The Surprising Financial Upside of Hotel Attachment
Airlines naturally focus on maximising revenue and profitability from selling flights. Transporting customers long distances at high speed is a massively complex endeavour which requires tremendous capital investment and attention to operational details to ensure safety. It is a valuable industry that is vital to the global economy.
When it comes to selling travel more generally, however, what type of companies do global financial markets reward disproportionately? The answer to this question is surprising, and the underlying reasons highlight how airlines can optimise their financial results.
Financial Markets Reward Online Travel Intermediaries
The airline industry is renowned for being asset intensive, low margin, highly cyclical, and vulnerable to periodic demand and supply shocks. For some investors, this makes purchasing equity in airlines more of a short-term trade than a long-term investment. Because of the industry’s risk profile, investors are willing to pay only about USD $0.50 for each dollar of annual revenue generated by the typical airline.[1] As a result, the value of all publicly traded airlines added together is USD $345B at the time of writing.[2]
By contrast, the value of all publicly traded online travel intermediaries is USD $376B[3] including the portion of Google’s value derived from the travel segment, which we estimate to be USD $90B[4]. This outsized valuation is driven by the ~USD $6.00 which investors are willing to pay for each dollar of annual revenue produced by consumer services companies like Booking Holdings.[5] That is 12 times what an investor is willing to pay for a dollar of airline revenue!
Why do investors assign such a high value to a dollar of online travel intermediary revenue? In short, their revenue produces a higher margin which investors believe will grow faster over time with less risk. Perhaps most interesting is how they source their revenue. A close read of online travel intermediaries’ financial reports shows that 90 percent or more of their revenue – and, therefore, valuation! – is sourced directly or indirectly from hotels and other lodging providers.
How Much Value are Airlines Leaving on the Table?
Airlines are travel sellers too, and most sell more of their flights through their own online channels than any other. They therefore have the same opportunity to attach hotel bookings – and dip into hotel marketing budgets – as any other online travel intermediary. Understandably, airlines’ limited technology resources are often focused on delivering a superior shopping and customer service experience for their core products.
We believe, therefore, that airlines under-index when it comes to hotel attachment. How would their financial results be different, though, if they were to invest in capturing their fair share of online hotel bookings?
We spoke to Stephen Fitzgerald a hotel distribution veteran to provide us with a few assumptions to quantify the opportunity. Steve estimates that 26 percent of global hotel bookings made online are attached to an airline itinerary. If we assume that 90 percent of online travel intermediaries’ revenue comes from hotels and 26 percent of that revenue is associated with an airline itinerary, then we can calculate that $88B of online travel intermediaries’ equity valuation comes from attachment of hotels to air journeys. By extension, if we assume financial markets are willing to pay USD $6.00 for each dollar of an online travel intermediaries’ revenue, then this means there is USD $15B of hotel marketing expense available to reallocate from online travel intermediaries to airlines.
According to Steve’s assumptions, airlines are already capturing roughly 5 percent of online hotel bookings, and therefore USD $790M of hotel marketing expense, via their own channels. By contrast, Steve estimates that 80 percent of airline itineraries booked online are captured by the airlines’ own channels. If airlines were able to capture the same share of online hotel marketing expense related to air itineraries, then Steve calculates the number would rise to USD $12.6B or about USD $4.70 per passenger boarded booked via an airline website!
Furthermore, if the financial markets were to reward airlines with the same revenue multiples for this newfound revenue, then it would increase airline valuations by about $70B or 20 percent! Clearly the stakes are high and the ROI of optimising the sale of hotels on airline websites is worthy of close consideration.
What Options are Available for Airlines to Capture the Lost Value of Hotel Attachment?
Airlines that want to maximise their hotel attachment rate and associated commissions largely have two choices: a standalone white label solution from an online travel intermediary or a third-party technology solution which offers a fully integrated customer experience. Each approach has its pros and cons.
Standalone White Label Solutions
Airlines opting for standalone white label solutions re-distribute the content and services of their online travel intermediary partner. The primary advantage is that it is easy to implement and requires little attention from the airline on an ongoing basis, as the online travel intermediary does it all. However, this approach has its challenges. First, there is minimal product differentiation between the airline’s channel and those provided by other re-distributors of the same content and services. Second, airlines directly compete with the online travel intermediary’s own channels, which are often more sophisticated and compelling. As a result, conversion rates from white labels can be disappointing. After all, why would a customer book the online travel intermediary’s content through an airline’s site if the experience is subpar?
Fully Integrated Technology Platforms
By contrast, airlines can choose a fully integrated technology platform. These platforms provide several benefits not available in white label solutions:
They enable a more seamless end-to-end experience for customers. For example, an airline can leverage its core airline website traffic to drive demand for package holidays. They can employ techniques like “switch sell” during the booking flow, encouraging flight-only passengers to consider holiday packages that include hotels. The integration is real-time and in-path, ensuring a compelling experience.
They can combine content from hotel and other lodging providers in flexible ways. Behind the scenes, airlines can customise their platforms to connect to multiple hotel suppliers, aggregators, and channel managers via APIs. Once sourced, airlines can use this content to dynamically combine public rates, private contracted rates, and fares into dynamic packages, showing customers immediate value indicators.
They provide superior margins. Airlines can negotiate rates from hotels and other lodging providers which are significantly lower than those available through white label solutions, adding healthy margins to packages.
A fully integrated technology platform can require more effort to implement and manage than a white label solution. However, when deployed correctly, it offers substantial rewards, including a significantly higher ROI.
As this research demonstrates, the financial potential of incorporating hotels as a core component of an airline's ancillary portfolio is substantial and presents a compelling opportunity. Currently, airlines significantly under-index in capturing this value compared to online travel intermediaries. By strategically investing in hotel attachment, airlines can secure a significant share of the USD $15 billion hotel marketing expense currently directed through intermediaries, while potentially boosting their overall valuations.
To maximise this opportunity, airlines should consider moving beyond standalone white-label solutions, which lack differentiation and competitiveness. Instead, adopting a fully integrated technology platform offers numerous advantages, including a seamless end-to-end customer experience, dynamic packaging capabilities, and superior margins from negotiated hotel rates.
The time is ripe for airlines to embrace these integrated solutions and realise the full financial upside of hotel attachment.
Get in touch to find out how OpenJaw can help and to learn more about our industry-leading t-Retail Platform.
References
[1] Based upon the price to sales ratios of a selection of large, global airlines on May 22, 2024, as reported by www.seekingalpha.com.
[2] According to https://companiesmarketcap.com/airlines/largest-airlines-by-market-cap/.
[3] According to https://companiesmarketcap.com/online-travel/largest-companies-by-market-cap/.
[4] According to Skift (https://skift.com/2022/05/05/can-online-travels-titans-ever-break-free-of-google/) Google earned USD $8.9B from its travel vertical in 2021, which we assume has grown proportionally with Google’s overall revenue and attracts Google’s current price-to-revenue multiple.
[5] According to https://www.stock-analysis-on.net/NASDAQ/Company/Booking-Holdings-Inc/Valuation/Ratios - :~:text=Price to,sales %28P%2FS%29 6.24.