The BOOT is back for 2009 with 5 predictions for the online travel industry

The BOOT is back for 2009. Tanned (a little burnt), rested (though could do with another big sleep in) and ready for action (kind of). Inspired by the Travolution article "Predictions for 2009" I am going to open up the 2009 edition of the BOOT with my predictions for the travel industry. Here are my five predictions for 2009:

1. There are more airlines to go bust. In fact before the end of 2009 a big carrier will go bust or be taken over as a saving measure. Alitalia is a gimme so I wont count the impending Alitalia failure/restructure as a successful prediction. Another big carrier (or two) will fail or be bought in 2009. Update - if you want a list of all of the 21 airlines that died in 2008 check out this post over at cranky flyer;
2. Domestic travel growth will surprise us all. I am a noted optimist when it comes to the travel industry surviving shocks and set backs. People will still travel in 2009 - they will just go short. Consumers will look for domestic deals and shorter trips to enable them to enjoy the travel and breaks they want without the long-haul price tag;
3. Consolidation is not yet finished: In 2008 TripAdvisor bought everything in sight, Venere first bought Worldby then joined the extended TripAdvisor family by being acquired by Expedia, Microsoft bought Farecast, Priceline bought Agoda, Wotif bought AsiaWebDirect and Travel.com.au and more. The consolidation in the online travel industry will continue through 2009. There are too many bargains out there;
4. 2009 will not be the year of mobile for the travel industry: Every year since 2000 we have been talking about the mobile revolution in online travel. This year I rejoined that chorus of mobile revolution fan boys while at PhoCusWright in LA. With the Global Financial Crisis (I am told there is even an acronym for this - GFC) in full swing I think the larger players will pull back from their mobile plans and focus on core products, costs control and customer loyalty. Mobile will have to wait until 2010; and
   
5. The dinosaurs will screw up and come out of the GFC even weaker: The big offline players have been screwing up online for a long time now. The good ones have managed to avoid destruction due to the booming economy and the sale of complementary products (land, car, package and especially cruise). The boom is over and the pain is hitting. Just recently Flight Centre announced a likely 33% drop in profits for 2009. In the past I have given advice on how you would know that offline players like Flight Centre "get it" and are ready to execute online. The GFC actually provides a fantastic opportunity to "get it" and join the online travel revolution. Expectations for performance are low during a bust giving offline players time to shift focus and make investments in areas they have previously ignored online. But I think the offline players will miss this chance. Instead of emerging from the GFC with a stronger online focus they will dig even deeper into the offline hole and emerge even further behind the online industry leaders. As evidence of this see the recent interview from new Stella Travel (Australia's number 2 offline player) CEO Peter Lacaze where he confessed to being an online sceptic. [Disclosure - in the past I have consulted to Stella on their online strategy].

UPDATE - Prediction number 6 - the last minute model will come back. I called the last minute model as being on hiatus in May 2008. It will come back as hotels start to hurt during the GFC.

Stay tuned to see what I get wrong and right here. The BOOT is back for 2009.

thanks to Tokyo Boy on flickr for the photo

Not to be outdone by TUI - Thomas Cook drops too much do buy hotels4U

Seemingly in permanent catch up with TUI, Thomas Cook has shouted "look at me, I now get it online" in announcing that it has bought bed bank hotels4u.com for GBP21.8mm (Telegraph story here) - and there are more to come they insist (according to e-tid).

Very limited stats and info behind the deal:

• management to be retained. Haim Perry will stay on as MD (retaining 25% of the company as part of an earn out); and
  
• Hotels4U has 500,000 customers a year and "access to" 30,000 hotels.

Thomas Cook's website was the biggest travel site in the UK (in terms of traffic) from 1998-2002 (or thereabouts). This was despite a dismal site, lack of inventory and a general disregard from the management. At this time, Thomas Cook had the opportunity to look at Amex's missed chance in ruling the US online market and solidify its online lead in the UK. Instead it followed the well trodden offline dinosaurs strategy of being trapped in the headlights of the incoming online meteor shower. Another great BOOT mixed metaphor meaning that Thomas Cook stuffed up at the turn of the century in ignoring all of the advice and opportunity to establish UK online dominance. Now they have to play catch up by overpaying for a small provider.

Flight Centre and PEP: This time it is really over

First Australasian private equity giant Pacific Equity Parnters (PEP) wanted to buy all of Flight Centre. But shareholder Lazard said "No".

Then, PEP and the Flight Centre founders came back fighting with a new proposal to give PEP control of 33% of the business - a proposal that did not need shareholder approval.

Now the word on the street (or stock exchange in this case via e-travel blackboard) is that this deal is also dead. This time the deal died not at the hands of an errant shareholder but at the hands of the founders. Seems the founders commissioned an expert's report from Ernst & Young that valued the company at more than was being offered by PEP. In business stock exchange announcement double speak the Chairman Bruce Brown is quoted as saying

“While the creation of a leveraged joint venture had the potential to deliver significant benefits to FLT and its shareholders, it was also a highly complex and costly transaction, and the value proposition has become considerably less attractive for shareholders as a clearer picture of the costs of the transaction has emerged,”

No idea what that means. This one sentence has those great "stock" phrases "creation of a leveraged joint venture" and "value proposition". Wouldn't we all love it one day to see a Chairman say "the financial terms were crap and we think we can do it better alone".

Regardless of the way they phrased it, I do not believe that Flight Centre can do it alone. As I said before this highly successful business needs a business model rewrite. It needs a clear and unambiguous refocus on Internet distribution. I was asked once how a shareholder would be able to tell that the Flight Centre management was taking the Internet seriously. My answer was a quick and simple one - you will know that Flight Centre "gets it" online when the Chairman announces:

1. That a new Head of Online has been appointed, reporting directly to the CEO with direct control over all brands online, free reign on how to market and promote those brands and with a fund of money to invest in large acquisitions;
   
2. That a target for online sales has been set at [some big number like 20%] of turnover by 2009 (maybe 2010); and
3. That Flight Centre is embracing the need to be a technology company. Setting up a team of developers (or buying a development shop) devoted to online only activities, reporting to the new Head of Online.

That is - separate online from offline, make online growth the number one target of the business and embrace the geeks needed to make it happen.

If history is a guide this is not the type of announcement we could expect out of Flight Centre under the current management or structure. They will need another private equity deal or other structural shake-up to provide the drive for this change.

UPDATE - News reports are that the PEP is very unhappy with this decision (no surprises). The amazing part from the report is after PEP and Flight Centre working on this deal for what must be more than a year, the SMH is reporting that PEP and its advisers found out that the deal was dead with only 20 minutes notice before Flight Centre send the obituary to the stockmarket.

UPDATE 2 - Am trying to understand the Flight Centre Board machinations that led to this deal being killed by Flight Centre. Specifically - who on the Board was pro the PEP deal and who was against it. From my original post it seemed that the Board was behind Chairman Bruce Brown when he said the deal was a dud. But he update with news reports indicating that PEP has almost no warning of the deal being pulled indicated that there were some senior execs/Board members that were as surprised as PEP was.

A quote from CEO Graham Turner (in August 24 2007 Travel Today quoting an AFR.com report) confuses things even more. He says

"The shareholders have been the big losers in this [the failed bid]...I suspect Iwill be proved right in two or three years when shareholders could have got a serious dividend or buyback as well as retained significant equity in the company."

This indicates that Skroo is unhappy with the failure of the bid and means that Flight Centre's top boss and largest shareholder does not agree with the structure of the company. Weird.

The BOOT goes Old School at an ATEC industry lunch

Has been a long time between drinks but your BOOT correspondent attend an "Old School" industry event today. I went along to the ATEC NSW branch meeting and lunch. ATEC is the Australian Tourism Export Council - the industry group for supporting and promoting the inbound tourism industry in Australia. A place/group for Government, Inbound Tourism Operators (ITOs) and Suppliers to meet and promote the industry.

As an event it is not a usual place for an online retailer to spend time. The talk at the event is typically about issues that do not often cross my mind such as "series growth", scheduling of famils, brochure placement and cursing airline capacity constraints and actions (OK maybe I do the the last part). What was on interest was that since my last "traditional" industry event was not just the the increased talk about online retailing and the challenges face by that but of the impacts of dynamic pricing, direct connections, flexible allotments and advanced revenue management techniques. This should indicate a change in the whole industry but the vast majority of this talk was coming from the suppliers (especially hotels) and not from the ITOs and intermediaries. Clear evidence of the continued shift in power back to the hotels in the traditional industry brought about by the overall economic good times. and that the Internet industry is mature and finally changing the way the traditional industry works and operates.

Flight Centre and PEP: Time to have a Rupert Murdoch moment

The Flight Centre deal with PEP is definitely back in action. I raised the potential of a new deal a few weeks ago. As you may recall - PEP made an all or nothing bid for the whole company which (like the Qantas buy out) seemed like a dead certainty until a particular shareholder (in this case Lazard) held out. Now the deal is back with a structure that does not require shareholder approval but gives PEP a big say in the running and gives current big Flight Centre shareholders a big dividend.

My views on Flight Centre are clear. They need to have a Rupert Murdoch like wake up. This is where the CEO of a large corporation turns to the senior execs and says "we missed the early signs of the internet but I am going to focus everything I do from now on to catching up". In Murdoch's case they caught up by buying MySpace, Photobucket, Rotten Tomotoes, IGN and more. Graham Turner, PEP and gang need to accept that they are late to the internet as a channel, accept that the internet is more than a side bar activity and take immediate acquisition and business transformation steps to join the internet revolution or wake up one day and find this newly restructured business losing more and more market share to online upstarts (Webjet, Travel.com.au and Bestflights.com.au) and online powerhouses (Expedia, Travelocity and Travelport).

Either hotels and operators in Europe are still out to lunch on the Internet or the EC is

Guest Editor Post from Michael Potts of e-interactive

I noticed today that AFP put out an interesting press release on the back of the ITB 2007 Travel Fair held in Berlin earlier this month called “Internet becoming indispensable to European travel industry”. Related to the use of internet by European travel retailers, it mentions that the European Commission (no reference dates provided) has published data on the proportion of European travel suppliers and intermediaries providing the ability for customer to booking online.

According to the figures only 36% of tour operators provide online booking services, whilst 40% of package operators (the difference is subtle between these two, perhaps too subtle for the end consumer who wouldn’t notice a difference) and 62% of hotels allow booking online.

Only 36% of tour operators? Wow….! 38% of hotels don’t have a website? I’m in the right business it seems! I have tried to find the full version of this research and failed, however these numbers do feel incredibly low for a mature market.

Given that in the US, online travel revenue will exceed offline revenue in 2007 (PhoCusWright's U.S. Online Travel Overview, Sixth Edition, 2006), I would imagine that the percentage of suppliers and intermediaries providing online services is much higher. Is this a great opportunity for worldly wise 3^rd party sellers and OTA’s like Expedia to offer a web development service for these 1000’s of hotels? And is this why so many of these 3^rd parties are being allowed to advertise on European hotels brand names?

Flight Centre privatisation in trouble

Word on the street (ok - from Travelweekly) is that the privatisation of Flight Centre is in trouble. The billion dollar plus deal was announced in October but is seems that management and the board are not going to get to the magic 75% voting mark to make the deal happen. The article says that it is Lazard Asset Management (28% owner of the company) that is holding out. Chances are they are simply looking for an increase in the bid.

However I would caution anyone against calling the deal dead. The PE firm behind the deal - PEP - are not going to give up too easily and with $400 plus million resting on the deal, the management including Scroo Turner are certainly going to keep fighting. Chances are we will see a revised bid very soon.

That said - this is not a slam dunk must do deal for PEP. I have not done the financial analysis so cannot say for certain if the value is right or wrong. But I do know - and said before- that Flight Centre has not reacted properly to the rise of online travel, to reductions in airline commissions, to changing staff patterns, to the international challenges (especially in the US and UK) or to the need to have more depth and breadth in directly contracted land product. If the deal does go through, PEP will need to address all of those issues


UPDATE - Ouch - Flight Centre stock is down more than 10% as a result of all this.

On your marks, Jetset, go (well next year we will)

I have gone from feeling contempt for offline agents that have been slow to move online to almost pity. Clearly Flight Centre has made huge mistakes online (as we discussed here). Now we have a better one. Large Australian franchise network - Jetset Travel - have announced boldly a plan to "step up its online offering with the launch of a fully bookable website next year".

Unbelievable. Simply Unbelievable.

10 years after the launch of Expedia, 9 years after the float of Travel.com.au on the ASX, 7 years after the birth of comparative shopping engines with the launch of Sidestep and 6 years after the launch of Wotif, Jetset have announced that they will have a site up and running by mid next year. The CEO is competing with himself for understatements of the century when he says that Jetset is "late to market...and..to some extent playing catch up" and even better "The lack of a bookable online engine was my first priority".

That truly is like one dinosaur up to their nose in tar, with a tsunami, meteor and earthquake all on the way, turning to another and saying "next year I am going to grow an opposable thumb"

Here is the full article thanks to Travelweekly.

Scroo goes private, pockets hundreds of millions and blames suppliers

Flight Centre was once the darling of the Australian travel industry, stock market and corporate culture watchers. They were expanding around the globe, growing at 20% a year and had established a city, village, country, family etc culture that was the envy of retailers everywhere. Somehow it all started to go wrong. First Ansett went bust, then Qantas pulled commissions, the wrong CEO was appointed, the push in the US was failing, 9/11, SARS, domestic downturn, Santa Claus was late, the Tooth Fairy decentralised purchasing and dropped spending by 20% and Dr Seuss inc stopped booking long haul.

As a result of all of this Flight Centre has decided to go private. To de-list and join the private equity bonanza. This will make the founders - especially Graham "Scroo" Turner - hundreds of millions while maintaining a lot of control (btw the staff are not happy). As part of the transaction Turner says that pressure will be applied to suppliers to improve the margin decline from reduced sales per store and airlines butchering of commissions.

That all sounds possible but truth be told I think it is because they have executed poorly online. For such a strong brand and company with such strong cash flows and supplier volume Flight Centre has done a terrible job building an online business. It is not like they haven't had the chance. Every single one of the big online travel B2B and B2C players have been through the Brisbane headquarters of Flight Centre (me included) trying to sell a solution for launching, enhancing, growing, molding, making etc Flight Centre online. Flight Centre was always receptive and keen but the culture that made them strong offline made them weak online. Their strength in incenting individual stores to think independently and drive sales in a decentralised fashion impeded the ability to create a centralised online sales function - stealing sales from the stores. Flight Centre was caught in the classic offline retailer dilemma - how do I grow online and not cannibalise offline. Well...you can't.. and they should have made that decision quickly in 2001 and gone on to dominate online travel in at least Australia. Flight Centre spent too long wrestling with this dilemma and thus ceded the online space to the Wotifs, HotelClubs, Webjets etc of the world. Purchases of Quickbeds and Travelthere were not aggressive enough plays and once bought were under invested in both in technology and marketing.

You can't doubt the power of the Flight Centre brand but they had the chance to learn from the mistakes of American Express in the US and Thomas Cook in the UK and take their huge brand online and own the market. Going private looks like a great deal for the Flight Centre management, a good deal for shareholders but it is an admission of the failures of the Flight Centre online strategy.