Imagine planning a vacation ten years back. Remember standing in the long queues for hours to book a ticket, booking a car with a driver who is also your guide for the tourist place and looking for the travel agent to get the best travel experience? Gone are those days. Today, you book an online ticket, hire travel advisors who provide the personalized services and drive your own outstation cab - all from your pocket device - a mobile app. All this has been possible because of the internet revolution in the travel space brought about by online travel agencies or OTAs.
The travel booking market in India — in which OTAs have a 40-45% share — had been growing at a CAGR of 10-12% for the past eight years and is estimated to be worth $45-50 billion by 2023. - Financial Express
In this article, we explore some of the industry’s fascinating characteristics and dive deeper into India's biggest OTA player - MakeMyTrip.
How do OTAs work?
The e-travel industry currently contributes to a majority of 88% growth of the Indian e-commerce industry. And the future might come bearing more gifts for the Indian online travel agencies. According to Morgan Stanley, Indians book only about 10-15% of hotels online. This number is 25-30% for China, 41% for Europe and 46% for the USA. With increased internet penetration, OTAs are betting on faster growth in acceptance of online bookings for hotels leading to an increased pie.
The travel industry is fragmented, especially the hotel segment. Travel Agencies with brick and mortar stores tried to solve this problem but could only do that regionally, given the size of the industry. Then entered Online Travel Agencies and riding on democratization and reach of the internet, OTAs provided a deeper solution to consolidate the fragmented industry. Not surprisingly, in terms of Market capitalization, OTAs like Priceline (Booking.com) and Expedia have surpassed the likes of Marriott, Hilton, and Delta, who dominated the industry a couple of decades ago.
Let us first discuss how OTAs make money. There are predominantly 3 business models that Online Travel Agencies (OTAs) follow:
Advertising business model
Merchant business model
Agency business model
Advertising Business Model
In this business model, the website lists or advertises the offering by other travel industry players. This is similar to how Google Ads work. Advertisers bid for space on the page and the highest bidder gets the more lucrative spot. Revenues either come from the number of clicks or impressions shown, irrespective of whether the booking is successful or not. TripAdvisor earns the majority of its revenue from this model.
Merchant Business Model
This is an investment intensive business model. The platform buys hotel rooms from the merchants, hosts them on their website and sells those to the customers. This business model has the benefit of low prices due to buying in bulk, long term contracts and having the flexibility to create a combined package along with airlines and other offerings. In the beginning, the company will have to keep its cash tied up to hold the inventory and possible losses due to lesser sales, but with time and bargaining power, they can look to negotiate better deals with merchants to solve these challenges. This model is followed by Expedia.
Agency Business Model
They follow the old-school commission-based revenue model. These OTAs have contracts with the hotels they list on their website and earn only when a booking is successful. Because this is a commission-based model, these companies don’t need to hold hotel rooms, saving them from having cash tied up to hold this inventory and avoiding losses from unsold inventory. India’s biggest OTA Player MakeMyTrip and global leader Priceline (parent company of Booking.com) follow this business model.
In the OTA Landscape, there is a cut-throat competition for gaining market share. MakeMyTrip is the largest player with about half of the online travel agency sales of hotels. MakeMyTrip accounts for 2/3rd of the online domestic air tickets and largest online seller of international outbound airfare. In the domestic air market, other competitors — Yatra, Cleartrip, Paytm, and Expedia — fight to achieve lower share positions of between 8 and 12 percent each. In the hotel industry, MakeMyTrip has twice the number of bookings as Booking.com but also faces massive competition from Oyo and other hotel booking websites.
The Indian giant, MakeMyTrip’s journey from its launch in 2000 to being the undisputed industry leader, is fascinating. Before deep-diving into MakeMyTrip’s journey, let us discuss the man behind this success story - Deep Kalra.
The poster boy of consumer internet ecosystem in India
"However big or small, make it a good business, make it a clean business, make it a business you are very proud of" - Deep Kalra
With a passion to revolutionize the Indian travel industry, Kalra weathered the worst setbacks through his visionary decisions and persistence. And since the last few years, he has contributed to the Indian startup ecosystem through angel investments. His investment portfolio includes notable startups like Dunzo - an online delivery platform, Mitron - a short video app, and Park+ - an online parking platform.
Apart from working for the startup ecosystem, he is one of Ashoka University’s founders and is a part of its governing body. He entered into a social space by founding "I am Gurgaon" - a Gurgaon based NGO.
Journey of MMT
After completing his MBA from IIM Ahmedabad, Deep worked for corporates for eight years. Amazed by the power of the internet, he launched MakeMyTrip with Rajesh Magow, Keyur Joshi, and Sachin Bhatia in 2000. MMT in those days was way ahead of the time, so they focused mainly on USA tourists traveling to India. Then came the dot-com bubble and 9-11 attack blocking the company’s way to raise capital for growth. Kalra and the team had to invest their own money, work without salary for over a year and cut back the workforce by half.
A glimmer of hope appeared when Indian Railways launched an online ticket booking system, changing the mindsets of Indian travelers. MMT grabbed this opportunity and partnered with IRCTC. The rise of low-cost carriers in the aviation sector encouraged flight travel and MMT became a travel agent for these carriers. And the company never looked back since then.
In 2010, MMT launched its IPO on NASDAQ and made a series of acquisitions, including HotelTravel and EasyToBook to expand its portfolio outside India. MMT ventured into new territories to capture the Indian online travel market. They acquired GoIbibo for $1.8 Bn in 2016, marking the biggest deal in the space. This brought MakeMyTrip, GoIbibo, redBus, Ryde and Rightstay under one umbrella, with the combined entity holding a 60% market share.
Today, the behemoth holds more than 50% market share in all the verticals - Hotels and packages, Air ticketing, and Bus ticketing. From travel and hotel booking to travel management and cab services, MakeMyTrip’s “travel super app” provides all kinds of products and services related to travel and tourism.
With margins as high as 22%, hotel booking contributes $360.1 Mn - 49.8 percent to the company’s adjusted margins (adjusted margin comprises commissions, fees, and incentive payments). MMT and GoIbibo still continue to operate differently because of the difference in the target customers they serve. GoIbibo targets budget customers, while MMT targets premium customers as well. To give you a perspective, MMT earned booking revenue of ~$54 per room per night in FY2020, which is around the same as RevPAR of $48 for 4-star hotels in India.
Though small in proportion, bus ticketing revenues registered the highest growth, 25.5 percent YoY in FY2020. 50% of the total bus tickets booked online were booked through redBus. And with only 40% online penetration in the segment, redBus has an excellent opportunity for growth.
Overall, for every $ of booking revenue, MMT earned a 10.6 percent margin and incurred 12.9 percent of operating costs in FY2020. As the marginal cost of serving an extra customer is low, the faster it grows, the earlier it becomes profitable.
Then came COVID and completely halted the travel and tourism industry for quite some time. Like every other industry player, the pandemic did give MMT a hard blow, with hotel revenues plunging to just 5 percent in the first half of FY2021. Thanks to the flexibility due to a business model with less fixed costs, MMT somehow managed to decrease its losses from $36 Mn to $21 Mn YoY in the quarter ending Sept 30. Though the company seems to be following the right path, it is not as easy as it looks.
The Road Ahead
By 2029, India’s tourism sector is expected to reach $488 Bn, accounting for 9.2% of the total economy. - IBEF Report, 2021
The competition in the industry is fierce, with everyone trying to cater to the changing consumer needs. OTAs are constantly innovating the way they operate to grab their market share. The shifting trend towards alternative accommodations and budget hotels has necessitated big players to constantly rethink their business models.
As the industry starts healing from the COVID scars, it will witness a number of mergers and acquisitions leading to consolidations. Sitting on about $198 Mn cash, debt-free MMT further plans to raise funds to acquire its peers. Apart from investing $150-200 Mn in Oyo, Airbnb has formed a strategic partnership with Oyo and is now listing Oyo properties on its platform.
It’s not just OTAs that are fighting in the race. Hotel chains like Marriott, Hilton, and Hyatt are pushing for D2C (Direct-to-Customer) strategy to reduce their dependence on middlemen. E-Commerce giants Flipkart and Amazon are dipping their toes in the travel waters threatening to disrupt the OTA space.
And then there is Google - the elephant in the room! Equipped with the strongest ecosystem comprising Google Travel, Flights, Maps, and Search, Google has an unfair advantage over others. Since Google earns billions of dollars every year from OTAs for being a gatekeeper for online travel planning, it will be interesting to see what Google does with their venture into this space, if not kill them all.
This article is co-contributed by Rohit