In With the Old, In With the New: PhoCusWright’s Trends for 2008
The travel industry is no different. The predictions PhoCusWright offered a year ago ring true today; some are still in the works. A new year doesn’t necessarily offer a clean slate – but it can provide some insight and fresh resolve.
The beginning of a new year is the traditional time for taking stock of where we’ve been and where we’re going. But as anyone who has aimed to reinvent themselves with a pile of resolutions on New Year’s Day can tell you, life is, in fact, continuous. Change is gradual. (Many of those resolutions, after all, were the same ones made the year before…) The travel industry is no different. The predictions PhoCusWright offered a year ago ring true today; some are still in the works. A new year doesn’t necessarily offer a clean slate – but it can provide some insight and fresh resolve.
In 2007, Long Tail economics brought a plethora of niche strategies to what has truly become a global travel industry. Opportunity and innovation abound in unexpected places, with “emerging” markets adopting Web 2.0 technologies and next-generation distribution strategies. India’s online travel marketplace will grow to over US$6 billion by 2010 and China remains the holy grail of global expansion – despite the World Bank’s recent downgrade of both countries’ comparative GDPs. In Europe, the online market continues to mature, with online growth rates slowing in 2008 amidst continuing consolidation and blurring business models. For the U.S., 2007 was a landmark year as online bookings crossed the 50% mark.
Suppliers and online travel agencies are still battling for online traveler loyalty, while PhoCusWright consumer research indicates that their customers are becoming increasingly savvy, switching between booking channels (including offline) at will to suit their needs. With supplier Web sites continuing to gain ground, the online travel agencies, led by Expedia, may finally start cashing in on all that search traffic. They’re joined by a diverse breed of new intermediaries that are benefiting from the ad and referral revenue gleaned from next-generation metasearch, social networking and traveler review offerings.
Lest there be any lingering doubts about its staying power, social media is indeed transforming business as usual, with the strength of networks such as Facebook at a high and the promise of convergence between social and e-commerce efforts looming large. The quality of the online user experience continues to evolve. Rich media keeps getting richer: Maps are being not only mashed up, but also built out in 3D, and segmented marketing and personalization will (finally!) enable improved relevance for travelers.
Global opportunities are wide open and private equity continues to transform the industry amidst ongoing consolidation – even as new Travel 2.0 startups emerge. Consumers are doing more travel-related activities online than ever before, resulting in both more ways to connect with them and a mighty battle for their attention. PhoCusWright analysts offer a list of trends for 2008. Some are new, some are fresh takes on long-term industry changes and two represent trends noted in 2007 that have finally come to fruition.
1. Mobile Gets Connected – Finally!
Industry pundits have been touting the promise of mobile travel for years, and 2008 will be the year that promise is realized. Apple’s iPhone makes it clear that smart design can make rich content accessible on smaller mobile devices, and a confluence of factors will make application development highly appealing. The growth of 3G (third-generation mobile technology) and GPS-enabled devices will make more robust applications possible, as other barriers to development are gradually eliminated. The traditional walled garden that has long plagued the telecommunications industry is finally being penetrated, as offerings such as Google’s Android mobile platform enable third-party software development independent of the telecom companies. Open development is a necessity that even the carriers now recognize: Verizon announced in November plans to allow third-party software.
Current restrictions that limit service for individual mobile devices to particular carriers (e.g., only AT&T provides coverage for the iPhone) are also under attack, with Google and others lobbying for open access. The Federal Communications Commission (FCC) this month will auction a chunk of public airwaves, one third of which are earmarked for open access. This newly available wireless spectrum could lead to increased competition and a period of intense innovation, depending in part on who wins.
As global travel companies expand into Europe and Asia, mobile is likely to become an increasingly important differentiator. In developing markets, including India and China, the number of wireless subscribers surpasses Internet penetration. According to Portio Research, worldwide mobile penetration will pass 50% in 2008. Mobile ad revenues are expected to skyrocket in the coming years – a phenomenon that many travelers will welcome. The PhoCusWright Travel 2.0 Consumer Technology Survey indicates that 30% of travelers would like to receive special offers during their trips via their mobile devices about local restaurants and activities. And this interest will grow as more appealing, media-rich offerings become available. Mobile is particularly relevant to hotels and destinations, but travel suppliers and intermediaries of all types should be seizing this opportunity to connect with travelers.
2. Consolidation Continues
Consolidation often comes along with periods of travel industry innovation, and 2008 will be a model year for both. Mergers and acquisitions will definitely continue, but the question is, where? Likely consolidation targets include areas where multiple service providers offer undifferentiated services and where growth is stagnating, emerging markets where successful travel startups are likely to be gobbled up by larger fish (read: India), and niche sectors that require mergers in order to reach critical mass. One case in point: the late-2007 announcement of a planned merger between Kayak and Sidestep, which may provide the boost metasearch needs to go mainstream (see “Metasearch Comes of Age,” below).
This may also be the year that long-anticipated mergers of U.S. airlines become a reality. Both UBS and Bear Stearns released reports this month asserting the likelihood of a major near-term merger, with both putting their money on Delta to make the first move. The Open Skies agreement, which will open up travel routes between the U.S. and the European Union beginning in March, is also likely to promote airline consolidation in Europe. Cross-pond mergers, however, are on hold for the time being, with restrictions regarding foreign ownership of U.S. airlines continuing (although Lufthansa’s recently acquired strategic stake in jetBlue places it in a choice position should rules change).
3. Social and E-Commerce Approaches Converge
Online social media and e-commerce will converge – but not without a few growing pains. The global online social networking phenomenon will expand on a worldwide basis. According to Hitwise, Facebook is the ninth most visited site in the U.S. Alexa reports that Facebook is the top Web site in Canada; in Germany StudiVZ is ranked number six. The marketing potential of these networks makes it inevitable that they will be commercialized. Initiatives like Google’s OpenSocial, aimed at enabling developers to create applications that will work on any participating social network, will help to drive growth, providing critical mass and incentive for travel companies to develop applications.
Yet those seeking targeted marketing and the social networks that enable it must be diligent about avoiding intrusion on consumers’ privacy. Facebook’s move to open its social network to advertisers via the Beacon platform met with resistance. The platform enables users to notify the network when they make a purchase or add an item to a wish list on participating Web sites. The problem was Facebook’s initial decision to make the notification feeds opt-out, rather than opt-in. Facebook since revised its policy, but this is a prime example of the challenges that will be faced as social networks, advertising and, eventually, e-commerce come together.
Social networks have a variety of qualities that make a strong business case for convergence. The opinions of friends and family can prove highly influential, so these networks are optimal venues for sharing travel information and preferences. Further, they enable travel advertisers to reach highly targeted groups of travelers. And, perhaps most importantly, many heavy users view their profiles as the center of their online universe. Social networking sites will continue to grow and eventually replace or integrate with Web browsers. Not only will these integrated sites provide a venue for travel advertising, but they also could eventually spawn more personalized, closed-group types of travel search.
4. Green is the New Black
“Green travel” will be a buzzword in 2008, but it remains to be seen how aggressive travel companies will be in making changes and how actively travelers will embrace them. Increased public awareness of environmental issues will undoubtedly fuel a push for greater corporate and individual responsibility to reduce carbon emissions and global warming. While there should be a groundswell around this trend, the market is likely to see only small attempts to participate in green travel.
Though the most proactive moves have come from Europe, a number of U.S. travel suppliers and online travel agencies have offered customers the option to purchase carbon offsets. Car rental companies (among then Alamo, National and Enterprise), airlines (e.g., Continental Airlines, British Airways, Virgin Atlantic and Delta) and online travel agencies are all getting into the game. Even GDSs have a role to play – Galileo in 2007 announced it is working on a tool for suppliers and travel agents to help consumers measure their carbon emissions. Enterprise, Hertz and Avis, among others, are also offering hybrid rental cars. Eco-friendly hotels are increasingly in the press and established players are exploring options for greening up their offerings, with a number of independent organizations emerging to evaluate energy efficiency and consumption practices. Still, despite the growing buzz, only a small minority of travelers are currently buying carbon offsets for their travel. More robust industry efforts may prove elusive until travelers or legal mandates demand them.
5. Slicing and Dicing the Market
The Long Tail is causing the law of averages to give way to market niches in travel. This means there will be not only more targeted promotion and delivery of travel options, but also far greater use of market segmentation through data mining of both tangible factors (e.g., demographics, psychographics, travel metrics, purchasing behavior) and intangible factors, such as spheres of influence and brand affinities. This micro-marketing approach is critical in the current online environment, where the rate of new online travelers is declining and consumers are confronted with a plethora of choices.
Suppliers and online travel agencies will up the ante with sophisticated marketing models that optimize supply and demand while designing marketing campaigns to match profiles and shopping patterns. These efforts, combined with better merchandising techniques (thanks to lessons finally learned by studying other parts of retailing) will help to drive immediate purchases as well as cross-selling and up-selling.
6. See and be Seen: APAC
If there’s a place to be in 2008, APAC is it. Of course, each country has its own footprint of opportunity. In India the focus is on domestic and inbound travel; in China business travel represents enormous potential. Even smaller markets, such as Japan and Australia/New Zealand (ANZ), represent significant online opportunities.
The APAC travel market is expected to surpass $200 billion in 2008, a fact that is not lost on the U.S. based conglomerates vying for position. Expedia, for example, already has a Web presence in several APAC markets and is poised to launch in India. Travelocity, which owns online travel agency Zuji, launched in India last year. Priceline, also in 2007, acquired Bangkok and Singapore-based discount hotel site Agoda Company. Competition in the region is fierce, particularly in India, where players such as Yatra and MakeMyTrip are already well established.
Yet the upside potential is enormous. Travel companies should be operating, competing, distributing and servicing clients in at least some part of the APAC region. The pace, composition and dynamic growth in this region will breathe new life into a mature travel market and the aging online space.
7. Anything But Plastic: Airlines Unite
The airlines are continuously searching for ways to reduce distribution costs and have already hacked away at both agency and GDS fees. The end of commissions came in the past decade and last year airlines enjoyed the fruits of their full-content-deal labors. The next frontier: credit card fees.
Airlines have already experimented with a range of alternative payment options that enable them to avoid or reduce associated charges. Over 200 airlines worldwide issue low-fee Universal Air Travel Plan (UATP) cards to major corporate clients, which enable the airlines to avoid credit card fees on those bookings. A range of methods have been tested on the leisure side. In 2007, both Northwest Airlines and Southwest Airlines began accepting PayPal for online bookings. Other options include Western Union, Bill Me Later and TeleCheck, a service that debits travel charges directly from the customer’s bank account. These minor efforts, though, don’t provide the sought-after scale of fee reductions. In 2008, airlines will band together to devise another payment vehicle that circumvents the credit card companies and takes a significant amount of cost out of the market.
8. Metasearch Comes of Age
Just when some had started to question whether metasearch would ever live up to the hype, 2008 may see this technology getting the jolt it needs to go mainstream. Innovative new entrants such as Farecast and the planned merger of Kayak and Sidestep are likely to provide the increased press and consolidated consumer power that metasearch needs. Kayak’s $196 million round of funding and the upcoming merger has some speculating that the company will go public. Either way, the acquisition will yield a combined set of unique monthly visitors that rivals most suppliers and the smaller online travel agencies.
Some travel suppliers embrace metasearch, while others argue that it’s bad not only for the industry, but also for consumers. Yet as more consumers become aware of and start using travel search engines, we’ll see the overall efficiency of the travel market increase. The end result for travel suppliers will be continued pricing pressure on airfares and hotel rates as metasearch engines get more press. Some, like Farecast, will also drive travelers to shift their travel plans to take advantage of lower fares on different dates.
9. Media-Based Pricing Shakes Things Up
Online travel agencies ruled the roost in the early days of online travel, but while they remain strong, suppliers have succeeded in convincing travelers to seek out lower fares by booking – or at least shopping – direct. Online travel agencies came to serve a dual function as both agency and search engine. PhoCusWright wondered in previous years why online travel agencies didn’t adapt their business models in order to capitalize on all their search traffic. In late 2007, Expedia took a bold first step, announcing a new pricing model that blends transaction pricing with media pricing.
InterContinental Hotels Group (IHG), Expedia’s launch partner, pays not only for transactions, but also when consumers click on specific properties within search results (linking to a property information page).
This model, while stopping short of actually referring travelers to book direct, makes it more likely that Expedia will cash in even if they do just that. For hotels, the model could provide highly effective advertising within the Expedia Network. IHG properties will be available on Expedia and Hotels.com branded sites globally in 2008. Major U.S. hotel chains will likely be the next to sign on, with international markets following slowly pending the results. Other online travel agencies will be watching Expedia’s business model experimentation closely – don’t be surprised to see a second online travel agency making a similar move in the coming year.
10. Anything But Air
Suppliers will increase their ancillary revenue by expanding existing strategies and experimenting with new ones. U.S. airlines, followed cautiously by hotels, are becoming full service suppliers – providing travelers with a one-stop shop for purchasing air/car/hotel, as well as activities, tours and cruises. EasyJet and Ryanair are doing the same in Europe, while other airlines will increasingly borrow strategies from the low-cost carriers to develop new revenue streams.
Other strategies include in-flight sales, excess baggage fees, call center fees, travel insurance and foreign currency exchange. Airlines in the U.S. and Europe also will cautiously experiment with unbundling – breaking out optional fees for specific flight options such as optimal seating and early boarding. Traditional airlines will need to tread cautiously, however, to avoid a backlash from consumers unhappy with being charged for a service that was previously included in the airfare (British Airways, for example, learned this the hard way).
11. Global TMCs Think Small
Global travel management companies (TMCs) will embrace the Long Tail in ’08 in a collection of trends that recognize the value of local content, small and medium-sized enterprises (SMEs) and unmanaged travel expenses. TMCs will seek to balance global travel programs based on local market needs, aggregating local content on global online booking tools. Business intelligence platforms will be democratized, with powerful graphical user interface (GUI)-based tools made available to clients of all strata and spends.
In North America, American Express and Rearden Commerce will continue to provide proof of the concept that unmanaged travel expenses matter to corporate clients – and should be top-of-mind for TMCs as well. For business travelers, a one-stop shop for all travel-related products and services (e.g., airport parking, dining, ground transportation) saves time; for corporate clients, it saves money. Need we say more?
Other trends PhoCusWright analysts foresee include:
On-Plane Wireless Communication. It will take a few years until all flights have wireless connectivity, but the efforts of Aircell in equipping airlines with in-flight Wi-Fi will see a major uptick in usage with American Airlines and Virgin America, among others, coming on board in 2008.
Hotel Occupancy Tax Litigation Heats Up. Litigation over online travel agencies’ responsibility to pay hotel occupancy tax will spread across the U.S. as municipalities try to interpret laws in ways that yield them more tax revenue.
Online Travel Agency Bargaining Power Wanes. Online agencies will find themselves less able to throw their weight around in the hospitality sector due to more dispersed, Long Tail demand and more sophisticated search technology. Travel 2.0 offerings such as mapping mashups and user reviews will shift even more power into the hands of suppliers.
SEO Trumps Ads in Europe. Where and how companies reach consumers has become the essential battle in terms of subsequent online sales. Europe will see an increased focus on SEO rather than paid advertising as optimization techniques become more familiar. Thanks to the Long Tail, smaller companies and niche markets in this region will benefit from an enhanced focus on organic search.
E-Commerce Will Expand. Companies will apply e-commerce to more stages of the guest life cycle (e.g., pre-arrival and post-departure) beyond research, shopping, and purchase. They will also look to expand their e-commerce initiatives to other, untapped aspects of the business (e.g., groups, vacation rental, timeshare, meetings).
Older Travelers Lured Online. Better travel applications will target the 50+ generation to encourage online bookings among this demographic, and will be geared toward attracting those who previously tended to shop, but not book, online. This trend will be particularly impactful in Europe, where older travelers have been reluctant to embrace online travel.
European Hospitality Systems Get a Boost. In Europe, seamless integration of hospitality systems, from PMS to CRS to GDS to Internet channels, will allow merging of data and enable professional CRM programs. Improved applications will increase customer loyalty and easy online booking processes.
Notes From the Field: In Conclusion... All signs point to a dynamic and highly competitive travel marketplace in 2008, and those hoping to come out on top will need to push for innovation all year long. PhoCusWright analysts devote a lot of time and energy to studying the marketplace, but at the end of the day, it’s your efforts that determine whether our predictions come true. So what trends do you see on the horizon? Based on popularity rankings for PhoCusWright research in the second half of 2007, below is a list of the top seven articles that were of greatest interest to our clients. Check them out if you haven’t already – they just might provide some insight into what’s topping your competitor’s list of resolutions.
1. PhoCusWright’s U.S. Online Travel Overview Seventh Edition
2. The PhoCusWright Business Travel Trends Survey Second Edition
3. PhoCusWright’s European Online Travel Overview Third Edition
4. Search: The Final Frontier (Until the Next One)
5. The Transient Travel Genogram
6. Dynamic Packaging for Leisure and Business
7. Reservations Technology at a Crossroads
By Cathy Schetzina, with Daniel Connolly, Brendan May, Ralph Merten, Peter O’Connor, Bob Offutt, Michaela Papenhoff, George Roukas, Norman L. Rose, Jesus Salgado, Lorraine Sileo, Susan Steinbrink and Philip Wolf