Online travel agents Booking and Expedia are busy trying to cut costs, and sharpen up their organisations ready to bounce back into a post-vaccine travel landscape.
But the latest quarterly results presentations provided precious little in the way of clarity, as to how they will find their niche, in the new travel landscape likely to re-emerge in 2021. There were also warnings of a weaker upcoming quarter, set against confident predictions that 2021 will see a strong rebound in travel – just as soon as it can happen free of worries about the coronavirus.
Meantime, with reservation volumes substantially down, the platforms have also had to roll with a major switch in consumer preference, as the Covid-19 saw a shift towards self-contained accommodation. “In Q3, we continued to see an increase in the mix of customers booking alternative accommodations versus the prior year levels,” said David Goulden, CFO at Booking. “However, as we progressed through the quarter and into October, we saw this increase in the alternative accommodation share moderate. Booking.com’s alternative accommodations represented approximately one third of all new bookings in the quarter.”
Goulden also revealed other changes in consumer behaviour: “We’ve also seen the length of the booking window contract in the third quarter after expanding versus the prior year in the second quarter as customers made a higher share of bookings in both quarters to stay in the peak summer period. The booking window continues to shrink versus last year in October as customers focused on their short-term travel needs. Mobile bookings, particularly through our app, continued to gain share in the third quarter and October. And finally, we continue to see greater than 50% of our newly booked room nights coming to us through a direct channel.”
Expedia CEO Peter Kern had seen similar changes: “Alternative accommodations have been quite strong, not just for us, but for others. Obviously, that’s been great news for Vrbo and we’ve been a big beneficiary area of that, but that has shifted lodging share significantly across geographies.”
“There seem to be more direct bookings in the smaller market independent hotels as people are calling to make sure they’re open, make sure that safety protocols, etc., are happening. And conversely, the places where we typically have the most share is things like big urban markets, international travel, international packaged travel, etc., have obviously been among the most impacted.”
“We’re obviously leaning heavily into Vrbo. We think it’s having a moment. All the research shows that it has gained share and it has gained awareness, and there’s some very positive things going on with that brand.”
Booking is committed to improving its offering in air tickets, still focusing on a vision of selling the connected trip: “The connected trip vision of providing this frictionless customer experience will be brought together by a seamless payment network, which we continue to develop and extend to more of our supply partners.”
At Expedia, work in progress includes internal streamlining, said Kern: “We combined our performance marketing team during this period, and we are doing a lot of plumbing work to retool and recalibrate all the algorithms and everything we do so that we can optimize a multi-brand instead of the brand against the brand. We’re trying to be prudent here while we rebuild everything, on the theory that we will be at our end state by the time Covid-19 is over, or more precisely, travel trends come back to more normal levels.”
He said Expedia is also expanding its partner services business, already working well with Marriott. “We are a leader in this space, and we feel very good about our opportunity here. In fact, we believe we can grow share here during Covid-19 as we help our B2B partners come out faster and help more partners over time. We have expanded our partnership on the supply side with Marriott in terms of their wholesale distribution partnership.”
Expedia is still working on how best to exploit the brands it owns. Kern said: “Right now, we think the number of brands creates opportunity as long as we have segmented them and thought about them geographically, etc., to their greatest effect. Some brands admittedly, we have historically run for more profit, whereas others we have pushed. We are looking at that whole kind of plate of options and driving the best result by country, by the brand that we can. And that may mean, we close some brands in some countries.”
Among the brand challenges is messaging: “We have found that there is a little bit of a conflict from the standpoint of people don’t generally go to our OTA brands for alternative accommodations. It’s not what they think of.”
At Booking, CEO Glenn Fogel suggested that worse is to come: “Given the trends we are currently seeing, we believe that year-over-year room night decline to be greater in Q4 than what we observed in October. If this turns out to be the case, it will be very challenging for us to reach profitability in Q4.”
With that prospect, cost cutting continues. “We are making progress with our initiatives to reduce the workforce at Booking.com by up to approximately 25% with an associated annualized savings estimated between $250 million to $300 million. We have been taking restructuring actions at Booking.com in various countries. And in some countries, we have implemented voluntary leaver schemes.
Fogel promised it would all be worthwhile in the long run – even though there might be more short term pain, in the form of weaker margins. “We expect our business to have very attractive, and continue to have industry-leading margins when demand fully returns. There’ll be a couple of puts and takes. So for example, as we build into new products like air, those will be dilutive to the margin rates, but obviously, healthy margin dollars are important to our business and strategy. And things like payments, again, will be diluted to the margin rate, but will contribute margin dollars. You have to take that into account when thinking about the long-term future.”
At Expedia, one experience of the downturn has been that a spike in consumer demand for refunds forced the company to test out its machine-based conversation tools. “We’ve been testing the conversation platform into all kinds of use cases, and we will ultimately have it in virtually everything we do, including our dealings with supply partners,” said Kern. “So it is being rolled out broadly – as the NPS scores have been strong on it.”
People generally like to deal with the machine if they can and just get it over with and not have to talk to a person. And we feel very good about it, so it’s scaling up. As we blend back into normalcy, assuming we will be more proficient and have these tools on the performance marketing side.”
HA Perspective [by Chris Bown]: Ahead of the pandemic, the OTAs were struggling to recreate the recipe of their secret sauce for future success. Thanks to the pandemic, it’s suddenly immaterial if the recipe is still in flux.
But come the spring, the market will be expecting the recipe to be revealed. There’s only a limited amount of time.
Right now, the OTAs look squeezed – on the one hand, there’s the big brands, with their promise of hygiene and safety behind their direct bookings. They’ve also spent the last few months sharpening up their recipes, with Wyndham leading the charge in the way it has improved the digital experience for guests, not just when booking but right through the process of check-in, check-out and payment.
On the other hand, there’s Airbnb, which earlier this year looked a highly unlikely candidate for a successful 2020 IPO. But, bouncing back like Tigger, the brand is poised to float, and draw in cash for a fresh onslaught into the OTA space.
So, what next for Booking and Expedia? In common with Airbnb, Vrbo has benefited from Covid-19’s push towards more home rentals. But Expedia says it is still working out how to segment its brands, as the punters struggle to work out how to book their staycation accommodation.
Booking promises a fresh push into airline ticket sales – and in a marketplace that’s been largely becalmed for several months, that might work. Or perhaps aggressive/desperate airlines will shut out the third-party sales. Then there’s machine learned responses, to those troublesome people who want to change or cancel their bookings. This recipe feels more like reheated gravy, than secret sauce.
Additional comment [by Andrew Sangster]: It’s not been the recovery that OTAs normally get following a downturn. But then it is hardly the recovery anybody gets following a downturn.
It is worth contrasting the fate of OTAs – online travel agents – with their offline variants, in particular Europe’s biggest travel agent come tour operator TUI. Expedia’s share price is now above the level it reached before the pandemic (not back to all-time highs, that was in 2017 when it was 25% higher than it is today).
TUI, on the other hand, looks sorry. It has recovered a little from the lows in March but remains at little more than a quarter of where it was at its height in May 2018. And that is despite all the vaccine news.
For hoteliers, the worry will be seeing TUI reduce its airlift. In Germany, aircraft are being cut by 50% from 39 with a reduction to five bases. These volume cuts will take time to rebuild, if they ever are.
Having previously focused on investing in hotels and cruise liners it is now taking an “asset right” approach, reducing investment. Asset sales beckon.
During the summer, TUI opened 44% of its owned hotels (157) and it sold just 15% of its original summer programme by 13th September. For summer 2021, it says the outlook is “promising as customers are committing to future seasons”.
Cost savings of EUR300m are being targeted with 8,000 jobs going globally. And TUI is coming under fire for not paying its suppliers, notably hoteliers. Rather than pay within 60 days, which has been the norm, TUI is demanding hoteliers wait until March 2021 for payments of up to 75% of what is owed.
This is a stretched company. Before the collapse of Thomas Cook there was a belief that such giant businesses were too big to fail. Nobody believes that now, including, critically, hotelier suppliers.
But with nowhere else to go, most hoteliers will be forced to endure whatever conditions TUI decides to impose. It will not just be TUI organising asset sales before this pandemic plays out.