What Might Lufthansa’s Adoption Of The Blockchain Technology Mean For The OTAs?

by Trefis Team
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Just like hotel suppliers, airlines also have a love-hate relationship with the OTAs (online travel agencies). While the airlines like the fact that OTAs provide them a significant amount of exposure, it is also true that the high commission that OTAs charge to airlines has always been a matter of displeasure for the latter. We’ve earlier written about the blockchain technology which is aiming to create a fairer market place. Recently, German airline Lufthansa announced that it will be working with Swiss startup Winding Tree to build travel applications based on blockchain. Winding Tree is a decentralized open source platform for travel distribution that aims to make travel booking more affordable for the travelers while at the same time making it more profitable for the suppliers.

What Is Blockchain?

Blockchain is the technology that drives the cryptocurrency, Bitcoin, the first decentralized digital currency in the world. Blockchain is a distributed database where data can only be added implying that the historic data cannot be lost or corrupted in the long run. Earlier, in an interview with Skift, Fritz Joussen, CEO of TUI Group, one of the largest leisure, travel, and tourism companies in the world, mentioned how blockchain might help in collapsing the stronghold that big OTAs such as Priceline and Expedia currently have in the online travel market. Prior to Lufthansa, Russian airline S7 has been using the blockchain platform for the sale of its air tickets.

How Will Blockchain Help Market Participants?

An open market with low barriers to entry for competitors implies that the exorbitant fees that the airlines or hotels need to pay to the OTA players can be done away with. OTAs build their customer base by aggressive marketing campaigns and then charge high commissions to the hotel and airline suppliers in return for the reach they provide the latter. Though OTAs do help travelers with a vast array of choices and a range of prices to suit their needs, the rising commissions that they keep imposing on the hotels and airlines is something that they can continue with solely due to their oligopolistic power in the industry. For example, not only do Priceline and Expedia own 95% of the U.S. online travel market, in more fragmented markets like Europe and Asia, these big OTAs are growing even further, thus demonstrating the sheer bargaining power that they both command. However, according to Joussen, blockchain can break this oligopoly. Also, smaller players cannot compete in such an atmosphere as the barriers for entry remain high. Technologies like Blockchain offer a fair playing ground to everybody.

What About The OTAs?

Lufthansa is currently Europe’s largest airline, and if this partnership becomes a success then we can expect more airlines to join and adapt the blockchain technology in the future. This might imply the weakening of the OTAs’ position in the distribution of airline tickets in the future. Currently, both Priceline’s and Expedia’s share of revenue from airlines is in the low single digits and among OTAs only Ctrip has around 10% of its revenue share coming from airlines (which might increase in the future due to its Skyscanner acquisition). However, both in hotels and airlines, it seems that the emergence of Blockchain might be good news for both suppliers and travelers. OTA middlemen, on the other hand, might need to reduce their share of the commission, which under the current circumstances only seems fair.

The idea behind this platform is to cut off the middleman and give the distributing power back into the hands of hotels and airlines. The public blockchain offers security and at the same time doesn’t let one single player control the market. Also, the high barriers to entry created by the bigger OTAs will be dissolved if this becomes a reality. Bigger OTAs pose a significant threat of extinction or bankruptcy to the smaller ones simply because of their influence over the hotel and airline suppliers. Sometimes, even when a small OTA does well despite the hindrances, those are acquired by the bigger OTAs so that the latter can further consolidate their position in the industry.

It is not like the OTAs will not be required anymore, but instead their role will change where they might help travelers find the exact property they are looking for from a curated list. However, competition will increase in the travel industry, as anyone can source rooms from blockchain and hence the bigger OTAs solely deciding the inventory distribution and their commission rates might be dismantled. Instead, the hotels and airlines can also have a say in deciding how much commission they want to pay to the OTA middlemen. The harder hit might be the metasearch engines, however, because they currently take advantage of the flaws in the distribution system which might be nullified by blockchain.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Expedia

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