Consumers have rushed to the Internet to buy cheap airline tickets, hotel reservations, car rentals and tourist package deals, turning the travel sector into one of the hottest industries of the burgeoning Net economy. But now it looks as if this huge business opportunity is falling into the hands of just a few major players that are quickly creating hard-to-match offerings by snapping up smaller firms.
The wave of consolidation began to crest in October, when travel reservation giant Sabre Holdings acquired Preview Travel and proposed to merge it with its own online wing, Travelocity. Last week, the two companies teamed up with Priceline.com to bolster their positions against Microsoft's recently spun-off Expedia travel site. Not to be outdone, Expedia on Monday acquired Travelscape.com and VacationSpot.com.
As the bigger companies have grabbed larger market share, smaller firms have been forced to seek partnerships or look to niche markets, such as offering adventure, honeymoon and discounted vacation packages. Others have gone out of business.
"Clearly, the smaller online agents are being squeezed," said Gomez analyst Krista Pappas. "There usually is room for only a few key players and for those who can find a niche market."
The urge to merge is being driven by fierce pricing pressure, particularly in airline ticket sales, the bread-and-butter service of travel sites. This is where the sites face growing competition from the airlines themselves. Not only have the airlines cut commissions for online travel agents, squeezing their profit margins, but they have also begun to press forward on their own online initiatives.
United Airlines, Northwest Airlines, Continental Airlines and Delta Airlines plan to launch a joint travel site offering airline, car rental and hotel services in the first half of this year. That site has already signed agreements with twenty-three foreign and U.S. airlines to sell their tickets at prices as low or lower than available on other travel sites.
United Airlines previously teamed up with Buy.com to create the forthcoming BuyTravel.com and signed agreements. United also owns a stake in business travel site GetThere.com.
Meanwhile, other big competitors are testing the travel services waters, including Wal-Mart, which just launched a travel site as part of its newly relaunched Web store. Although Wal-Mart's e-commerce site has yet to take off, the company signed a deal in December with online giant AOL to create a new Internet access service targeted at Wal-Mart's huge offline customer base.
Online travel services are the virtual senior citizens of the Net economy, with a major online push starting about three years ago, said Expedia marketing vice president Erik Blachford. At the outset, travel firms flooded onto the Net as many entrepreneurs saw the Web as a way to market and sell vacation packages.
It was relatively easy to set up a Web site in the old days, Blachford said. The barrier to entry was low. Many companies launched sites with little more than a search engine to tap into the estimated $3 trillion that travel services generates every year. Jupiter Communications projects that online purchases of leisure and unmanaged business travel will grow from $2.2 billion in 1998 to $17 billion in 2003. The latter figure represents about 10 percent of the total market for such travel.
Still, few online travel services have been able to tap that market to turn a profit.
For the fourth quarter of last year, Expedia lost $23.2 million on $17.8 million in revenue. For the six months ended Dec, 31, the company lost $28.1 million on $33.1 million in revenue.
Travelscape, which filed to go public in April of last year and then withdrew its application in August, lost $5.4 million on $8 million in sales during the first quarter of 1999, the last quarter for which it submitted its financial records. The company lost $4.4 million on $18.9 million in revenue for all of 1998.
Travelocity.com, a proposed merger between Sabre Group's Travelocity division and Preview Travel, publicly filed a proxy statement related to the merger Monday. By combining the assets and operating statements of Travelocity and Preview Travel, Travelocity.com would have lost $31.3 million on continuing operations for the nine months ended Sept. 30, 1999. During that same period, the combined company would have made $60.7 million in sales.
Like other Internet leaders, Expedia and Travelocity have entrenched themselves by spending big on advertising and using their high sales' volumes to negotiate cut-rate hotel and car rental deals. When other companies developed superior products or technology, the companies acquired them. An example of that came when Expedia acquired Travelscape, according to Pappas.
Pappas said Travelscape had developed direct relationships with hotel operators, especially in Las Vegas, and operated phone call centers that Expedia coveted.
The result of both companies' expansion has been textbook business strategy. The industry leaders have effectively erected an enormous financial barrier to entry, closing much of the business off to all but the best-financed competitors, according to analysts.
"If you are a smaller company that doesn't have a niche, I worry that you won't have the scale to survive," said Jupiter's Melissa Shore, who pointed to 1travel.com as an example of a company that has not gone far enough to differentiate itself.
"Somebody like 1travel.com is trying to offer the same services as the big companies but is not as well financed," she said. "I don't see how they can compete over the long term."
By contrast, analysts pointed to Great Outdoor Recreation Pages, known as Gorp.com, as having the potential to successfully work the fringes of the online travel market. The company sells adventure getaways, such as safaris, white-water rafting and mountain climbing. Gorp.com's strategy is to deliver more information and provide customers with highly personalized service--such as screening videotape of potential vacation spots--in a very defined travel market, according to chief executive John Guttenberg.
Another example of a company working the market fringes includes discount-ticketer Lowestfare.
Such companies could also find themselves targets of expansion-minded CEOs, however.
"The big companies are well aware of these niche companies," Travelocity chief executive Terry Jones said, adding that these firms are eyeing several for potential partnerships. "The fit would be better as partnerships for some of them because they cover such a highly specified market."
"This is not the time to try and offer everything to every customer," Jones said. "Going up against the big guys, with the enormous technical and marketing hurdles, is almost impossible."
News.com's Troy Wolverton and Stefanie Olsen contributed to this report.