The Indian online travel agent (OTA) space became a bit smaller this week, with Travelocity buying out Travelguru. Although the terms were not disclosed the media is reporting the acquisition was valued around USD 9-10 million. The insiders know the true number but typically when a successful exit is announced all the players want to highlight the fact by saying “we returned 5x, 50x or whatever to our investors…blah, blah, blah.” I didn’t see or hear such a statement and honestly that’s not the point of this post. Instead it’s about the current economic viability of the OTA’s and the Airlines. OTA’s are much more then just airline ticketing but I believe they are a large financial component for most OTA’s.
Let’s first start with the product – air travel. It’s no secret the airline industry went through a massive airplane buying and airport construction binge since 2005. With the economic environment we are all feeling the after effects, carriers are delaying deliveries of new planes, newly constructed airports are jacking up their user development fee (UDF) and the aviation turbine fuel (ATF) surcharge is killing everyone’s balance sheet. The UDF is a catch-22, with the decline in traffic, airports want to charge more to makeup for the short fall but this pushes away consumers. With the drop in tax collection, the government needs money as well and hence the ATF is a way to recover some of that tax money. This puts the airline in a painful spot, Air India is begging for a government bailout of USD 2-3 billion to help alleviate the situation. Secretly, the private carriers would love a bailout as well, but I doubt Praful Patel, Minister of Aviation, can save face with the public if he bails out Kingfisher or Jet Airways.
One of the ways the airlines have dealt with this situation is to cut the commissions paid to travel agents. This recently led to many travel agents refusing to book flights for certain carriers since it wasn’t worth their effort. The OTA’s that have high fixed costs and shallow pockets are going to face the music very soon. Most OTA’s started during this binge when the number of passengers traveling in India looked like a hockey stick (J curve) and hence all the VC money thrown at them. Some of the OTA’s have looked at bus and train travel which have very small margins but potentially a hugh number of travelers. But, most of those travelers are not connected to the internet. How many OTA’s will exist in their current avatar 18 months from now? It’s anyones guess.
Random Fact: TravelGuru was started in 2006 by Ashwin Damera and Ganesh Rengaswamy, they both attended Harvard Business School (HBS). Travelguru was selected in 2005 as the Harvard Business Plan Contest winner.