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Margins of online travel operators plunge

Forum Gandhi Mumbai | Updated on December 12, 2020

As travel regulations continue to evolve, travellers are willing to wait it out   -  GRAHAM BARCLAY

To woo customers amidst the pandemic, players forced to offer discounts, cashbacks

Margins for online travel operators (OTAs) have come down by 30 per cent as they have had to offer discounts, cashbacks and flexible travel booking to overcome the slump in tourism due to the pandemic.

In order to attract customers to travel, industry players like EaseMyTrip, ClearTrip, MakeMyTrip, SOTC, ixigo, and Thomas Cook among others have had to offer discounts as much as 50-60 per cent. Even hotels like ITC Hotels have launched a ‘100 per cent back’ campaign. Players like Thomas Cook, which focus on complete packages, have had to partner with key domestic carriers and hotels for deals.

“Our teams have been able to contract discounted rates across key partners and we’ve been able to pass on the benefit to customers to give fillip to demand - with attractive value add-ons and discounts ranging from 10-20 per cent as compared to last year,” said Rajeev Kale, President & Country Head – Holidays, MICE, Visa, Thomas Cook (India) Ltd.

Along with this, it has negotiated special flight-inclusive deals with the added benefit of flexibility of date changes and this is seeing a very encouraging uptick.

Yet, it hasn’t been able to use its inventory more than 65 per cent.

In the airline segment, Both ClearTrip and EaseMyTrip said that the travel industry’s margins or commissions are driven by volumes. ClearTrip’s Head of Corporate Strategy Aditya Agarwal said that “20 per cent of the margins are linked to volumes which have nosedived this fiscal.

India is anyway a low cost carrier driven market, so margins are slimmer anyway, this along with lower volumes is a double whammy for the industry players.”

Volume-driven industry

Currently, for MakeMyTrip and Cleartrip hotel bookings for the Christmas and New Year period stand at one-third during the same period last year. As state-wise travel regulations continue to evolve, travellers are willing to wait it out and firm up their bookings within a week or less from the travel date. The hotel segment is anyways deep discounting driven, according to Agarwal. A Mckinsey report on the travel industry in September explained that the OTAs have highly variable cost structures, which allow them to respond quickly to market downturns and preserve profitability better than other industries. However, it is a known fact that the travel industry is a volume-driven, margin led industry.

While they can control the costs of marketing, it cannot control the volumes because on a year-on-year basis according to industry data, travel has recovered only 25-30 per cent.

EaseMyTrip’s co-founder and CEO, Nishant Pitti, explained that the OTA, usually has two types of models: Contract based model for five stars, where upfront inventory is purchased, and a commission-based model.

In both these segments, Pitti’s OTA has had to offer higher value to the hotel players. For some hotels, EaseMyTrip has had to purchase an advance deposit for a hefty amount.

“We have given an advance deposit for ₹50 lakh or crore instead of purchasing inventory from the hotels. This gives us the ability to utilise the inventory at our convenience, and we get a better discount from hotels.” In the flat-price model, which usually applied to standalone hotels, EaseMyTrip has been able to get the “the base hotel prices at a 30 per cent lower rate to us, compared to last year. This discount can be passed on to the customers,” he explained.

McKinsey’s report

McKinsey’s report said that in the future, OTAs might consider moves across the value chain. “Suppliers have long been working to limit their dependency on the desirable volumes OTAs provide a gateway to. In this new world order, though, OTAs might be stretching their thinking in finding ways to secure room inventory (or airplane seats and cars, for that matter). Effectively splitting the commission, independent hotel owners might also get better returns from using an OTA brand for their hotel,” McKinsey’s report stated.

Published on December 12, 2020

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