Online travel aggregators (OTA) have simplified travel efficiency by building scalable marketplaces that help customers and travel providers meet their demand and supply needs. Globally, OTAs are the preferred choice for travellers to plan and book their travel needs and their penetration has been increasing in emerging markets like the Middle East and India. Industry participants also leverage OTAs to reduce their cost of customer acquisition. Additionally, they are also one of the largest contributors to online marketing spends. Considering the influence that OTAs have on travel marketplaces, it is not surprising to see this segment of the industry witnessing a high degree of competitive intensity which in turn brings pressure on profitability. This is especially true in hypercompetitive marketplaces in India and the Middle East.
Like all other industries, online travel aggregators too are going through phases of industry evolution. Typically in the first phase, the industry is fragmented, and both customer and industry participants are in a learning mode. Profitability is low as all stakeholders are spending on marketing and product development. Investors are evaluating businesses on potential, based largely on prospects of product adoption. We are well past this stage both in the Middle East and in India.
In the second phase, the industry experiences rapid growth as customer adoption increases swiftly. The degree of fragmentation among industry participants reduces and a few major industry players emerge. Growth is the focus area and profitability still takes a backseat. Investors will place a high premium on growth and would be willing to tolerate lack of profitability in exchange for high growth rates. The OTA industry in Middle East is still in this phase and is currently witnessing a shift from offline to online when it comes to travel spending. The Indian OTA industry has gone past this phase with respect to air travel aggregation, but has some headroom when it comes to hotels and activities aggregation.
In the third phase, the industry shifts to the maturity phase. Growth exists, but not at the same levels as the previous phase. Industry participants look for a balance between growth and profitability. Market share is dominated by three or four players and newer entrants find scale, a barrier to enter into the market. Industry leaders increase focus on cost optimisation and profitability. Investors start valuing profitability and growth on equal levels. Air travel aggregation in India is in this phase now.
If we look globally, OTA industry across markets has gone through these phases and the end result has always been profitable businesses. The two largest OTAs globally are profitable. Even in emerging markets such as Latin America and China, we have seen the emergence of market leaders who are profitable. We can expect the same trend to pan out in India and the Middle East and over time we will see profitability in the OTA space in these two markets.
There are risks to the industry path to profitability. Entry of a cash rich competitor willing to burn capital to gain market share can disrupt the industry path to profitability. We have seen this play out in India from time to time, and this either will result in some degree of consolidation or with new entrants partnering with existing incumbents. However, in the medium-to-long term, as the industry matures, industry participants that innovate continuously to help make travel simple will reap the benefits of low acquisition and retention costs and higher lifetime value per customer. This will, in turn, help drive margins. This coupled with a sharp focus on fixed costs will help industry participants attain sustainable profitability.
The pandemic with its disruptions has reset the industry in many ways. This gives industry participants a chance to restart their journey with the added benefit of leveraging lessons from the last few years. OTAs that build on these learning to build innovative products and drive efficiencies in costs will witness an accelerated path to profitability.
The author is the Head of M&A, Corporate Finance, Business Strategy at Cleartrip.com