Tough Economy Still Can't Squash Online Travel Growth

Despite
tough economic conditions, a tense political climate and fewer travelers,
the online travel market performed surprisingly well in 2002. According
to a new report from Phocuswright Inc., Online Travel Overview:
Market Size and Forecasts 2002-2005, online leisure/unmanaged
business travel grew 37% to over US$28 billion while the overall
travel market declined 5%.

By
2002, 15% of all travel was booked online, and slower but steady
growth is predicted for the next few years, assuming improved economic
conditions by the second half of this year or early 2004. Online
market penetration varies widely by segment; for example, one in
five airline tickets is sold online (for Southwest, the percentage
is more like six in 10), but that percentage falls to 9% for hotel
reservations and 4% for cruises and vacation packages.

Phocuswright
foresees some shift in market segmentation between now and 2005,
when the percentage of travel booked online is likely to double and
reach over 30%. Today's largest segment, airlines, despite significant
online growth, will lose market share as online travel retailers
continue to diversify. Airlines' current 54% share of the online
travel market will fall to 49% in 2005 as other segments, including
international sales, cruises, vacations, car rentals and hotels,
grow at a faster pace.

Online
travel agencies represent roughly half (49%) of all travel booked
online, with supplier Web sites comprising the other 51%. Again,
reliance on online travel agencies varies by segment. For airlines,
43% of online sales are booked through travel agencies, but that
percentage is closer to 60% for vacation packagers.

Looking
at the other end of the spectrum, in 2002, the largest gains in the
online travel market were posted by the smallest segments – vacation
packages and cruises, which grew 75% and 64%, respectively. Combined,
these two slices of the online travel pie represent only 4% of the
market.

Higher-margin,
more complex vacation packages and cruises are a tougher sell online.
Roughly 90% are sold through traditional travel agencies, and, especially
in today's economy, suppliers are reluctant to jeopardize these firmly
established, reliable relationships, despite the commissions involved.

The
online vacation package market will reach $1 billion this year, up
74% from last year, according to Phocuswright. Online cruise sales
will reach $900 million this year, up 61%. Even though only 10% of
packages and cruises will be booked online by 2005, it's an important
part of the equation as many consumers will make their travel decisions
online, even if they ultimately purchase offline. As a matter of
fact, about half of online cruise sales are researched online but
purchased offline using the toll-free number on the travel Web site.

Another
somewhat unique factor to consider in this niche is the fact that
nearly 60% of online vacation packages are sold through intermediaries,
and this percentage is expected to grow considerably by 2005. Tour
operators do not have the brand recognition or marketing budgets
to compete with the mega online agencies. In addition, dynamic packaging,
whereby consumers can create their own packages by combining air,
hotel and/or car in real-time, also threatens the online future for
tour operators and vacation packagers.



Cruise lines work with online travel agencies to sell discount and last-minute
inventory, but they use their own Web sites for marketing purposes rather
than direct sales. Many don't even feature consumer booking engines on
their sites. Thus, 54% of last year's online cruise sales were generated
from online travel agencies, with Travelocity grabbing one third of this
business.

Overall,
online travel growth rates will ultimately slow down, but stay in
the double-digits – which will still be impressive as the overall
travel industry struggles.