Online Travel Agencies' Moats Supported by COVID-19, Key Markets

Although the shares of online travel companies have rebounded from the undervalued levels seen during parts of 2020, evaluating the competitive positioning of Booking (BKNG), Airbnb (ABNB), Expedia (EXPE), and TripAdvisor (TRIP) can prepare investors for action if opportunities occur. We think five key factors influence the network effect advantages that underpin these companies’ narrow economic moats.

• What is the structural impact to demand caused by the global pandemic?
• How are industry operators positioned in the growing alternative accommodations market?
• What is the competitive landscape in the attractive experiences market?
• Who stands to benefit from the large traditional hotel industry?
• What is the competitive threat from dominant technology companies like Google (GOOG)/(GOOGL), Amazon (AMZN), and Facebook (FB)?

In our view, Booking has the strongest network advantage of the online travel agencies, or OTAs, we cover. It boasts the most complete offering of travel content and higher levels of traffic and global awareness across alternative accommodations, experiences, and traditional hotels. We see Airbnb’s and Expedia’s platforms as having solid competitive standing, with the former only lacking a traditional hotel presence, while the latter provides a healthy offering across all verticals. Despite its strength in the experiences market, TripAdvisor has a more mixed moat, in our view, mainly because of meaningful competitive pressures from the likes of Google at present and potentially Amazon and Facebook in the not-too-distant future.

Online travel companies’ network advantages are established by attracting suppliers to post their transportation, lodging, and experience content (supply) on company platforms, which attracts more travelers (demand), subsequently enticing more supply, creating a virtuous cycle that increases value for both new and existing users (hosts and guests). We believe that this edge should lead to excess economic returns for at least the next decade.

COVID-19 Could Benefit Online Travel Companies

We think long-term network advantages for the online travel agencies we cover could strengthen as a result of COVID-19, supported by operator critical mass scale, a recovery in demand in the travel market, and some sustainment of the recent uptick in remote working.

While COVID-19 has derailed the travel industry’s growth trajectory, smaller competitors face increasing challenges in funding the substantial human capital to build relationships with accommodation suppliers and gather crucial information and photos from those properties. These players would also need to spend heavily on advertising to attract customers to the website and finance IT, a data center, and 24/7 customer support services to retain those consumers. Further, Booking, Expedia, Airbnb, and TripAdvisor generate strong and sustainable cash flows to acquire, partner with, or organically build out an attractive travel supply offering, which would prove challenging for smaller operators with less resources to replicate.

We also see Booking, Expedia, Airbnb, and TripAdvisor holding a marketing scale benefit over smaller competitors, and we expect this to grow as a result of the financial strain caused by COVID-19. Expanding traffic advantages further support the network advantage by affording each the opportunity to test and implement platform changes quicker than smaller competitors, leading to an improved user experience and enhanced booking conversion levels.

In addition, we expect the travel market will fully rebound from the global pandemic demand shock, which we expect to drive economic profits for advantaged network operators. Our analysis has found that after demand shocks like 9/11 and the great financial crisis, travel demand made a full return to prior levels in three to four years. While COVID-19 is different from past events because of its global reach, we think travel-related companies could still recover at a similar pace. Our stance calling for a full recovery in travel harmonizes with Morningstar’s long-term outlook for an economic rebound.

We also believe some sustained increase in remote working will aid leisure as well as business/leisure vacations but will be offset by a pullback in corporate trips, resulting in an immaterial impact to overall long-term travel demand and industry network moats.

Airbnb Leads the Travel Market for Alternative Accommodations

We see alternative accommodations remaining a key influencer of economic moats in the online travel industry. Airbnb boasts the leading network advantage and booking share, followed by Booking’s growing presence and Vrbo (owned by Expedia) at number three; TripAdvisor has an immaterial presence.

In our view, the alternative accommodations market is key to operator networks, given the robust mid-20s average online annual booking growth we estimate for it during 2021-25, aided by some sustainability of increased remote working despite persistent regulatory headwinds.

During the last few years, the alternative accommodations market has faced ongoing opposition stemming from the industry’s impact on society (resident quality of life), safety (adhering to codes), and economics (cost of living). As a result, regulations such as requiring guests and hosts to share information with cities, having hosts register for a license to list on alternative accommodation platforms, limiting the amount of days a unit can be rented, and demanding units meet safety standards have been instituted.

We think further regulatory pressure could be offset by the elevated use and awareness of alternative lodging since the onset of the global pandemic, driven by increased remote working and education. This stance is buttressed by the recovery Airbnb experienced in its alternative accommodation business in 2020, as travel options were largely reduced to local road travel versus air destinations during most of last year. Even as concerns surrounding COVID-19 fade once vaccine distribution becomes more widespread, we don’t foresee a mad dash back to office work. When considering our long-term outlook for remote work, we think this modest shift stands to add around 2 percentage points of annual growth to the $144 billion alternative accommodations industry (as of 2019) over the next several years.

We see Airbnb expanding upon its leading alternative accommodations booking share over the next five years, aided by its leading content (supply) and awareness (demand), while Booking also sees some share gain due to its strong listing and global reach network. These share gains will mainly come at the expense of mom-and-pop vacation rental platforms and to a small degree Expedia’s Vrbo, which has relatively muted network effects. TripAdvisor has de-emphasized its vacation rental business, with plans to offer the service through a metasearch approach, placing it in a disadvantaged competitive position, in our view.

Experiences Market Catapults Online Booking Growth

The $171 billion experiences market is another key to online travel companies’ network effects. TripAdvisor is expanding its leading presence here, but Booking and Airbnb are ramping up, with Expedia also harvesting scale at the expense of mom-and-pop owners and smaller competitors.

The experiences market is key to network effects because of its low online penetration, which we estimate was only in the low 20s versus the mid-40s for all online travel in 2019. However, we estimate online penetration of the experiences market will expand to the mid-30s by 2025 and for booking growth to rebound strongly in 2021-23 from the severe COVID-19-related 2020 drop, followed by high teens average annual growth during 2024-25, far outpacing the high-single-digit growth we model for the entire online travel market during that time.

In this market, we see TripAdvisor and Booking as best positioned, while Airbnb and Expedia are also poised to see some share gains, all at the expense of smaller competitors. On the supply side, TripAdvisor is the industry leader with 1.2 million-1.3 million experiences at the end of 2019, of which 345,000 were bookable online. It formed its lead in the attractions market with its acquisition of Viator in August 2014, which gave the company around 500,000 attractions in a very fragmented marketplace.

On the demand side, we find that larger travel platforms have an awareness and traffic edge over niche offerings. For instance, TripAdvisor holds a top 10 travel app spot in 26 countries (as of Jan. 26), and tripadvisor.com attracted 90.2 million visits in December 2020. This compares with the niche operator Viator’s top 10 app presence in 0 countries (as of Jan. 26) with viator.com generating 4.5 million visits in December. Other large platforms also show awareness and traffic advantages relative to other niche players.

As a result of the supply and demand presence captured in the experiences market, we calculate that the larger travel platforms of TripAdvisor, Booking, Airbnb, and Expedia combined booking share will expand to over 20% in 2025 from 7% in 2019 at the expense of niche and mom-and-pop operators.

Size of Traditional Hotel Market Crucial to Online Travel Companies’ Moats

Booking holds the leading position in the traditional hotel market, followed by Expedia and then TripAdvisor. Airbnb’s core alternative accommodations put the company in a more challenging position to expand in traditional hotels.

Traditional hotels are a key influencer of online travel companies’ network moats, in our view, because of the market’s $548 billion booking size (31% of the $1.8 trillion 2019 total travel booking market). This trumps the $144 billion and $171 billion spent on alternative accommodation and experiences, respectively.

We don’t think the emergence of alternative accommodations has structurally changed the demand for traditional hotels. The online traditional hotel market has continued to grow during the last several years even as alternative accommodations posted healthy growth, based on Phocuswright data and our calculations. While online alternative accommodations bookings have grown around 20% annually during the past decade, online traditional hotel bookings have generally been able to maintain low-double-digit growth. Additionally, U.S. hotel occupancy was able to increase and reach new highs over the last decade despite the emergence of alternative accommodations.

We also don’t think COVID-19 has structurally impaired demand for traditional hotels. During the height of the pandemic, travelers favored local road trips, which benefited both alternative accommodations and U.S. economy hotels that often reside in nonurban, off-interstate locations. We believe Airbnb’s expansion into traditional lodgings will be limited, given the company’s mission statement and culture that centers on community and belonging. As a result, we don’t believe the entire traditional hotel booking market will be addressable to Airbnb as it is for Booking, Expedia, and TripAdvisor.

On the supply side of the network equation, Booking and Expedia clearly have stronger positions in online traditional hotels than Airbnb. Booking’s platform hosts around 20 million traditional hotel rooms, and we estimate Expedia is in the same neighborhood, both towering over the estimated few hundred thousand boutique rooms on Airbnb’s network. TripAdvisor’s hotel business is done through a metasearch approach, where OTAs and many hotel suppliers choose to list their content, leaving it with a large supply offering. Booking also enjoys industry-leading network demand via its high mobile app awareness and traveler visitation to its platform.

Competition Could Counteract Opportunities for Online Travel Agencies

In our view, the expansive reach of the large global platforms of Google, Amazon, and Facebook presents the biggest danger to the economic moats of Booking, Airbnb, Expedia, and TripAdvisor, versus smaller competitors that no longer have the critical mass scale to impede the positioning of established operators. We believe that this competitive risk is manageable for the OTA operators--Booking, Airbnb, and Expedia--but a headwind for metasearch players like TripAdvisor.

Thanks to its dominant search share, Gmail accounts, and map app use, Alphabet’s Google remains the largest potential risk to online travel companies. Given Google’s massive global use, it is not surprising that investors have monitored the company’s moves in the travel industry ever since its 2010 acquisition of flight information software company ITA. Since then, Google has continued to build out a travel metasearch platform, offering hotels, flights, experiences, and vacation rentals from OTAs and suppliers as well as its own user reviews and mapping features. Further, Google appears to be using its dominant travel search standing to place its travel metasearch platform in a favorable position ahead of organic links, which are the most relevant based on the customer’s search query.

Despite the benefits of its position, we see Google’s travel metasearch platform as a manageable risk for online travel agency operators for a handful of reasons.

• Google is not seeking to become an OTA, which involves developing and servicing relations, something that is not a core area of expertise for the search engine behemoth.
• Google already monetizes travel through paid advertising received from OTA, metasearch, and suppliers.
• Google lacks a mobile travel app despite the increasing booking mix to this medium.
• Google faces regulatory risks that could minimize its competitive positioning.
• Leading OTAs’ network advantages help drive high global awareness and direct traffic, leading to lower dependence on indirect channels like Google’s metasearch offering.

Although we see the risk from Google as manageable for the OTA operators, we believe TripAdvisor faces higher competitive challenges, as Google’s metasearch platform competes more directly with around 60% of TripAdvisor’s business.

We expect that Amazon will eventually enter the global travel market with a metasearch product versus becoming a travel merchant or OTA, creating a similar competitive risk as Google’s platform, with Booking, Expedia, and Airbnb navigating the threat without much impact and TripAdvisor experiencing more of a headwind.

Amazon has had several OTA model travel-related pilots in the past only to pull away for undisclosed reasons. Although a more complete Amazon travel platform might be a few years away as the company focuses on building out its apparel, grocery, home furnishings, and pharma presence, we think it’s a matter of when, not if, it occurs.

We see an Amazon metasearch platform having a manageable and negligible impact on Expedia, Booking, and Airbnb, as it would represent an additional indirect marketing channel to these operators versus a direct OTA competitor. Even if travelers used an Amazon metasearch product, OTAs could participate, although at the cost of advertising paid to the online retail leader. This is because, in our view, most of the content shown on Amazon’s platform would be managed by the leading OTA operators that have the most expansive supply networks built over several decades.

We think Facebook could develop into an indirect marketing channel for online travel agencies like Booking, Airbnb, and Expedia and a competitor to TripAdvisor’s hotel metasearch offering. Its platform reach is undeniable, as 1.79 billion and 2.7 billion people used the service each day and month, respectively, as of June 2020. And travel is a large area of discussion on Facebook, as trusted friends and family share experiences and recommendations with their social network. According to a July 2018 Facebook-commissioned survey performed by Accenture, 76% of weekly U.S. Facebook users share their travel experiences, ask friends for travel recommendations, and check into places while traveling. This supports Facebook’s move to begin offering dynamic travel ads in 2017. Through this initiative, Facebook helps online travel operators target ads to users based on their own, friends’, and family’s search and behavior activity. While the use of Facebook dynamic ads bears monitoring, it remains in its infancy and may be limited, as Facebook must be careful to not degrade its user experience with annoying ads. This is shown in Booking, Expedia, Airbnb, and TripAdvisor deriving only single-digit percentages of their traffic from social networks, with no notable increases in that trend since we began tracking data in the middle of 2016.