The world’s two largest OTAs are boosting spending on marketing while hotel lobbyists are calling for federal regulators to stop the proposed merger of two of the most popular OTAs in the U.S., reflecting a heightened battle between suppliers and intermediaries for a greater share of travel spending.
Expedia Inc. and Priceline Group each ratcheted up second-quarter marketing costs. Expedia did so as it made preparations for its pending acquisition of smaller competitor Orbitz Worldwide, a deal that is still being reviewed by the Justice Department. Orbitz also recorded higher second-quarter costs.
The Expedia-Orbitz deal has drawn fire from the American Hotel & Lodging Association (AH&LA). Earlier this month, the trade group publicly opposed the $1.34 billion deal, first announced in February, citing factors such as a narrowing choice of booking channels, higher costs for smaller hotel chains and the higher probability of deceptive practices from “rogue” OTAs.
A combined Expedia-Orbitz would control almost three-quarters of the U.S. online market, while the AH&LA estimated that Expedia, Orbitz and Priceline combines account for more than 95% of the OTA market.
Meanwhile, some hoteliers are drawing their own fire for their efforts to secure more bookings through direct channels.
Marriott International earlier this month launched a marketing campaign promoting Marriott’s website as having the best rates on the hotelier’s rooms. Ads concluded with the tagline “It pays to book direct.”
While that effort was likely geared to pull prospective guests away from OTAs, ASTA last week termed the language “misleading” and called for the hotelier to discontinue the campaign “immediately.”
Suppliers and their channels continue to battle over their respective shares of the U.S. online hotel sector, where annual spending is predicted to jump 55% between 2012 and 2016, to $58.1 billion, according to a Phocuswright report released in November. OTAs have been gradually pulling some of that spending away from hoteliers’ websites. Last year, OTAs accounted for 48% of online hotel spending in the U.S., up from 46% in 2012.
Hoteliers fear that a combined Expedia and Orbitz will result in a further loss of booking dollars.
“We believe this transaction and the resulting consolidation of the online travel marketplace will result in significant negative consequences, particularly for consumers, but also for the large number of our members who are small business owners and franchised properties,” AH&LA CEO Katherine Lugar wrote in an Aug. 6 statement.
Meanwhile, Priceline and Expedia continue to ramp up spending in their competition with each other, and those higher expenses were reflected in both companies’ second-quarter financial results.
Expedia’s second-quarter selling and marketing costs jumped 19% from a year earlier, while general and administrative expenses surged 38%. The company, which in May sold its 62.5% stake in China-based OTA eLong, also reported that gross bookings excluding eLong rose 20% to $15.1 billion, while room-night growth excluding eLong rose 35%.
Net income quadrupled from a year earlier, to $449.6 million, though that increase was largely the result of its $508.8 million gain on the eLong sales. Revenue increased 11%, to $1.66 billion.
Priceline’s online advertising spend rose 21%, while sales and marketing costs were up 26%, outpacing the company’s 7.4% revenue growth to $2.09 billion. Gross bookings advanced 11%, to $15 billion, with international bookings rising 30% while U.S. bookings remained flat.
Orbitz took a $4.25 million loss, compared with year-earlier net income of $6.88 million. Revenue fell 3.4%, to $239.6 million. The cost of revenue surged 34%, largely as a result of higher costs related to implementing systems to stem fraudulent transactions. Gross bookings fell 8%, to $3.09 billion, as standalone air and vacation-package revenue were both down 14%.
Financial analysts appeared to be unconcerned about Expedia’s higher spending, noting that it was appropriate for a company whose recent acquisitions included Travelocity and Australia-based Wotif.
In an Aug. 9 note to clients, Deutsche Bank analyst Lloyd Walmsley wrote, “We see a long runway for the company to continue to improve its operations across its legacy assets and acquired businesses, with better website conversion, increased hotel supply, deeper penetration of existing hotel partners and improved marketing optimization.” Walmsley maintained his “buy” rating on the stock.
And while Guggenheim Partners analyst Jake Fuller in an Aug. 6 note to clients classified Orbitz’s second-quarter performance as “weak,” he maintained that many of the challenges were short term and typical for a company on the verge of being acquired. He added that the recent performance of Travelocity could hint at a better future for Orbitz, as well.
“We note that Travelocity appears to be ramping revenue post acquisition as it benefits from a higher converting platform, access to more hotel inventory and better marketing support,” Fuller wrote. “A weak performance [by Orbitz] probably does not change the prospects for the deal.”