Growth Rates Slowing for Online Travel

US online leisure and unmanaged business travel expenditures are expected to soar to $28 billion in 2005, but year-over-year growth will slow from the current triple-digit rate, according to research by Jupiter Communications.

As in other Internet sectors, Jupiter expects to see consolidation in the online travel market as both agencies and suppliers are expanding their offerings beyond their traditional scope.

US consumers booked a dramatic $6.5 billion of leisure and unmanaged business travel online in 1999, almost triple the $2.2 billion booked in 1998, representing five percent of total US booking in 1999. In addition to a strong economy, new product offerings and improved site functionality fueled this growth on the part of agencies and suppliers. Online bookings are expected to increase significantly to 14 percent of total bookings by 2005, reflecting important growth in the market for lodging, cruise, tour, and rental car products.

“The increased growth of the Internet travel market has created winners out of all players but decreasing growth will make apparent holes in players’ strategies,” said Melissa Shore, senior analyst for Jupiter Communications. “Airlines as well as other suppliers have the upper hand because they own key assets–loyal customers, long-standing brand awareness, and large, well-run call centers–that online agencies do not own. However, many of these players have yet to maximize those assets and offer loyal consumers value to move to the online channel. By contrast, agencies have maintained their market share in this space, but now must choose between becoming either broad, mass-market players or niche players, or risk being caught in the middle.”

Because online air tickets will remain the dominant travel purchase, airlines will continue to dominate the travel space, according to Jupiter. Despite this leadership, airlines as well as other suppliers and travel agencies, must focus on leveraging their most loyal customers by giving them a reason to book online; traditional programs, recognition, and tiered servicing, not bonus miles, should keep frequent customers satisfied.

Online travel agencies have maintained 51 percent of the online bookings, despite aggressive marketing and development efforts by suppliers, but with the slower growth expected, agencies must now choose to compete on one of two paths: niche or mass market. For companies taking a mass-market approach, Jupiter found it is crucial for them to offer broad products and services, but players must cater to distinct segments of the population by offering targeted products simultaneously. Companies competing as niche players must deliver targeted products to their customers, and in the process, they will become a compelling partner for both mass-market travel sites and suppliers.

According to a report by Forrester Research, the driver of US online business travel will be corporate policy, versus individual travel. The report found that companies are eager to save travel and processing costs will mandate the use of Web-based corporate booking engines. The few remaining unmanaged business travelers will buy online just like leisure travelers.

“In 2000, managed travel will already account for 57 percent of the $4.9 billion businesses spend on travel online,” said Henry Harteveldt, senior analyst at Forrester. “By 2004, however, corporate policy will dictate the spending of 77 percent of the $20.3 billion of business travel booked online.”

Business travel will grow due to new corporate policies that require travelers to use company-approved booking engines. Firms will experience cost-savings through booking engines. These engines achieve savings through directed use of of a company’s negotiated fares with their preferred suppliers, as well as reduced service charges for making employee travel reservations.

According to Forrester, the Internet’s cost efficiency appeals to companies that currently manage travel offline, and it will actually increase the number of companies that manage travel overall. Companies with larger travel budgets will be the first to shift their travel buying online through the installation of a booking engine, with 70 percent of Fortune 1,000 companies making this migration by 2002. Larger unmanaged accounts will adopt managed travel and shift their travel buying directly online. Smaller firms will move their business travel online as well, first encouraging individuals to use any Web interface, then gradually adopting services that target smaller businesses.

Forrester also found that a sizable but secondary opportunity will remain for sites that attract unmanaged travelers. To capture the online business of this sector, aggregators will target small businesses by buying business tickets on high-volume routes in bulk or reselling tickets at a markup. Public Web sites will offer incentives like cash rebates or travel credit based on a combination of total revenue paid and levels of fares purchased. Supplier will capture more customers by allowing small businesses to auction unused, nonrefundable tickets purchased from the supplier’s Web site.

“Unmanaged travelers can benefit from many of the same features offered to managed accounts, but they will have to sign up for it one person at a time at the travel Web site of their choosing,” Harteveldt said.

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