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Why inbound tour operators will own the internet
1.0 Setting the Scene
Travel was the largest category of online sales in the US in 2003 with 43% of the total e-
commerce market1. The move away from traditional travel companies (travel agents and
tour operators) is dramatic. Specialist online travel research firm PhoCusWright Inc. is
predicting the internet will take 37% of all US travel sales by 2007, up from 21% in 20032.
Although the US leads the online travel industry world with a US$65.4B market in 2005,
Europe is catching up with 49% growth to deliver US$34.5B and Asia Pacific had 31.4%
growth with US$15.9B in revenues 2. British “High Street” travel agencies are reported
to be closing down “one every couple of days” 3.
Although the vast majority of online bookings are straight forward flights, hotel and rental
car reservations, more complex ‘touring’ destinations like New Zealand are not exempt,
long term. Tourism New Zealand research shows that 57% of ‘interactive travellers’ (a
grouping defined by Tourism New Zealand as their primary target market) ‘discovered’
New Zealand online 4. PhoCusWright said in 2004 that while online booking of much
more complex travel requirements has yet to be delivered, “it will happen” 5.
Now that technology is coming available it gives early adopter inbound tour operators in
complex touring destinations the opportunity to take a large slice of this growth market.
This paper investigates why they are uniquely positioned for this opportunity.
2.0 Disintermediation.
Disintermediation is the elimination of intermediaries, caused by the internet allowing
suppliers to deal direct with consumers. Because the travel service industry is
information based and effectively travel agents and tour operators are commissioned
order takers –they are particularly vulnerable to disintermediation 6. Within one transaction
there may be two tour operators (one in the suppliers country, one in the consumers
country), and a travel agent between the supplier and the consumer. But the information
available on the internet and the ability of hotels and airlines to sell directly to travellers
means that travel companies may no longer be needed 7. Considering airlines and hotels
requirements for cost savings and the consumer’s enthusiasm for the internet and the
lower prices it offers travel companies are, as one Economist article puts it, “between a
rock and a hard place” 8.
Lean Consumption
One of the attractions of booking travel online complies with the principles of what the
Harvard Business Review refers to as “Lean Consumption” – providing consumers the
aggregated solutions they want, where and when they want it, reducing time and hassle9.
While streamlining the buying process, online travel websites are actually lowering travel
distribution costs by 33%6. The HBR Study showed that companies that implement lean
consumption are more profitable – by making it easier for customer to buy off them and
lowering costs by saving everybody’s time. In the process they attract new customers
from less user friendly competitors 9.
3.0 Reintermediation
While the internet will see some intermediaries eliminated 10, research has consistently
shown that there is a place for a new type of intermediary in the travel booking process.
Referred to as cyber-mediation, these intermediaries can add value to the consumer,
particularly for complex tourism, by providing all the information tourists need in one
place. That information, for example, multi media presentations, maps, customer
reviews, price comparisons, FAQ’s, personalization and decision support applications
helps the consumer build confidence that they have the information required to make a
buying decision without perceived risk7.
Inbound tour operators, with their depth of destination knowledge are well positioned to
fill this role. Industry researchers have concluded that rather than seeing the internet as a
threat, travel companies should see this as an opportunity to re-engineer their business,
changing from ‘bricks and mortar’ to hybrid ‘clicks and mortar’ companies, integrating
technology into their existing operations.6, 11, 12
- A study of Taiwanese travel companies (a country with a high internet adoption)
found that 64% of travel companies had a website, and another 24% would consider building
them in the future11. But the study concludes that rather than totally focusing on the internet,
companies should pay equal attention to both the internet and traditional distribution channels,
employing a range of strategies such as embracing strategic alliances and vertical integration,
improving the quality of service, reducing costs and serving niche markets11.
- Niche Marketing is also signalled out in a Canadian Government study in recommending that
Canadian travel companies build internet offerings focused on tightly defined markets. By applying
“General Store” familiarity to their websites, it is suggested that travel companies will be less
vulnerable to price and service competition12.
- A separate study of Scandinavian tourism websites concluded that if websites offered value
added services (maps, Multimedia presentations etc) and online reservations tourists would use
them for booking complex tourism products.7
- An Economist article identifies professionalism as an opportunity for online
differentiation, being perceived to be helping customers to buy what they want,
rather than “helping suppliers flog what they have got” 8.
Certainly time has shown that the proposition of just selling on supplier’s product ‘at a
discount’ will not be enduring. The ‘new’ intermediary online travel sites (such as
Expedia, Travelocity, Orbitz and Hotwire are to an extent being disintermediated
themselves by hotel chains improving their websites and offering ‘best price guarantees’.
Merrill Lynch predicted in late 2005 direct travel supplier online sales would increase by
27% in that year - compared to only 19% for the online travel agents 2.
Tour Operators
PhoCusWright research shows that the tour operators are now taking a more significant
role in the on-line market, and are now hauling back market share they were losing to the
online travel agencies. Although they started late, PhoCusWright believe tour operators
will increase from a 12% market share in 2005 to 18% in 200714. UK Tour operator,
Thomson Holidays, who previously predominately sold their product through travel
agencies, are now selling half of their holidays on their own website – up from 38% in
2005 15.
Channel Conflict
Tour Operators may be concerned that setting up in competition with its customers
(overseas tour operators and travel agents) will cause conflicts.
The issue of channel conflict during this disintermediation / reintermediation evolution is
not unique to the travel industry. Manufacturers selling direct to the public, the music
industry with Sony, amongst others, selling music online, car manufacturers creating built
to order systems for online shoppers, and cosmetic companies like Avon having to go
online to compete with rivals with online distributors16. Forrester Research reported that
in a survey of consumer goods manufacturers 66% selected channel conflict as their
biggest issue in online sales strategies. However Forrester believe retailers have ‘gotten
over it…they have to manage it’ 16.
Channel conflict in the travel industry is rife. Airlines, hotels and tour operators sell to the
public as well as through their distributors, the travel industry. While travel agents and
intermediary tour operators don’t necessarily like it – it is a reality of the way the travel
industry is heading. With the advent of low cost airlines, full service airlines are offering
internet only deals, and cutting travel agents commissions 17 . North American Hotels in
2005 got 41% of their bookings online – up from 36% in 2004 1.
4.0 Opportunities for Tour Operators
The research establishes that tour operators and travel agents are being disintermediated.
This is occurring more slowly in the market of FIT touring travel, because of:
- the difficulty for travellers in putting together an itinerary on their own to visit a country that they don’t
understand the geography of, and
- the difficulty and risk of making bookings on many different websites, which is the only way an online
booking can be done currently.
However the majority of visitors to ‘touring’ countries like New Zealand are researching on the internet
and it is clear than an increasing number of travellers prefer to make their bookings online.
With the introduction of Cadabra the problems of online complex bookings are solved.
Established tour operators in the market are well positioned to “reintermediate” in this new world,
due to their strong relationship with suppliers and experience in assembling itineraries to suit the
specific needs of consumers. It is this experience that delivers the value to consumers that justifies
reintermediation.
This is not just a defensive strategy, to protect market share. By being an early adopter of this new
technology tour operators have the opportunity to take a large slice of this growth market2, 13 –
online bookings. Not only will they increase sales, but, following the principals of lean consumption, they will be more profitable9 -
the itinerary wizard and other features of Cadabra do the work that is required to assemble and modify individualized itineraries.
Tour Operators should also take advantage of Cadabra’s theme capability to establish a
wide variety of ‘niche market’ plays. This functionality allows you to easily and quickly
establish versions of the website themed towards a segment of the market eg golfers,
skiers, wine lovers, antique hunters etc. In the crowded online travel category, being
able to be found for by a variety of specialist search terms is essential.
The channel conflict resulting from setting up an online model in competition with their
current distributors is an issue, and it has to be considered. However it is clear that the
traditional model is not going to prosper long term so tour operators need to aggressively
start building an online model to both avoid being disintermediated themselves and to
ensure that they take advantage of the available profit growth.
1 eMarketer Inc (2005). “Travel Agencies Online Report”. http://www.emarketer.com
2 eMarketer Inc (2005). “Online Travel Worldwide Report.” http://www.emarketer.com
3 UK Travel Weekly (2006) ”Future lies online says Carrick,” (31 March 2006), 1814: 28-28.
4 Tourism News (2006) “Hide and See,” (April 2006): 18-20.
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5 Philip C. Wolf, (2004) “The PhocusWright Executive Conference Opening Remarks” (11 Nov 04). Available: http://www.digitaldirectory.com/downloads/opening_ec04.pdf
6 Dilts and Prough (2003) ”Travel Agencies: A service Industry in Transition in the Networked Economy,”
The Marketing Management Journal (Fall),13 (2): 96-106
7 Nyveen and Lexhagen (2001) “Swedish and Norwegian Tourism Websites: The Importance of Reservations Services and Value-Added Services,”
The Scandinavian Journal of Hospitality and Tourism, 1 (1): 38-53
8 The Economist (2002) “Fit for DIY; Travel Agents,” (1 June 2002), 363 (8275): 79
9 Womack and Jones (2005) ”Lean Consumption,” Harvard Business Review (March 2005):58-68
10 Porter (1999) “The Net wont transform everything,” Inter@ctive Week, (October 25 1999)
11 Bennett & Lai (2005) “The impact of the internet on travel agencies in Taiwan,” Tourism and Hospitality Research, 6 (1): 8-23
12 Industry Canada (2003) “Electronic Commerce in the Retail Travel Services Industry in Canada,” Industry Canada (16 October 2003) Available: http://straegis.ic.gc.ca/epic/internet/indsib-tour.nsf/en/qq000q6e.html
13 PhoCusWright FYI (2006) “European Market Sizzles, U.K. Online Travel Agents Fizzle,” (24 May 2006) Available: http://www.phocuswright.com/fyi/fyi_283.php
14 HotelMarketing.com (2006) “UK: Travel websites replace agents as most popular way to book a holiday,” (18 May 2006)
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15 Gilbert & Bacheldor (2000) “The Big Squeeze” informationweek.com (21 March 2000): 47-56
16 Bray (2006) “The struggle over travel distribution,” Financial Times (15 May 2006): 2
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