cars, hotels, luggage, transfer services, etc.), which is easier for the airline to secure if a customer is forced to use the airline’s booking system, rather than if the customer books via a travel agent (OTA, that may or may not rely on a GDS, or traditional travel agent that uses a GDS).

For online travel agents, it’s also a challenge to bypass global distribution systems as well and to access content of travel suppliers directly. Sometimes, the savings that are reached by that are used to outcompete competitors and also offer an advantage for customers (access to lower prices).

 

Section 4: Regulatory drivers

Two elements tend to be regulated in this industry: the transparency of pricing and protection against bankruptcy risk (i.e. through the EU Package Travel Directive) – as adding intermediaries can increase counterparty risk but also because the dependency on a travel supplier can cause substantial distress in case of bankruptcy. Both areas of regulation are actually instances of consumer protection.

On the level of competition, the European Parliament has previously expressed concern around Computer Reservation Systems (CRS) which for the purposes of European Commission regulation include GDSs: a CRS is not allowed to request that an airline deal exclusively with that CRS, and the CRS is not allowed to practice discrimination through applying different rates and conditions to different airlines. The Commission released this in a non-binding code of conduct in 1989, but still holds powers of control to take action if the code of conduct would not be respected.

 

References

Merlino, D. et al. (2010) ‘Technology and independent distribution in European travel industry’, PhoCusWright Inc.