Posted by: Kathy Dragon | October 21, 2008

Where’s the travel industry headed?

October 21, 2008

So it was no surprise that the economy dominated much of the discussion at PhoCusWright’s Town Hall Meeting in Palo Alto, CA, on October 8. In a Q&A session moderated by PhoCusWright president and CEO Philip Wolf, the one question on everyone’s mind was: “Will the 2008 economic meltdown be as bad for our industry as September 11, 2001?”

The answers to this question, of course, vary. Certainly, there are key differences between the two events. The terror attacks were a direct assault on the U.S. and aviation industry. The economy was already suffering from the tech stock bubble burst of 2000. Then the September 11, 2001 events virtually froze the travel industry for weeks—if not months—before the eventual thaw. Yet while cutbacks prevailed and some travel companies fell, online travel companies reported surprisingly bright results.

Americans’ fear of flying was tempered somewhat by the low prices available on the Internet, and these low prices helped travelers get back in the air more quickly than anticipated. Representing just 8% of the market at the time, online travel agencies (OTAs) grew at double-digit rates in 2002 as they grabbed market share from traditional travel agencies which did not have access to such low fares and hotel rates.

Most of that market share has since been digested. The online travel industry has grown up and now represents half of all travel sold in the U.S. That means online travel sellers are just as vulnerable to dramatic swings in demand as are offline channels. So if the travel industry slumps, so goes the online travel industry—OTAs and supplier direct sites alike.

And this current crisis is directed more or less at travelers’ pocketbooks. Everyone wants to know, “Just how big will the ripple effect be?” Prices are generally higher and, without confidence in their next paycheck or retirement account, many Americans—corporate and leisure—may simply postpone traveling or only travel when necessary. Such is the fear that grips every travel company today—what if fewer people—a lot fewer—travel next year?

So how did travel industry executives answer the question, “is this worse for the travel industry than September 11?” The answers were yes. And no.

Half of the 36 attendees were pessimistic. One big concern is the effect on investments and innovation. If illiquidity persists, investors may disappoint because once-committed venture/private equity capital is not readily available. Roughly half the attendees at the Silicon Valley breakfast were start-up companies. Attendees also pointed out that this is a global crisis; while the 2001 terror attacks were far-reaching, most of the impact was felt in the U.S. A global crisis could have deeper, more longer-lasting effects.

But others were more optimistic, suggesting money might just flow in a different direction. For example, hoteliers won’t let the genie out of the bottle this time around and flood OTAs with discounted inventory; rather, they’ll put more money in Search Engine Marketing (Google, Yahoo, MSN). Half of the attendees who were intermediaries weren’t even directly reliant on a transactions-based model, making their money on pay-per-click instead. While they’re not immune to a travel fall-off, they’ll reap benefits as travelers diligently search and shop for the best places and deals.

Perhaps the brightest hope for online marketers is that travelers, like in 2002, will flock online in search of lower prices, keeping OTAs, metasearch sites, and even online direct channels humming. After all, as one attendee noted, “the white table cloth dining industry has fallen off a cliff along with the $20 bottle of wine. On the flip side, cheap supermarket wine is experiencing a boom.” So maybe it will once again be chic for online travel to be cheap.

Whatever happens, one remembers Barry Diller’s infamous words at The PhoCusWright Executive Conference in 2002, when asked why IAC paid over US$1 billion for a majority stake in Expedia just months after September 11, 2001. “You know, if there’s no travel, there’s no life,” he emphatically declared.

Let’s hope that’s what travelers say in 2009.

Related Link: PhoCusWright, Inc.

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