European Players Unite to Challenge Global OTA Dominance - By Carroll Rheem, Director, Research, PhoCusWright Inc.

In a Feb. 9 release, Amadeus announced its intention to sell Opodo to AXA Private Equity (GO Voyages) and Permira Funds (eDreams) in a transaction that values the company at €450 million. As part of the agreement, the three OTAs will also be locked into a 10-year commitment to Amadeus GDS services. The deal is currently pending approval from Amadeus' Board of Directors and E.U. regulators; neither is expected to present a challenge.

The question is – assuming all three OTAs merge into one company, what will it be? A powerful pan-European player with a broad range of local expertise that can challenge the global giants? Or a mismatched, air-heavy hodgepodge of disparate brands and platforms that will eventually stagnate from a lack of product diversification? The answer is most likely all of the above. While every company has strengths and weaknesses, this one will have truly significant points on both sides. Here are some of the key factors at play:

STRENGTHS

A solid base.
Opodo has always had a pan-European footprint, but GO Voyages and eDreams bring a strong presence in France and Spain – markets that are still relatively immature in terms of online booking adoption. Spain, in particular, is a place where the global players are weak. This leaves the new group with healthy growth prospects for the next few years. They have mastered the markets that the global brands have struggled with. In addition, the brands may prove to be successful in emerging marketplaces such as Eastern Europe due to their experience in early adoption-phase markets.

Locals are in the know.
Traveler perspectives and priorities are substantially different across Europe. The ability to merchandise effectively on a local level provides an advantage for home-grown OTAs, particularly in markets where travelers have markedly different behaviors and preferences compared to U.S./U.K. travelers. The newly banded OTAs can also help each other enter new markets more quickly and effectively by leveraging each other's local knowledge to improve their offerings market to market.

WEAKNESSES

Integration: Between a rock and bad margins.
If observing the integration efforts of global OTAs in Europe has taught us anything, it is that messing with operations in the name of efficiency and consistency can preoccupy an organization to the point that it actually dissolves value. Orbitz/eBookers may finally be capitalizing on the re-platforming it underwent, but it has lost substantial share and has a brutal game of catch-up to play. Priceline has managed to be a spectacular exception among the OTAs that bought their way into Europe, in part by not ruining Booking's secret sauce with Priceline ingredients. However, Booking's model was very different from Priceline's; their systems did not have a lot of redundancies. In contrast, Opodo, GO Voyages and eDreams are all air-centric (though eDreams is slightly less so compared to the others). Part of what makes the concept of a merger appealing is operating efficiencies. It will be difficult for them to execute a single platform without eroding at least one if not all three brands. On the other hand, keeping three different systems does not make operational sense.

It's not as easy as it looks.
Multinational organizations even within the E.U. have to contend with challenges that neither GO Voyages nor eDreams have mastered. Neither has established significant business outside of their home markets. Opodo certainly provides a pan-European framework, but its growth has not kept pace with Priceline and Expedia in the past couple of years. The negative side of locals being in the know is that it is extremely difficult to be a local in more than place. The global players have a few notches on their belts with this; Go Voyages and eDreams do not.

They could have been a contender… but not without hotel.
Being an air-centric OTA in earlier stages of online adoption is not such a bad position. Online momentum starts with airline tickets, and these companies will enjoy healthy development as Europe shakes off the throes of recession in the next few years. But subsequently, air growth will begin to plateau while hotels will still be going strong. More importantly, hotels are where the profits are. The fragmentation of the lodging sector in Europe guarantees there is plenty of fuel for OTA hotel sales to climb onward and upward for a long time to come. Not one of the three OTAs in this transaction has a robust hotel practice, which greatly limits long-term growth prospects. Trying to challenge the likes of Priceline and Expedia without an answer for hotels is like bringing a knife to a gunfight.

Despite all the ordeals they face, it is important to recognize that GO Voyages and eDreams are healthy companies that have achieved impressive results in their markets. The skills and ingenuity that earned them their positions will no doubt help them through the acquisition of Opodo and the likely merger ahead. While they may not create a viable competitor to wrestle the top positions away from Priceline and Expedia, they will take a place among the largest global OTAs, and we look forward to seeing them make their mark.

A comprehensive picture of the European online travel market is available with PhoCusWright's European Online Travel Overview Sixth Edition.

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