Two major events occurred last week that hold relevance for Online Travel Agencies (OTAs). The trade association for the world’s airlines, IATA, revised its 2013 outlook for the airline industry. The association lowered its forecast for industry profits by $1 billion to $11.7 billion as it does not see the industry improving as expected. The other major event was the release of STR Global Limited’s data on regional hotel industries for the month of August. While all other regions reported satisfactory to good performance, falling ADR’s in Asia-Pacific emerged as a concern.
Internationally Exposed OTAs To Be Adversely Impacted In 2013
The downgrade by IATA reflects the decline in passenger demand due to the oil price spike that resulted from the Syrian crisis. It also reflects disappointing growth in emerging markets such as India, China and Brazil. While the US airline industry is experiencing improvement in profitability driven by consolidation and joint ventures, other regions are seeing a decline in profitability due to dampening of demand. 
The global average operating margin of 3% in the airline industry is already quite low. Due to declining profitability, airlines that operate outside the U.S. might seek to enhance their profitability by selling tickets through their own websites rather than paying commission to OTAs for selling them. Therefore, OTAs having greater exposure to markets outside the U.S. could be adversely impacted this year.
The other report by STR Global Limited indicated that from the start of the year till August, ADR grew across all regions except Asia-Pacific, where they fell by approximately 3.5% to $123.  The decline was driven by a fall in ADR in countries such as India and China, where economic growth has slowed down. The hotel industry is highly sensitive to changes in ADR. Thus, OTAs that are exposed to the Asia-Pacific region and generate a higher proportion of revenues from hotel bookings could see their ADR decline this year.
Expedia versus Priceline: Who Will Take The Worse Hit?
Priceline’s (NASDAQ:PCLN) gross bookings from international markets as a percentage of total bookings have risen from 55% in 2007 to close to 85% in 2012. On the other hand, Expedia (NASDAQ:EXPE) gets only 40% of gross bookings from international markets. Priceline continues to pursue international expansion strongly. Its strategy includes aggressive expansion in Asia-Pacific via its Agoda.com website. The company also derives a greater proportion of revenues from hotel bookings (>95%) compared to Expedia (~75%). Hence, we believe that Priceline will see a more amplified impact in airline ticket sales and hotel ADR this year compared to Expedia, should the slide in airline profitability and Asian ADR continue. Nevertheless, Priceline’s stock should maintain its strength as the company earns only about 1% of its revenues from airline ticket sales, and its hotel room nights growth is solid enough to offset the decline in ADR.Notes:
- Profits Grow in 2013, But at a Slower Pace – Upward Trend to Continue in 2014, IATA, September 23, 2013 [↩]
- Asian hotel rate slide continues – updated, Travel Daily Asia, September 24, 2013 [↩]