European Online Travel Overview Tenth Edition

Phocuswright’s European Online Travel Overview Tenth Edition

Comprehensive sizing, analysis and Written and researched by forecast of the total and online travel Donna Airoldi, Luke Bujarski, Karen Burka, Jesus markets in Europe. Salgado Criado, Feliça Eisenbeis, Stanislas Feminier, Pablo Fernandez, Colie Hoffman, David Juman, Ralph Merten, Peter O'Connor, Friederike Schwarz, Lorraine Sileo, Sandra Voscort and Cathy Schetzina Walsh European Online Travel Overview Tenth Edition December 2014

Phocuswright Inc. 116 West 32nd Street, 14th Floor New York, NY 10001

PO Box 760 Sherman, CT 06784 +1 860 350-4084 +1 860 354-3112 fax www.phocuswright.com European Online Travel Overview Tenth Edition

Written and researched by Donna Airoldi, Luke Bujarski, Karen Burka, Jesus Salgado Criado, Feliça Eisenbeis, Stanislas Feminier, Pablo Fernandez, Colie Hoffman, David Juman, Ralph Merten, Peter O'Connor, Friederike Schwarz, Lorraine Sileo, Sandra Voscort and Cathy Schetzina Walsh

European Online Travel Overview Tenth Edition is published by Phocuswright Inc. The information contained herein is derived from a variety of sources. While every effort has been made to verify the information, the publisher assumes neither responsibility for inconsistencies or inaccuracies in the data nor liability for any damages of any type arising from errors or omissions. All Phocuswright Inc. publica- tions are protected by copyright. It is illegal under U.S. federal law (USC101 et seq.) to copy, fax or electronically distribute copyrighted material beyond the parameters of the license or outside of your organization without explicit permission.

About Phocuswright Phocuswright is the travel industry research authority on how travelers, suppliers and intermediaries connect. Independent, rigorous and unbiased, Phocuswright fosters smart strategic planning, tactical decision-making and organizational effectiveness.

Phocuswright delivers qualitative and quantitative research on the evolving dynamics that influence travel, tourism and hospitality distribution. Our marketplace intelligence is the industry standard for segmentation, sizing, forecasting, trends, analysis and consumer travel planning behavior. Every day around the world, senior executives, marketers, strategists and research professionals from all segments of the industry value chain use Phocuswright research for competitive advantage.

To complement its primary research in North and Latin America, Europe and Asia, Phocuswright produces several high-profile conferences in the United States and Germany, and partners with conferences in Canada, China and Singapore. Industry leaders and company analysts bring this intelligence to life by debating issues, sharing ideas and defining the ever-evolving reality of travel commerce.

The company is headquartered in the United States with Asia Pacific operations based in India and local analysts on five continents.

Phocuswright is a wholly owned subsidiary of Northstar Travel Media, LLC.

Areas marked with this symbol ( q) are interactive and clickable in the pdf version of this report.

Online Travel Key Findings 90 Table of Contents q Mobile 29 Agencies 65 Macro Landscape 91 Section One 1 Suppliers Overview Conclusion 68 Airlines 30 Size of the Market 92 Key Findings 1 Hotels 33 Mobile 94 Overview 2 Section Four 70 Rail 37 Italy Suppliers European Online Airlines 96 Travel Market 4 Car Rental 38 Overview 70 Hotels 99 Share and Trends Tour Operators 39 Online Distribution by Country 7 Dashboard 71 Rail 101 Online Travel Suppliers: Agencies 44 Key Findings 72 Car Rental 103 Airlines 9 Conclusion 48 Macro Landscape 73 Tour Operators 105 Hotels 12 Size of the Market 74 Rail 13 Online Travel Agencies 108 Section Three 50 Mobile 76 Car Rental 14 Germany Conclusion 112 Suppliers Tour Operators 15 Overview 50 Airlines 77 Online Online Distribution Hotels 79 Section Six 113 Travel Agencies 16 Dashboard 51 Spain Rail 81 Mobile 18 Key Findings 52 Overview 113 Metasearch 19 Car Rental 82 Macro Landscape 53 Online Distribution Dashboard 114 Methodology 20 Tour Operators 83 Size of the Market 54 Key Findings 115 Online Travel Mobile 56 Agencies 84 Section Two 22 Macro Landscape 116 Suppliers France Conclusion 86 Airlines 57 Size of the Market 117 Overview 22 Hotels 59 Mobile 119 Online Distribution Section Five 88 Dashboard 23 Rail 61 Scandinavia Suppliers Airlines 121 Overview 88 Key Findings 25 Car Rental 62 Hotels 122 Online Distribution Macro Landscape 26 Tour Operators 63 Dashboard 89 Rail 127 Size of the Market 27

Car Rental 129 Table of Charts q Figure 1.12 9 Figure 1.22 17 European Total and Online Top European OTAs Tour Operators 131 Figure 1.1 3 Travel Markets, Compound by Gross Bookings, European Travel Market Annual Growth Rates by 2012 and 2013 Online Travel Gross Bookings, 2006-2016 Market, 2013-2016 Agencies 133 Figure 1.23 17 Figure 1.2 3 Figure 1.13 9 OTAs in Europe, Gross Conclusion 137 European Real GDP European Online vs. Total Bookings and Share by Growth, 2008-2014 Travel Gross Bookings, Region of Operations, Share by Market, 2013 2012-2016 Figure 1.3 4 Section Seven 139 European Total and Figure 1.14 10 United Kingdom Figure 1.24 18 Online Travel Markets and European Airline Gross European Mobile Gross Overview 139 Growth Rates, 2012-2016 Bookings by Channel Bookings and Mobile Share and Online Penetration, of Online Bookings, Online Distribution Figure 1.4 5 2012-2016 2011-2016 European Online Travel Dashboard 139 Market and Growth by Figure 1.15 10 Figure 1.25 18 Channel, 2012-2016 Key Findings 140 European Traditional Airline European OTA and Gross Bookings by Channel Supplier Mobile Figure 1.5 5 Macro Landscape 141 and Online Penetration, Bookings, 2011-2016 Online Travel Penetration 2012-2016 by Region, 2012-2016 Size of the Market 142 Figure 1.16 11 Figure 1.6 5 Mobile 144 European Low-Cost Airline European Travel Market, Gross Bookings by Channel Figure D.1 23 Share by Channel, Suppliers and Online Penetration, French Share of Gross 2012-2016 Airlines 144 2012-2016 Bookings by Channel, Figure 1.7 6 2013 vs. 2016 Hotels 148 European Online Leisure/ Figure 1.17 12 Unmanaged Business Travel European Hotels Gross Figure D.2 24 Rail 151 Market, OTA and Online Bookings by Channel French Share of European Direct Bookings, 2012-2016 and Online Penetration, Total and Online Travel Car Rental 152 2012-2016 Markets, 2013 Figure 1.8 6 Tour Operators 153 European Online Direct Figure 1.18 13 Figure D.3 24 Travel Market, Share by European Rail Gross Total Online Penetration Online Travel Segment, 2013 Bookings by Channel 2012-2016: French and Agencies 156 and Online Penetration, European Travel Markets Figure 1.9 7 2012-2016 Conclusion 160 European Travel Supplier Figure 2.1 27 Gross Bookings and Figure 1.19 14 French Travel Market Distribution by Channel, European Car Rental and Online Growth Rates, 2013 Gross Bookings by Channel 2012-2016 and Online Penetration, Figure 1.10 7 2012-2016 Figure 2.2 28 European Total and Online French Online Travel Travel Gross Bookings and Figure 1.20 15 Market, OTA vs. Supplier- Online Penetration by Market, European Tour Operator Direct Share, 2013 and 2016 2013 Gross Bookings by Channel and Online Penetration, Figure 2.3 28 Figure 1.11 8 2012-2016 French Supplier-Direct European Unemployment Online Market 2013 Rates by Market, Figure 1.21 16 2010-2015 European Online Travel Figure 2.4 30 Agency Gross Bookings French Mobile Share of and Growth, 2012-2016 Online Supplier-Direct and OTA Bookings by Segment, 2013 vs. 2016

Figure 2.5 31 Figure 3.2 55 Figure D.2 71 Figure 4.11 85 French Airline Gross German Online Travel Italian Share of European Online Travel Agencies in Bookings and Online Market, OTA vs. Supplier- Total and Online Travel the Italian Market, Estimated Direct Penetration, Direct Share, 2013 and 2016 Markets, 2013 Market Share, 2013 2012-2016 Figure 3.3 55 Figure D.3 72 Figure 2.6 34 German Supplier-Direct Total Online Penetration French Hotel Gross Online Market, 2013 2012-2016: Italian and Bookings and Online European Travel Markets Direct Penetration, Figure 3.4 56 Figure D.1 89 2012-2016 German Mobile Share of Figure 4.1 74 Scandinavian Share Online Supplier-Direct and Italian Travel Market of Gross Bookings by Figure 2.7 37 OTA Bookings by Segment, and Online Growth Rates, Channel, 2013 vs. 2016 French Rail Gross 2013 vs. 2016 2012-2016 Bookings and Online Figure D.2 89 Figure 4.2 74 Direct Penetration, Figure 3.5 57 Scandinavian Share Italian Online Travel 2012-2016 German Airline Gross of European Total and Market, OTA vs. Supplier- Bookings and Online Online Travel Markets, Direct Share, 2013 and 2016 Figure 2.8 38 Direct Penetration, 2013 French Car Rental Gross 2012-2016 Figure 4.3 75 Bookings and Online Italian Supplier-Direct Figure D.3 90 Supplier-Direct Penetration, Figure 3.6 60 Online Market, 2013 Total Online Penetration 2012-2016 German Hotel Gross 2012-2016: Scandinavian Bookings and Online Figure 4.4 76 and European Travel Figure 2.9 39 Direct Penetration, Italian Mobile Share of Markets French Tour Operator 2012-2016 Online Supplier-Direct and Gross Bookings and Online OTA Bookings by Segment, Figure 5.1 92 Direct Penetration, Figure 3.7 61 2013 vs. 2016 Scandinavian Travel 2012-2016 German Rail Gross Market and Online Bookings and Online Figure 4.5 77 Growth Rates, 2012-2016 Figure 2.10 44 Direct Penetration, Italian Airline Gross French Online Travel 2012-2016 Bookings and Online Direct Figure 5.2 93 Agency Gross Bookings, Penetration, 2012-2016 Scandinavian Online 2012-2016 Figure 3.8 62 Travel Market, OTA vs. German Car Rental Gross Figure 4.6 79 Supplier-Direct Share, Figure 2.11 45 Bookings and Online Italian Hotel Gross 2013 and 2016 Online Travel Agencies in Supplier-Direct Penetration, Bookings and Online the French Market, Estimated 2012-2016 Direct Penetration, Figure 5.3 93 Market Share, 2013 2012-2016 Scandinavian Supplier- Figure 3.9 63 Direct Online Market, German Tour Operator Figure 4.7 81 2013 Gross Bookings and Online Italian Rail Gross Direct Penetration, Bookings and Online Direct Figure 5.4 95 Figure D.1 51 2012-2016 Penetration, 2012-2016 Scandinavian Mobile German Share of Gross Share of Online Supplier- Bookings by Channel, Figure 3.10 65 Figure 4.8 82 Direct and OTA Bookings 2013 vs. 2016 German Online Travel Italian Car Rental Gross by Segment, 2013 vs. 2016 Agency Gross Bookings, Bookings and Online Figure D.2 51 2012-2016 Supplier-Direct Penetration, Figure 5.5 96 German Share of European 2012-2016 Scandinavian Airline Total and Online Travel Figure 3.11 66 Gross Bookings and Figure 4.9 83 Markets, 2013 Online Travel Agencies in Online Direct Penetration, Italian Tour Operator the German Market, Estimated 2012-2016 Gross Bookings and Online Figure D.3 52 Market Share, 2013 Direct Penetration, Total Online Penetration Figure 5.6 99 2012-2016 2012-2016: German and Scandinavian Hotel European Travel Markets Figure 4.10 85 Gross Bookings and Figure D.1 71 Italian Online Travel Online Direct Penetration, Figure 3.1 54 Italian Share of Gross Agency Gross Bookings, 2012-2016 German Travel Market Bookings by Channel, 2012-2016 and Online Growth Rates, 2013 vs. 2016 2012-2016

Figure 5.7 102 Figure 6.4 120 Figure D.1 139 Figure 7.7 147 Scandinavian Rail Gross Spanish Mobile Share of U.K. Share of Gross U.K. LCC Gross Bookings Bookings and Online Online Supplier-Direct and Bookings by Channel, and Online Direct Direct Penetration, OTA Bookings by Segment, 2013 vs. 2016 Penetration, 2012-2016 2012-2016 2013 vs. 2016 Figure D.2 140 Figure 7.8 148 Figure 5.8 104 Figure 6.5 122 U.K. Share of European U.K. Hotel Gross Bookings Scandinavian Car Rental Spanish Airline Gross Total and Online Travel and Online Direct Gross Bookings and Bookings and Online Markets, 2013 Penetration, 2012-2016 Online Direct Penetration, Direct Penetration, 2012-2016 2012-2016 Figure D.3 140 Figure 7.9 151 Total Online Penetration U.K. Rail Gross Bookings Figure 5.9 106 Figure 6.6 126 2012-2016: U.K. and and Online Direct Scandinavian Tour Spanish Hotel Gross European Travel Markets Penetration, 2012-2016 Operator Gross Bookings Bookings and Online and Online Direct Direct Penetration, Figure 7.1 142 Figure 7.10 153 Penetration, 2012-2016 2012-2016 U.K. Travel Market U.K. Car Rental Gross and Online Growth Rates, Bookings and Online Figure 5.10 108 Figure 6.7 128 2012-2016 Direct Penetration, Scandinavian Online Travel Spanish Rail Gross 2012-2016 Agency Gross Bookings, Bookings and Online Figure 7.2 143 2012-2016 Direct Penetration, U.K. Online Travel Figure 7.11 154 2012-2016 Market, OTA vs. Supplier- U.K. Tour Operator Figure 5.11 109 Direct Share, 2013 and 2016 Gross Bookings and Online Online Travel Agencies in Figure 6.8 130 Direct Penetration, the Scandinavian Market, Spanish Car Rental Gross Figure 7.3 143 2012-2016 Estimated Market Share, Bookings and Online U.K. Supplier-Direct 2013 Direct Penetration, 2012-2016 Online Market, 2013 Figure 7.12 157 U.K. Online Travel Figure 6.9 132 Figure 7.4 144 Agency Gross Bookings, Spanish Tour Operator U.K. Mobile Share of 2012-2016 Gross Bookings and Online Online Supplier-Direct and Direct Penetration, OTA Bookings by Segment, Figure 7.13 157 Figure D.1 114 2012-2016 2013 vs. 2016 Online Travel Agencies in Spain Share of Gross the U.K. Market, Estimated Bookings by Channel, Figure 6.10 134 Figure 7.5 145 Market Share, 2013 2013 vs. 2016 Spanish Online Travel U.K. Total Airlines Gross Agency Gross Bookings, Bookings and Online Figure D.2 114 2012-2016 Direct Penetration, Spain Share of European 2012-2016 Total and Online Travel Figure 6.11 135 Markets, 2013 Online Travel Agencies in Figure 7.6 146 the Spanish Market, Estimated U.K. Traditional Airline Figure D.3 115 Market Share, 2013 Gross Bookings and Total Online Penetration Online Direct Penetration, 2012-2016: Spanish and 2012-2016 European Travel Markets

Figure 6.1 117 Spanish Travel Market and Online Growth Rates, 2012-2016

Figure 6.2 118 Spanish Online Travel Market, OTA vs. Supplier- Direct Share, 2013 and 2016

Figure 3.3 119 Spanish Supplier-Direct Online Market, 2013

The European Online Travel Overview

Luke Bujarski

Key Findings 0 The European travel market expanded just under 1% in 2013. Though signals are mixed about what the next several years will bring for Europe’s economy, the region has largely overcome the crippling systemic shocks spurred by the global financial crisis.

0 The U.K. and Germany will remain Europe’s economic growth engines through 2014. Spain’s economy has shown encouraging signs of rebound, while France and Italy continue to struggle with mounting public debt. In France, total travel bookings were flat in 2013. In Italy, they declined by 3%. However, online bookings for the year expanded in both markets – 5% in France and 10% in Italy.

0 Europe’s total online travel market expanded 8% in 2013, reaching A101.3 billion. Gross bookings will expand at a compound average growth rate (CAGR) of 8% through 2016, when online penetration will climb to 47%. Although other distribution channels – e.g., phone, travel management companies (TMCs), and traditional travel agents – will lose share through 2016, they will still represent more than half (53%) of the travel market.

0 Europe’s traditional airline segment shrank in 2013 as a result of the soft economy. Growth resumed in 2014 and will continue through 2016, thanks to new cost-cutting and operational strategies at some of Europe’s most beleaguered airlines. A drop in crude oil prices in 4Q14 will also give airline profits a boost.

0 Gross bookings for low-cost carriers (LCCs) grew 5% in 2013 and will continue to expand through 2016, when revenue will reach A20.9 billion. Competition will intensify for Europe’s veteran LCCs as new competitors – as well as some traditional airlines – embrace the low-cost model for both intra-European and transatlantic flights.

0 The outlook for European hotels is relatively bright through 2016; a steady increase in demand will push growth to 3% annually for each of the next three years. Tight supply in key European cities drove revenue per available room (RevPAR) growth in 2013. However, a hefty pipeline of new properties (particularly budget accommodations) in hot spots like London and Paris – in addition to competition from the alternative accommodations market – will likely curtail increases in average daily rate (ADR). By 2016, total hotel gross bookings will reach A88.3 billion.

0 Rail remains a popular, convenient and economic alternative to flying. In 2013, gross bookings totaled A30.2 billion, a 1% increase from 2012. Ad- vancements in online connectivity also sparked numerous investments in rail-focused online travel agencies (OTAs) throughout Europe in 2014. By 2016, online penetration for the segment will reach 37%.

0 Car rental gross bookings stood at A10.3 billion in 2013. While public transport, car-sharing, and taxi-hailing platforms have become more accessible to inbound travelers and made rentals less likely, the decline in car ownership among Europeans has prompted more rentals among domestic travelers – people taking weekend getaways close to home, for example. Additionally, steadier economic conditions have increased rental demand among business travelers, and the growing popularity of blend- ing leisure time into business trips has given car rental firms an opportunity to expand their offerings.

0 Tour operators, particularly the large multinational brands, are investing heavily in improvements to online content and booking functionality. As a result, the segment’s online penetration will inch upward over the next few years, reaching 26% in 2016. Small and midsize operators, due to their limited investment power, remain stymied online by the bigger brands. Gross bookings for the segment as a whole fell to A52.8 billion in 2013 – a 2% decrease from 2012 – and further decline is expected in 2014 before tour operators regain their footing in 2015.

0 Europe’s OTAs grew 12% in 2013, with gross bookings of A39.9 billion. As the market matures, growth will slow – OTAs will expand by a CAGR of 9% through 2016. At the same time, consolidation will continue as Europe’s larger, more mature brands eye fresh targets for acquisition.

0 Metasearch, along with new travel search models such as instant booking, will continue to challenge the typical OTA model and push established market leaders to explore new strategies to engage both consumers and supplier partners. Holiday search and metasearch via mobile will become especially competitive spaces in the next several years.

Overview After a dismal four years, gross bookings in Europe’s travel market finally bounced back to prerecession levels in 2012. Demand edged upward in 2013 as consumers and businesses began to regain their economic footing. More stable GDP and unemployment rates, particularly in key markets such as the U.K. and Germany, will give more Europeans access to travel. Total gross bookings will expand by 3% annually through 2016, when they will reach A268.4 billion (see Figure 1.1). As 2014 brought greater financial stability to the U.S. and Europe, growth slowed in some emerging markets, particularly China. As a result, investor attention and capital, which had been focused (during the recession) on the accelerating growth of developing markets, returned to more mature markets. However, the downturn in China’s growth – and the accompanying drop in

Figure 1.1: European Travel Market Gross Bookings (FB), 2006-2016

280 268 270 260 260 251 250 241 241 241 243 240 229 229 230 225 216 220 210 200 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Chinese demand for European exports – could still dent Europe’s economy and travel industry. At the same time, acceleration in the U.S. economy, likely to continue through 2015, will increase trade between Europe and the U.S. and will drive demand for business travel to and from Europe. The EU economy is expected to finish 2014 with growth of 0.3%. Germany, Spain and the U.K. lead the way (see Figure 1.2).

Figure 1.2: European Real GDP Growth (%), 2008-2014

2008 2009 2010 2011 2012 2013 2014 Germany 1.1 -5.1 4.0 3.3 -0.4 0.4 0.3 Spain 0.9 -3.8 -0.2 0.1 -1.6 -1.2 0.4 France -0.1 -3.1 1.7 2.0 0.0 0.2 0.1 Italy -1.2 -5.5 1.7 0.4 -2.4 -1.9 -0.1 U.K. -0.8 -5.2 1.7 1.1 0.3 1.7 0.8 EU 0.4 -4.5 2.0 1.6 -0.4 0.1 0.3 (28 Countries)

Geopolitical tension between the EU and Russia over territories in the Ukraine and the subsequent collapse of the Russian ruble stunted travel from Russia to Western Europe as well as investor confidence in the European economy. The crisis also contributed to depreciation of the euro, especially relative to the U.S. dollar and the British pound, which in turn stimulated inbound travel to eurozone countries. Meanwhile, political strife in Northern Africa and the Ebo- la epidemic in West Africa prompted many would-be visitors to the continent, particularly German and French travelers, to vacation within Europe instead.

Despite these obstacles, Europe’s online travel market expanded by 8% in 2013. OTA and supplier web portals, both desktop and mobile, will grow another 8% in 2014, but then will decelerate slightly through 2016 as the market reaches maturity.

European Online Travel Market Europe’s online market will reach A109.9 billion in gross bookings in 2014, an 8% jump from 2013 (see Figure 1.3).1 OTAs will grow 10% in 2014, picking up an additional A4 billion in gross bookings (see Figure 1.4) over 2013, and supplier websites will see an increase of A4.6 billion. By 2016, the European online travel market will total A126.1 billion.

Figure 1.3: European Total and Online Travel Markets (FB) and Growth Rates (%), 2012-2016

241 2012 94 243 +<1% 2013 101 +8% 251 +3% 2014 110 +8% 259 +3% 2015 118 +7% 268 +3% 2016 126 +7%

Online penetration in Europe will reach 44% in 2014 (see Figure 1.5). Despite Europe’s maturity, both OTAs and supplier web channels still have room to grow in certain markets, including Germany, Italy and Spain. As travel companies tune into growing demand for high-quality, do-it-yourself travel planning and booking engines in these markets, online penetration will continue to climb. Offline booking channels, including traditional travel agencies, telephone, faxes and walk-ins, remain entrenched in Europe. These channels accounted for 58% of the European travel market in 2013 (see Figure 1.6). While growth in the total travel market has slowed, there is ample opportunity to shift market share between the region’s many intermediaries and suppliers. By 2016, the market share of offline channels will drop to 53%.

1) The online travel market, as defined by Phocuswright, includes bookings made through OTAs, mobile channels and supplier websites.

Figure 1.4: European Online Travel Market (FB) and Growth by Channel (%), 2012-2016 Total 36 2012 58 94 40 +12% 2013 61 +6% 101 44 +10% 2014 66 +7% 110 48 +8% 2015 70 +7% 118 51 +7% 2016 75 +7% 126 OTA Supplier-Direct Online Note: 2014-2016 projected. Source: European Online Travel Overview Tenth Edition ©2014 Phocuswright Inc. All Rights Reserved.

Figure 1.5: Online Travel Penetration by Region, 2012-2016

50% 47% 45% 43% 44% 41% 44% 45% 45% 40% 42% 39% 32% 29% 30% 27% 24% 25% 25% 20% 23% 20% 21% 18% 10% 2012 2013 2014 2015 2016 U.S. Europe Asia Pacific Latin America Note: 2014-2016 projected. Source: European Online Travel Overview Tenth Edition ©2014 Phocuswright Inc. All Rights Reserved.

Figure 1.6: European Travel Market, Share by Channel,

2012-2016 Supplier-Direct Online OTA Other

55% 53% 61% 58% 56%

18% 19% 15% 16% 17%

24% 25% 26% 27% 28%

Airlines are the largest supplier segment, both online and offline. In 2013, they secured A34.6 billion in online direct bookings (see Figure 1.7), or 33% of airline gross bookings – a much higher share than any other supplier segment. In comparison, hotels captured A7.1 billion in online direct bookings – about 9% of their total revenue.

Figure 1.7: European Online Leisure/Unmanaged Business Travel Market, OTA and Online Direct Bookings (FM), 2012-2016 2012 2013 2014 2015 2016 Online Travel Agency 35,728 39,903 43,856 47,575 51,079 All Airline Direct 32,878 34,638 37,470 39,868 42,329 Traditional Airline Direct 20,094 20,976 22,501 23,814 25,193 Low-Cost Carrier Direct 12,784 13,663 14,969 16,054 17,136 Hotel Direct 6,306 7,080 7,865 8,766 9,843 Rail Direct 8,092 8,719 9,251 9,779 10,316 Car Rental Direct 1,962 2,062 2,177 2,293 2,413 Tour Operator Direct 8,736 8,944 9,274 9,648 10,094 Total 93,702 101,348 109,893 117,931 126,074

Traditional airlines represent 34% of all online direct bookings in Europe, followed by LCCs at 22% (see Figure 1.8). Except for car rental, hotels have the smallest share of the online direct market at 12%. Figure 1.8: European Online Direct Travel Market, Share by Segment, 2013 Certain European supplier segments are more 15% conducive to interme- Traditional Airline diated online sales. 3% 34% LCC Fragmentation in the Hotel 14% hotel sector, for example, Rail makes it difficult for every Car Rental brand to sell directly to 12% Tour Operator consumers. Lodging as 22% a whole received 22% of room revenue via OTAs in Source: European Online Travel Overview Tenth Edition ©2014 Phocuswright Inc. All Rights Reserved. 2013 (see Figure 1.9). In contrast, the rail segment depends very little on OTAs. Most European rail markets have only one or two operators, limiting the need for intermediaries. But OTAs are beginning to see the potential rail holds as an avenue to increase bundled hotel sales. Other than LCCs, all supplier segments rely on offline channels for the majority of sales. Airlines such as easyJet and Ryanair have historically distrib- uted content almost exclusively through proprietary web channels, but this

Figure 1.9: European Travel Supplier Gross Bookings (FB) and Distribution by Channel (%), 2013

Traditional Airline 24% 14% 62% 88.7

LCC 84% 5% 11% 16.2

Hotel 9% 22% 69% 80.9

Rail 29% 4% 67% 30.2

Car Rental 10.3

20% 14% 66% Gross Bookings

Tour Operator 17% 7% 76% 52.8

dynamic is changing as LCCs make efforts to attract a more diverse group of customers – e.g., business travelers booking via TMCs.

Share and Trends by Country Germany is Europe’s largest total travel market, but the U.K. registered the most online bookings in 2013 in terms of transactional value (see Figure 1.10). There are significant disparities in online penetration among the key European markets: Italy and Spain are on the low end, and Scandinavia is at the top. These differences stem from supply- and demand-related factors. For example, Germans prefer to take longer, more complex vacations than do travelers in other markets, and such trips often require the help of full-service traditional travel agents and tour operators. Suppliers also influence the rate of online adoption: The pan-European tour operators, for instance, have made significant strides in pushing online content and booking functionality. Thomas Cook U.K. expects the share of passengers who book through its online channels to

Figure 1.10: European Total and Online Travel Gross Bookings (FB) and Online Penetration (%) by Market, 2013 Online Penetration 36% 56% 41% 33% 32% 57%

55 48 Total Market Online Market 43

jump from 34% in 2012 to 50% in 2015, largely as a result of its investments in these channels (and divestments from traditional brick-and-mortar agencies). Economic forecasts for individual countries change as new data become available, but for now, recovery and stability have taken the place of recession and uncertainty in much of Europe. In Germany, growth is accelerating thanks to strong domestic demand for products and services, both from consumers and businesses.2 The U.K.’s GDP grew close to 2% in 2013 and is expected to rise another percentage point in 2014. Although consumption in France is likely to increase through 2015, the country’s recovery remains sluggish due to budget deficits. Following its peak at 27% in 1Q13, unemployment in Spain has been declining. Investor confidence in the country is returning, and the Spanish government is relaxing some of its austerity measures (see Figure 1.11). After contracting 2% in 2013, Italy’s economy is expected to recover gradually in 2014, driven by a robust tourism industry (among other variables). Growth in Scandinavia is expected to pick up marginally in 2014.

Figure 1.11: European Unemployment Rates by Market (%), 2010-2015

2010 2011 2012 2013 2014 2015 Germany 7.1 5.9 5.5 5.3 5.2 5.1 Spain 20.1 21.7 25.0 26.4 25.7 24.6 France 9.7 9.6 10.2 10.8 11.0 11.0 Italy 8.4 8.4 10.7 12.2 12.6 12.4 U.K. 7.8 8.0 7.9 7.6 6.8 6.5 Scandinavia 4.5 6.4 7.0 6.6 6.6 6.6 EU Average – – 10.5 10.9 10.7 10.4

Note: Figures for Scandinavia reflect weighted annual averages across Denmark, Norway and Sweden, based on population. Annual rates reflect the 12-month running average (with the exception of 2013, for which the average was calculated through October). Source: Eurostat ©2014 Phocuswright Inc. All Rights Reserved.

While better economic conditions can positively affect travel incidence, growth in digital channels largely occurs due to changes in consumer prefer- ence and the availability of different online booking channels and brands. In a mature market like Europe, growth in online travel comes at the expense of traditional offline bookings, as more and more consumers do their travel planning and purchasing via web channels. Hence, online country markets in Eu- rope are still growing faster than the corresponding total markets (see Figure 1.12). In heavily penetrated markets such as Scandinavia and the U.K., online growth tends to be slower. Given its size, Germany is proportionately less penetrated than Europe as a whole, as well as other countries. Germany accounts for 23% of the total European market, but only 20% of the online market (see

2) European Commission, European Economic Forecast Winter 2014 (February 2014).

Figure 1.12: European Total and Online Travel Markets, Compound Annual Growth Rates by Market, 2013-2016

12%

10%

6% 6% 5% 5% 4% 4%

2% 2% 1% France Germany Italy Scandinavia Spain U.K. Online Market Total Market

Figure 1.13: European Online vs. Total Travel Gross Bookings, Share by Market, 2013 Online Total

15% 17% 20% Germany 23% U.K. 8% 6% France 6% Spain 8% Italy 7% 27% 20% Scandinavia 8% Rest of Europe 17% 18%

Figure 1.13). Less penetrated markets present the biggest opportunity to tap fresh demand for online channels. In more mature markets, online brands are likely to grow by stealing share from their competitors.

Suppliers Airlines Europe’s airlines are projected to reach A109.9 billion in gross bookings in 2014, a 5% increase from 2013 (see Figure 1.14). The online air market is dominated by direct channels, which captured 33% of total gross bookings and 73% of online bookings in 2013. Overall, airline websites have done a better job than OTAs attracting fliers. 2013 online direct bookings jumped 5% from 2012,

Figure 1.14: European Airline Gross Bookings (FB) by Channel and Online Penetration (%), 2012-2016 Total 2012 32.9 12.5 59.2 43% 104.6

2013 34.6 12.9 57.4 45% 104.9

2014 37.5 13.6 58.9 46% 109.9

2015 39.9 13.6 60.6 47% 114.0

2016 42.3 13.9 62.8 Online Penetration 47% 119.0

Supplier-Direct Online OTA Other

while OTA air bookings increased by 3%. Both suppliers and OTAs continue to gain market share as traditional channels lose it. By 2016, online penetration for air will reach 47%. European airlines have, in a sense, flipped roles: Traditional carriers are seeking opportunities in the low- cost segment – e.g., Air France-KLM is pushing its Transavia offering over Air France, and Lufthansa is pushing Germanwings, despite doubts that the LCC can succeed amid such intense competition. Meanwhile, low-cost airlines are behaving more like traditional airlines: Ryanair is leveraging GDSs to engage new markets, and in November 2014, Norwegian Air offered its first low-cost transatlantic flight connecting London with New York. These shifts in strategy, which are likely to increase flight traffic, are happening at the same time that some of Europe’s main airport hubs – including Heathrow in London – are running at full capacity with no relief in sight. The result: a hyper-competitive environment.

Traditional Airlines

Figure 1.15: European Traditional Airline Gross Bookings (FB) by Channel and Online Penetration (%), 2012-2016 Total 2012 20.1 11.8 57.3 36% 89.2

2013 21.0 12.1 55.6 37% 88.7

2014 22.5 12.7 56.9 38% 92.2

2015 23.8 12.7 58.3 39% 94.8

2016 25.2 13.0 60.0 Online Penetration 39% 98.1

Traditional airlines had a turbulent year in 2013, battling pressure from LCCs and sluggish overall demand. Total gross bookings declined slightly due to heavy losses at Alitalia, Iberia, and SAS (see Figure 1.15). Passenger revenue at British Airways, on the other hand, grew 7% in 2013, as the U.K. economy recovered earlier than many EU markets. Stronger demand in 2014, combined with optimization in routes and operations, will help most of Europe’s major airlines gain steam in terms of total transactional value. In addition to strong demand for flights to and from the U.K., British Airways saw growth in its Asia Pacific operations. Meanwhile, Germany’s Lufthansa struggled to subdue pilot strikes in the second half of 2014. In November 2014, Abu Dhabi’s Etihad Airways received conditional approval from EU antitrust regulators for its purchase of 49% of Alitalia. Passenger numbers for IAG in 2014 were up nearly 9% year over year; domestic traffic (in the U.K. and Spain) increased by 1.6 million. Air France pilots backed parent company KLM in its strategy to expand Transavia. Online channels garnered A33.1 billion for traditional airlines in 2013 – 37% of the segment’s total gross bookings. Nearly a quarter of all bookings were online direct (A21 billion), and 14% (A12.1 billion) of passenger revenue came through OTAs. Other outlets, including TMCs and offline channels, accounted for over half of total bookings. By 2016, online penetration for the segment will reach 39% – up just three percentage points from 2012. While supplier websites and apps will increase their share of passenger revenue through 2016, OTAs’ share will drop slightly to 13%. Low-Cost Carriers Gross bookings for LCCs will expand by 29% from 2013 to 2016, growing at a CAGR of 9% (see Figure 1.16). By 2016, bookings will reach A20.9 billion. Between 2008 and early 2013, the economic downturn and double-dip recession in Europe affected LCCs less than traditional airlines – consumers, who had become more price-sensitive, naturally gravitated toward cheaper, no-frills flight options. Even with economic recovery well underway, LCCs

Figure 1.16: European Low-Cost Airline Gross Bookings (FB) by Channel and Online Penetration (%), 2012-2016 Total 2012 12.8 0.7 2.0 87% 15.4

2013 13.7 0.7 1.8 89% 16.2

2014 15.0 0.8 2.0 89% 17.8

2015 16.1 0.9 2.3 88% 19.2

2016 87% 17.1 1.0 2.8 Online Penetration 20.9

Supplier-Direct Online OTA Other

are selling through new channels and offering alternative payment options in order to hold the attention of business travelers who, during leaner times, turned to LCCs to save on airfare. If anything, the low-cost model has become somewhat standard for intra-Europe flights, as evidenced by the slew of LCC brands appearing online and the renewed focus on low-cost offerings among traditional airline groups. The LCC market, which once consisted mainly of three carriers – easyJet, Ryanair and (to some extent) Norwegian Air – has exploded with competition from brands like Vueling, Wizz Air and low-cost offerings from legacy carriers (e.g., Lufthansa’s Germanwings and Air France-KLM’s Transavia). In addition, Norwegian Air and Iceland’s Wow Air are currently experimenting with low-cost transatlantic flights. If successful, these flights will up the ante for other LCCs. Ryanair and easyJet, whose websites and apps have been their primary sales channels, have now opened their inventory to GDSs such as Travelport and Amadeus. While online direct channels remain principal to distribution, online penetration will drop to 87% by 2016 as LCCs receive more bookings through traditional channels, including TMCs. OTAs will hold on to their 5% share of the LCC market. Hotels Europe’s hotels reached gross bookings of A80.9 billion in 2013, up 2% from 2012 (see Figure 1.17). The segment will finish 2014 with an uptick of 3%, due partly to the spike in room revenue in the U.K.

Figure 1.17: European Hotel Gross Bookings (FB) by Channel and Online Penetration (%), 2012-2016 Total 2012 6.3 16.4 56.9 29% 79.6

2013 7.1 17.8 56.0 31% 80.9

2014 7.9 19.6 55.8 33% 83.2

2015 8.8 21.2 55.9 35% 85.9

2016 9.8 22.7 55.8 Online Penetration 37% 88.3

Supplier-Direct Online OTA Other

RevPAR is forecast to grow 3-4% in 2014 in most of Europe’s major cities, including Paris, Berlin and Frankfurt.3 Secondary cities, such as Dublin, Edinburgh, and Vienna, are also expected to gain as supply tightens and occupancy rises. Major cities have significant pipelines of new inventory, which could reduce RevPAR for 2015. In 2013, the most expensive cities in terms of ADR were Geneva, Zurich, London, Paris and Rome.

3) PwC, Room to Grow: European Cities Hotel Forecast 2014 and 2015 (March 2014).

France’s hotel segment will suffer in 2014 in the wake of losses at Accor and Disney. In London and across the U.K., high ADR and increasing cost- consciousness among consumers are driving demand for budget hotels, which is leading to substantial advances for brands like Premier Inn and Travelodge. In Germany, hotels are nearly stagnant in 2014. Despite strong performance in 2013 relative to other European hotel markets, Germany’s lodging segment will end 2014 with only 1% growth. Italy will rally after two consecutive years of losses; its hotel gross bookings will jump 4% in 2014 thanks to increased international demand. Similarly, the dependence of the Spanish hotel market on inbound tourism will boost bookings in 2014 as travelers from Germany and the U.K. flock to popular destinations in the Balearic and Canary Islands. Relative to other travel segments, hotels still hold the biggest potential for online intermediaries. Fragmentation and high transaction volume are typical of European hotel markets (in contrast to the U.S., where chains dominate). A larger number of suppliers and transactions tend to create more vibrant marketplaces, and the share of bookings funneled through OTAs in Europe is increasing at a faster pace than bookings on individual hotel websites. By 2016, 26% of hotel bookings will come through OTAs, compared to 21% in 2012. Online direct bookings, for their part, will grow from 8% to 11% of the total market during the same period. Travel search is evolving, particularly in relation to alternative marketing channels for hotels – namely metasearch brands such as Trivago, Kayak and TripAdvisor. For example, TripAdvisor’s TripConnect instant booking feature, currently in beta, allows shoppers to book accommodations directly on the TripAdvisor site, which then serves as a white-label service for hotel brands that bid for exposure on the site. The product test has so far been limited to the U.S., but TripAdvisor’s approach holds promise globally as a disruptive force in hotel distribution. Rail Rail remains popular as a convenient, cost-effective alternative to air travel, particularly in markets like Italy and Spain, where operators have invested in high-speed rail infrastructure. Total gross bookings for rail rose to A30.2 billion

Figure 1.18: European Rail Gross Bookings (FB) by Channel and Online Penetration (%), 2012-2016 Total 2012 8.1 1.1 20.7 31% 29.9

2013 8.7 1.2 20.2 33% 30.2

2014 9.3 1.4 20.4 34% 31.0

2015 9.8 1.5 20.6 35% 31.9

2016 10.3 1.7 20.8 Online Penetration 37% 32.8

in 2013, a 1% increase over 2012 (see Figure 1.18). 2014 will yield 3% growth, and by 2016, the segment is expected to reach A32.8 billion. Offline channels, such as self-service kiosks and ticket counters at rail stations, dominate rail distribution in Europe. Online bookings reached A9.9 billion in 2013, or 33% penetration; direct bookings comprised the vast majority of these sales. Historically, OTAs haven’t had much connection with rail; most European markets have only one or two suppliers. The exception is the U.K., where numerous franchises have mini-monopolies on individual routes. Despite this history, OTAs are starting to see rail as a viable opportunity to engage their customers. While margins on rail commissions are small compared to those on hotels, bundling other travel products (including hotel nights) with rail tickets is becoming popular. In addition, the process of booking cross- border rail travel in Europe remains fragmented, inconvenient and unresolved. If OTAs can ease this difficulty, they have an excellent opportunity to improve their value proposition and build customer loyalty. Currently, SilverRail Technol- ogies (not an OTA, but a tech firm) is leading the pack in efforts at cross-border integration and acts as a GDS stand-in for rail. Various startups are also looking to capitalize on rail. Capitaine Train (France) and Loco2 (U.K.) both received rounds of funding in 2014, and several multimodal sites, including GoEuro and Rome2rio, secured funding to integrate rail with other forms of transportation, such as local and regional buses.

Car Rental Europe’s already mature car rental market will grow more than 2% annually through 2016, when gross bookings will reach A11.1 billion (see Figure 1.19). Promising economic conditions and a bump in business travel will improve growth prospects through 2014, particularly as travelers continue to combine leisure travel with business trips. Europe’s major brands include Sixt, Europ- car, Avis/Budget, Enterprise and Hertz. Alternative types of car rental, including car-sharing programs such as Zipcar, are creating both opportunity and competition for traditional brands. Zipcar is now competing directly for the

Figure 1.19: European Car Rental Gross Bookings (FB) by Channel and Online Penetration (%), 2012-2016 Total 2012 2.0 1.3 6.8 32% 10.1

2013 2.1 1.4 6.9 34% 10.3

2014 2.2 1.5 6.9 35% 10.6

2015 2.3 1.6 7.0 36% 10.9

2016 2.4 1.7 7.0 Online Penetration 37% 11.1

lucrative airport and business traveler markets. At the same time, car ownership is declining in Europe partly as a result of car-sharing programs, and this decline has resulted in more leisure travelers renting cars from traditional companies for road trips. Online direct bookings accounted for 20% of total car rental gross bookings in 2013. An increasing share of direct bookings is coming from partner airlines and hotels that offer car rentals as add-ons through their own web portals. Nevertheless, walk-ins at airports will likely remain the primary sales channel for car rentals through 2016.

Tour Operators Packaged travel is a common holiday choice among European consumers, particularly in the U.K. and Germany. In 2013, tour operators sold A52.8 billion in custom and prepackaged travel (see Figure 1.20). Gross bookings will decline slightly in 2014, largely due to failings in the small-to-medium market in Italy and Spain, where domestic demand is still recovering from the economic downturn in 2009. Except for niche players that offer packages to exotic locales, tour operators are generally struggling to provide customers with cost savings and added value.

Figure 1.20: European Tour Operator Gross Bookings (FB) by Channel and Online Penetration (%), 2012-2016 Total 2012 8.7 3.4 41.7 23% 53.9

2013 8.9 3.4 40.4 23% 52.8

2014 9.3 3.6 39.6 25% 52.5

2015 9.6 3.8 40.2 25% 53.6

2016 10.1 3.9 40.8 Online Penetration 26% 54.9

Overall, larger, pan-European operators are faring better than smaller firms. But even major operators are responding to competitive pressure to revamp the traditional packaged holiday model: TUI Travel and Thomas Cook, for example, are moving their content and booking functionality online at the expense of their brick-and-mortar agencies. Packages are also moving online via various holiday search brands, such as Travelsupermarket – a well-known holiday metasearch engine in the U.K. – which increased its revenue by 35% in 2013. Although online penetration for tour operators reached 23% in 2013, offline channels remain primary. When researching and shopping for packages, most travelers use the Internet, but when booking, they reach out by phone or in person. To accommodate these preferences, tour operators are improving their online booking functionality and implementing real-time support for their

web products. The big operators are also offering in-destination apps to push online engagement.

Online Travel Agencies In a mark of maturity for Europe’s OTA segment, the dominant players have begun turning to acquisition rather than organic growth to keep bookings up and investors happy. In 2013, European OTAs registered A39.9 billion in gross bookings, up 12% from the previous year (see Figure 1.21). By 2016, this total will reach A51.1 billion. Growth will taper significantly through 2016 as a result of the slowdown in hotel sales at Priceline Group and Booking.com. The company expects gross bookings growth to fall from 32% in 2014 to 16-17% annually through 2016.

Figure 1.21: European Online Travel Agency Gross Bookings (FB) and Growth (%), 2012-2016

2012 35.7

2013 39.9 12%

2014 43.9 10% Growth 2015 47.6 8%

2016 51.1 7%

Many local players gained early footholds in Europe’s OTA market, and because of this, the space is heavily fragmented. In 2013, Europe’s five highest-grossing OTAs controlled less than 70% of the segment’s bookings (see Figure 1.22). However, further consolidation is expected through 2016. In late 2014, Bravofly Rumbo Group announced plans to acquire Lastminute.com from Sabre Corpora- tion. And as Europe’s big travel companies – such as Priceline and TUI Travel – mature, their appetite for acquisition will only grow, and as the total OTA market expands, global OTAs will increase their share of gross bookings (see Figure 1.23). Still, startups and certain regional players – particularly in the U.K. – will continue to encourage innovation by targeting niche customer segments with unique digital platforms. Two initial public offerings (IPOs) in April 2014 sparked a rash of OTA investments throughout Europe. In the first, eDreams Odigeo and shareholders Ard- ian and Permira raised A433 million from the sale of just over a 41% stake in the company. Then Bravofly Rumbo Group generated more thanA 200 million with its IPO on the Swiss stock exchange. Investor apathy slammed both companies, pushing share prices down 30-50% in the first months of trading. Despite this discouraging news, several regional OTA players have either expressed interested in IPOs publicly or have strong potential for them.

In the U.K., private equity firm Inflexion – owner of On the Beach – was considering floating the company at a market valuation of £200 million – 10 times the company’s 2013 turnover of £20 million. On the Beach, which specializes in

Figure 1.22: Top European OTAs by Gross Bookings (FM), 2012 and 2013

Estimated Gross Estimated Estimated Bookings Market Share Growth Primary European Market(s) 2012 2013 2012 2013 2013 Priceline Europe Pan-European 12,294 15,420 34% 39% 12% Expedia Europe Pan-European 5,408 6,011 15% 15% 16% Odigeo France, Spain 3,575 3,656 10% 9% 5% Orbitz WW Europe Pan-European 1,541 1,582 4% 4% 3% Unister Germany 1,062 1,170 3% 3% 4% Lastminute.com U.K., France 1,078 1,095 3% 3% <1% Bravofly Rumbo Group Italy, Spain, Switzerland 576 1,051 2% 3% 10% HRS/Hotel.de Germany 965 1,040 3% 3% 8% Travel Republic U.K. 740 865 2% 2% 11% ETI (Seat24, Travelstart) Scandinavia 705 798 2% 2% 13% HolidayCheck Germany 575 650 2% 2% 13% Schmetterling Germany 578 607 2% 2% 5% On the Beach U.K. 432 494 1% 1% 13% Karavel/Promovacances France 420 430 1% 1% 2% Voyage Privé France 390 415 1% 1% 6% TOTAL 30,339 35,284

Figure 1.23: OTAs in Europe, Gross Bookings (FB) and Share by Region of Operations (%), 2012-2016

2012 65% 35% 35.7

2013 67% 33% 39.9

2014 69% 31% 43.9

2015 70% 30% 47.6 Gross Bookings 2016 71% 29% 51.1

Global Local Note: 2014-2016 projected. Global OTAs include Expedia, Priceline, eDreams Odigeo, Orbitz and Travelocity. Local sites have a presence in Europe only. Source: European Online Travel Overview Tenth Edition ©2014 Phocuswright Inc. All Rights Reserved.

short-haul beach vacations for U.K. travelers, recently launched a Swedish site and has plans to develop German and Dutch sites. Two private equity-owned companies – France’s Promovacances and Dutch travel group Travix – may also be entertaining IPOs, though neither has stated this officially. In Germany, HRS, the popular hotel accommodations OTA, also holds the potential to go public. Its cash flow is strong, so it may not need the funding – but if floated, the company could raise a hefty sum.

Mobile Mobile travel bookings in Europe are growing exponentially, as is mobile commerce generally. By 2016, mobile travel bookings are expected to reach A27.3 billion, representing more than one fifth (22%) of the European online travel market (see Figure 1.24). In 2013, suppliers represented 59% of the mobile travel market, compared to 41% for OTAs. In the next several years, suppliers will increase their share of the mobile market as LCC and rail sales migrate to this platform. By 2016, OTAs will capture A11.2 billion in gross bookings (see Figure 1.25).

Figure 1.24: European Mobile Gross Bookings (FB) and Mobile Share of Online Bookings (%), 2011-2016 30 25% 22%

25 20% 17% 20 13% 15% 15 10% 27.3 10% 10 6% 20.4 14.6 5 3% 9.9 5% 5.7 2.5 0 0% 2011 2012 2013 2014 2015 2016 Gross Bookings Share of Online Bookings Note: 2014-2016 projected. Source: European Online Travel Overview Tenth Edition ©2014 Phocuswright Inc. All Rights Reserved.

Figure 1.25: European OTA and Supplier Mobile Bookings (FB),

2011-2016 16.2

12.1 11.2

8.6 8.3

5.8 6.0 4.1 3.3 2.3 1.5 1.0 2011 2012 2013 2014 2015 2016 Supplier Mobile OTA Mobile Note: 2014-2016 projected. Source: European Online Travel Overview Tenth Edition ©2014 Phocuswright Inc. All Rights Reserved.

Many OTAs are banking on mobile for future growth. Booking.com currently captures 17% of its bookings via mobile. Flight-focused OTA eDreams Odigeo reported that 10% of its bookings come through mobile channels. French OTA Voyages-SNCF, whose app is one of the most downloaded in France, sold one train ticket every three seconds through mobile devices in 2013 and plans to devote 80% of its IT R&D investment to mobile. Germany’s HRS, which promotes mobile hotel bookings by offering discounted rates, predicts that half of its bookings will come from mobile channels by 2017 (compared to just 12% in 2013).

Metasearch 2013 was an active year for metasearch. Priceline’s acquisition of Kayak in late 2012 spurred a series of investments by OTAs in their own metasearch brands. Expedia announced its acquisition of a majority stake in Trivago soon after Priceline’s purchase of Kayak, and smaller OTA brands followed suit, beginning with eDreams Odigeo’s purchase of Liligo from French rail company SNCF in September 2013. In December 2013, Bravofly Rumbo Group purchased French metasearch site Jetcost. U.K.-based flight-focused meta brand Skyscanner is still building a strong position without OTA investment; the company achieved nearly 100% growth in turnover in 2013. Other niche metasearch players also reported solid gains for the year, including holiday search engine Travelsu- permarket, whose yearly revenue increased 35%. Other metasearch leaders include Momondo in Northern Europe and Rastreator in Spain. Google and TripAdvisor also built momentum in the European travel search market in 2013 and 2014. Google’s Hotel Finder is gaining popularity, and its Flight Search is now available in select European markets. TripAdvisor, which implemented its metasearch service in 2013, is actively advertising in certain markets: In 2014, it launched an A8.5 million television campaign in France to promote its search feature. In June 2014, the company introduced its TripCon- nect instant booking feature in the U.S., which it plans to expand into Europe. Currently, the platform is optimized for desktop, tablet and mobile platforms in 25 languages and multiple currencies. Instant booking (for TripAdvisor and other metasearch brands) could be a game changer in travel search as suppliers shift their marketing budgets away from general search engine optimization and OTAs and toward these hybrid and more direct channels. However, both Priceline and Expedia have ab- stained from TripConnect so far (in favor of the metasearch-to-OTA path they currently use) – and while TripConnect is already popular among hotel chains, it could ultimately struggle with traction if the major OTAs do not adopt it.

Methodology Phocuswright’s European Online Travel Overview Tenth Edition presents the findings from proprietary research conducted in 2014 on the European leisure and unmanaged business travel markets. This effort was undertaken as a multipart project to assess the European travel market as a whole, and includes in-depth analyses of six individual European markets: France, Germany, the U.K. (including Northern Ireland), Italy, Spain and Scandinavia. To evaluate the markets, Phocuswright interviewed executives from over 90 Europe-based airlines, hotels, tour operators, rail companies, car rental companies, OTAs, traditional travel agencies and travel technology companies. European estimates and projections include the first 15 European Union (EU) countries, as well as Switzerland and Norway. Unless otherwise indicated, all sales are based on “gross bookings” – that is, the total transaction value of the products sold in Europe – for leisure and unmanaged business travel sites (i.e., consumer-facing websites that sell to individuals, including unmanaged business travelers purchasing outside of corporate travel policies). Gross bookings also include sales from non-EU travel suppliers that are transacted via EU-based OTAs and tour operators. Corpo- rate online booking systems such as Sabre GetThere and Amadeus e-Travel are excluded from this analysis. All financial information is based on data obtained from company interviews or publicly available financial reports. Estimates and projections are based on executive interviews, third-party information, web traffic results, economic indicators, market trends and Phocuswright analysis. Data is actual for 2012-2013 and projected for 2014-2016. In Figures, totals may not always add to 100% due to rounding. All currencies are in euros (A) unless otherwise indicated – as in the U.K. chap- ter, where figures are in British pounds (£) – and converted at the average rate for the period they represent. References to the “travel market” are under- stood to cover the total travel market, while “traditional travel agency” refers to principally offline travel agencies. In assessing the market, Phocuswright applies the following methodology to each respective travel segment: OTA: OTA market sizing estimates and forecasts are based on the local market demand processed via pan-European and local OTAs. Phocuswright figures express the total transaction value of travel sold via OTAs in each respective source market. For example, bookings generated within Germany, for both domestic and international travel, are allocated to the German market. Total OTA bookings reflect the share of total online supplier bookings processed by intermediaries. Airline: Airline supplier gross bookings, both offline and online, are assigned to the market in which the supplier is headquartered. For example, all business generated by Lufthansa worldwide is allocated to Germany, while all Air

France/KLM online revenue is allocated to France. IAG airlines (British Airways and Iberia) are an exception, as their figures are reported individually. Hotel: Hospitality supplier gross bookings, both offline and online, are based on room revenue generated by properties in the country source market. Room revenue for hotels and guesthouse/bed and breakfast establishments are included, while camping and similar establishments’ revenue is excluded. Room revenue also excludes food and beverage sales. Car Rental: Car rental supplier gross bookings, both offline and online, are based on revenues generated by rental fleets operating within the country source market. Tour Operator: Tour operator bookings are assigned to their respective source markets. For example, TUI Travel’s U.K. sales are assigned to the U.K. market. Total travel market calculations – for individual country markets as well as for the total European market – only include non-Europe tour operator bookings generated by each source market. This avoids double counting across other segments including hotels and airlines.

Additional considerations Note that aggregating individual supplier segment estimates and forecasts will not yield the same results as total market estimates, since adjustments are made for double counting. When distinguishing supplier-direct from intermediary bookings, consider the final merchant of sale as the booking channel. For example, metasearch engines are often non-transactional, and customers are redirected to the respective supplier or OTA site for payment processing. Car rental partnerships with airlines and hotels function in a similar way, in that customers searching for car rental products on an airline or hotel website will often be directed to the car rental website to process the payment. m

The French Online Travel Overview

Lead Analyst: Peter O’Connor Contributors: Donna M. Airoldi

Overview France has traditionally been a nation of travelers. They are adventurous in their travel destinations, and many take multiple annual trips, combining a summer vacation with short-haul breaks throughout the year. Together with rising purchasing power and growing consumer confidence, this behavior has historically driven growth, particularly in the online market. However, the global economic crisis, which arrived late in France, has had a lingering negative effect, causing consumers to be cautious and reduce the frequency, duration and budget of their trips. Travel incidence in France (65%) declined five percentage points in 2014, and international getaways have decreased for the third year in a row, with just less than half of French consumers planning to take a foreign vacation in summer 2014.1 Also, the number of nights spent abroad continues to fall year on year, with long-haul destinations particularly affected. These trends have a dramatic impact on the tour operator sector, and the ongoing instability in North Africa – traditionally a major outbound market – has exasperated the problem. Long haul has also been affected by political tensions (most notably in Thailand), although in this case tour operators have been more successful at diverting customers to alternative destinations. Naturally, the World Cup attracted considerable consumer interest and is expected to benefit airline, OTA and tour operator revenue for 2014. Even though more French planned to holiday at home, domestic tourism statistics are not overly positive. According to Protourisme, the number of nights spent in paid accommodations in 2013 decreased by 3.8% and spending declined 4.5%.2 Initial figures for 2014 indicate a similar pattern and, in contrast to previous years, all lodging segments are equally affected. In addition to economic challenges, consider the impact of the increasingly important shared economy. Companies such as Airbnb are gaining a foothold in France, where the large number of second homes could help this concept gain momentum, further threatening accommodation providers. Still, travel is the top “high priority” category for consumers’ discretionary spend, and overall annual household travel spend increased €60 in 2014.3 And although

1) European Consumer Travel Report Fifth Edition, Phocuswright (November 2014). 2) “Où sont passés les Français?” L’echo Touristique (Aug. 30, 2013). 3) European Consumer Travel Report Fifth Edition, Phocuswright (November 2014).

the domestic and outbound markets continue to exhibit the malaise that has characterized the French travel sector in recent years, the country remains one of the world’s most popular tourist destinations. Except for Spain and Italy, which have their own challenges, France saw visitor numbers grow from its traditional feeder markets (the U.S., U.K., Japan, Northern Europe); arrivals from countries such as China, India and Indonesia also increased slightly. This trend has not benefited all segments equally, though, as Paris and the Cote d’Azur regions, and upmarket hotels have profited more than average. Despite the continuing economic challenges, e-commerce continued to grow in 2013, and most travel segments will maintain or increase their share of online bookings. France trails only the U.K. and Germany in gross online bookings, and accounted for 17% of all online bookings in Europe in 2013; mobile represents a 10% share of the total online market. According to FEVAD (Fédération e-commerce et vente à distance), French consumers made more than 600 million transactions online over the course of 2013, spending a total of €51.1 billion, up 13.5% over 2012.4 However, travel’s share of total e-commerce (currently at about 30%) is expected to decline as other, less mature sectors accelerate.

Online Distribution Dashboard

Figure D.1: French Share of Gross Bookings by Channel, 2013 vs. 2016 Traditional Airline 22% 11% 68% 2013 23% 10% 68% 2016 LCC 90% 10% 2013 88% 12% 2016 Hotel 11% 22% 67% 2013 15% 24% 61% 2016 Rail 40% 3% 57% 2013 41% 4% 55% 2016 Car Rental 29% 13% 58% 2013 29% 13% 58% 2016 Tour Operator 18% 7% 75% 2013 21% 8% 71% 2016

4) “The state of e-commerce in France: online sales passed the F50 billion mark in 2013,” FEVAD press release (Jan. 30, 2014).

Figure D.2: French Share of European Total and Online Travel Markets, 2013 (FB) FRANCE 18% FRANCE 17% 43.1 17.6

Rest of Europe 83.8 Rest of Europe 199.8 Online Travel Market Total Travel Market 101.4 242.9

Figure D.3: Total Online Penetration 2012-2016: French and European Travel Markets

50% 47% 45% 45% 44% 42% 45% 44% 39% 43% 40% 41% 39% 35%

30% 2012 2013 2014 2015 2016 France Europe

Key Findings 0 Despite considerable challenges, gross bookings for the French travel market remained stable in 2013, climbing slightly by 0.1% to €43.1 billion. Gains in some supplier segments, including both low-cost carriers (LCCs) and traditional airlines, as well as a substantial increase in OTA sales, have been negated by a drop in tour operator activity due to the unstable political climate in destination markets and economic malaise at home. Total market size in 2014 is expected to decline slightly as these trends continue to have a negative effect.

0 The hotel, rail and tour operator segments have been the primary drags on supplier gross revenue during 2013, with further deterioration forecast for 2014. The unfavorable economic climate, both within the French market and in key incoming markets, is largely to blame. Oversupply, leading to an unhealthy reliance on last-minute sales, is also an issue.

0 The relative maturity of the French online marketplace means growth in online penetration has stabilized in the low single digits, with most growth captured by the pan-European OTAs. Future advances are likely to come from mobile at the expense of web-based distribution for both suppliers and OTAs. Despite the slow growth rate, total online sales (both web and mobile) are expected to represent 45% of gross bookings by the end of 2016.

0 For relatively simple travel products such as air, rail and hotel, the move toward mobile is taking on greater significance. OTAs, with their broader product selection, are profiting most from this trend: Indirect mobile sales are growing at nearly twice the rate of supplier-direct mobile transactions.

0 The relative strength of OTAs, coupled with the highly fragmented nature of French suppliers, makes it likely that intermediaries will continue to accelerate in the French online travel market. OTA share is expected to increase from 41% in 2013 to 42% in 2016, as suppliers continue to struggle to capture direct customers.

0 Priceline/Booking.com further increased its dominance of the French OTA market in 2013, and now accounts for 35% of OTA gross bookings. Offering very broad hotel product selection with over half a million properties, the site’s customer proposition is highly attractive to French travelers.

0 Despite efforts to expand its network and introduce innovative products, revenue at SNCF – the country’s national rail carrier – declined for the first time during 2013, with a further drop forecast for 2014. In addition to economic challenges, rail is facing renewed competition from LCCs as well as from car-sharing services.

0 French hotels have had another challenging year, with declines in both occupancy and ancillary spend. Independent properties, typically more dependent on domestic business, have been hit especially hard. Distri- bution, particularly the role of OTAs, remains a controversial issue, with government action on alleged anti-competitive practices likely in the short term.

0 For the third successive year, French tour operators have seen gross revenue plummet (-10%) due to the weak economy, political problems in destination markets and changing consumer travel habits. While most have redressed and refocused on their core products, further declines are likely.

0 As in the past, multi-channel remains key in the French marketplace. Although both suppliers and OTAs stress the importance of web and mobile, traditional channels such as call centers and retail agents remain vitally important. ROPO (researched online purchased offline) is extre mely high, with customers expecting to move seamlessly between chan nels to complete their bookings. This conduct results in friction, par ticularly in relation to price parity, web-only offers and customer service.

Macro Landscape

The French economy continues to stumble. President Hollande, suffering from record low popularity ratings, recently made a U-turn on economic policy, promising to cut taxes to stimulate the economy – despite a spiraling deficit and debt of more than €2 trillion.5 Unemployment figures reached a 16-year high in 2014, further shaking public confidence, which has had a knock-on effect on discretionary spending, including travel. A ray of good news: Households are slightly less pessimistic regarding future unemployment, even though confidence remains below long-time averages.6 GDP had been stagnant – flat in 2012 and down slightly (-0.1%) in 2013. In November 2014, the European Commission slashed France’s GDP to 0.3% for 2014 and 0.7% predicted for 2016, down from 1% and 1.5%, respectively.7 Growth remains weak; debt continues to rise. France’s debt level (99.8% of GDP), is the largest in the Eurozone, and the government annoyed the EC by refusing to implement austerity cuts.8 The commission now expects France’s deficit to rise to 4.4% of GDP in 2014 and 4.5% in 2015, falling far short of promises to cut its budget shortfall to 3% in 2015.9 Population rose by just under 300,000 in 2013, to 66 million inhabitants, which represents the lowest growth level since 2000. Officials credit the increase to natural births and deaths, not immigration. Total fertility dropped slightly but is still among the highest in Europe. Life expectancy continues to rise following a slight decline in 2012.10

5) “French public debt to reach nearly 2 tn euros: report,” Expatica (Sept. 17, 2013). 6) “In October 2014, households’ confidence was stable,” Insee (October 2014). 7) “EU slashes French outlook, eyes debt near 100% of GDP,” Herald Sun (Nov. 4, 2014) 8) “French deficit to become biggest in eurozone,” The Local (Nov. 4, 2014). 9) Gabriele Steinhauser, “EU Cuts Eurozone Growth Forecast,” The Wall Street Journal (Nov. 4, 2014). 10) “Population balance in 2013 – Three weddings for two PACS,” Insee (January 2014).

Size of the Market A variety of factors have impacted the French travel market, including a challenging economic environment at home and in several source markets, as well as ongoing political unrest in key outbound markets. As a result, the French travel market grew by just 0.1% in 2013 to total €43.1 billion. A slight decline (-0.4%) to €42.9 billion is expected for 2014 (see Figure 2.1).

Figure 2.1: French Travel Market (FB) and Online Growth Rates (%), 2012-2016

Total 2012 9.9 6.9 26.3 43.1

2013 10.3 7.3 25.5 5% 43.1

2014 10.6 7.7 24.6 4% 42.9

2015 11.0 7.9 24.6 4% 43.5 Online Growth 2016 11.6 8.3 24.7 5% 44.7

Most segments were relatively stable, with the exception of LCCs and tour operators. The former increased substantially (11%) in 2013, but at €246 million, LCCs still make up a relatively small part of the overall market. The tour operator segment, on the other hand, has suffered a virtual collapse. In 2013, gross revenue fell 10% to €4.6 billion due to retrenchment efforts by companies struggling to survive after multiple years of cumulative losses. The poor performance of the tour operator segment has had a significantly negative impact on the broader travel market, negating growth in other sectors and dragging down overall market figures. Although the medium-term outlook is more optimistic, suppliers and intermediaries active in the French travel market remain cautious. Annual growth figures are expected to be modest, taking total market size to nearly €44.7 billion by 2016. Online gross bookings grew 5% in 2013 to €17.6 billion, bringing the online penetration rate up to 41% – just below the European average of 42%. Despite the efforts of suppliers to drive direct online bookings, the majority of this growth is being generated by OTAs, particularly in mobile bookings. Changes in consumer behavior, resulting in a movement away from prepackaged travel toward booking individual components, accentuate this trend. With their superior positioning in search, extensive product selection and strong merchandising abilities, OTAs are capturing an increasing share of the expanding online market. OTAs’ share of French online bookings grew to 41% in 2013 and is forecast to inch up to 42% by 2016 (see Figure 2.2).

Figure 2.2: French Online Travel Market, OTA vs. Supplier-Direct Share, 2013 and 2016

2013 2016

OTA 41% 42% Supplier 59% Direct 58%

Air bookings (traditional carriers and LCCs combined) accounted for 46% of the online direct market at €4.8 billion in 2013 (see Figure 2.3). Comparatively high by European standards, the strong share has been driven by the largely successful efforts of Air France/KLM to move customers toward digital platforms. This figure is expected to stabilize in the short- to medium-term as the company finds it increasingly difficult to drive additional business through its online channels. A similar situation exists in the hotel segment, which has seen consistent increases in the proportion of business flowing through direct online channels in recent years. Here, too, the increases have been driven by the efforts of leading players such as Accor and Louvre Hotels. In contrast to air, however, this growth is expected to continue, albeit slowly, as smaller hotel chains and independents play catch-up with their larger cousins. Despite continuing efforts to drive customers toward Figure 2.3: French Supplier-Direct digital platforms, growth Online Market, 2013 in online direct rail sales has peaked. The rail seg- 8% ment’s relative proportion 5% Traditional Airline of the online direct market LCC 44% is expected to remain flat Hotel 28% at approximately 28% in Rail the short to medium term. Car Rental Tour Operator This, however, should be 13% 2% interpreted more as a reflection of the success of past efforts, rather than Source: French Online Travel Overview Tenth Edition a failure to exploit the ©2014 Phocuswright Inc. All Rights Reserved. potential of the current market. Online car rentals, in contrast, remain relatively stagnant, as the segment fails to capture the public’s imagination in terms of online direct sales. Lastly, the proportion of tour operator sales transacted through direct online

channels continues to erode as the drop in overall segment size effectively cancels out any increase in online penetration. As a result, the relative share of tour operators in the French online direct travel market is expected to remain stable at approximately 8% in the near term.

Mobile Mobile commerce continues to grow in the French marketplace, with (travel and non-travel) purchases via smartphones and tablets approaching 11% in 2013, up from 5.5% in 2012. In the travel category, figures were slightly lower, with mobile representing 10% of total travel gross bookings, despite efforts by suppliers and OTAs to drive their customers toward mobile channels. Simple transactions such as train tickets, hotel rooms and event tickets are the products purchased most frequently via mobile devices. Most reservations have short lead times (25% for the same day, and 56% for within the next three days) and the majority of bookings (58%) are for a single night.11 Overall, travel sales through mobile within the French marketplace remain re- strained. Travelers conduct extensive research on their mobile devices, and most companies are reporting explosive growth in mobile traffic. For the moment, however, the majority of transactions are still completed through other (online and offline) channels. Still, with smartphones becoming the device of choice for consumers – French smartphone penetration reached 60% in 201312 – mobile travel transactions will grow to represent 20% of online gross revenue by the end of 2016. France’s mobile travel market is forecast to reach €2.4 billion in 2014, a 35% increase over 2013. By 2016, mobile bookings will total over €4 billion and represent 9% of the French travel market. Although mobile’s share of online bookings has increased across the board, simpler travel products (such as airline seats, train tickets and car rentals) are the most commonly booked products through mobile devices. Driven by the efforts of market leader Air France, mobile traditional airline bookings will grow most significantly, increasing from 10% of online supplier-direct bookings in 2013 to 24% in 2014 (see Figure 2.4). Mobile rail ticket sales, already high at 20% of online direct bookings, will increase to nearly 29% as the national rail company- affiliated Voyages-SNCF.com continues to drive customers toward mobile by providing innovative facilities on its apps and mobile websites. Growth in mobile sales in the hotel sector is being driven by the efforts of the two largest hotel companies (Accor and Louvre), each of which is investing heavily in mobile channels. Lastly, although impressive in percentage terms, mobile growth in the remaining segments was less striking, in effect starting from a relatively low base and playing catch-up with the industry as a whole. On the whole, French suppliers’ weakness in leveraging mobile is being exploited by the OTAs, who

11) “Les comportements d’achats multicanaux des internautes,” Mediametrie/NetRatings (July 2013). 12) Hélène Azevedo, “Taking Pictures of Products Is Main In-Store Activity for French Smart- phone Owners,” comScore (Nov. 7, 2013).

are capturing an increasing share of the market, particularly in segments where supply is fragmented and individual suppliers lack the resources to effectively exploit this opportunity. As a result, mobile share is expected to more than double from 8% of total OTA sales in 2013 to 17% in 2016.

Figure 2.4: French Mobile Share of Online Supplier-Direct and OTA Bookings by Segment, 2013 vs. 2016

2013 2016 29% 24% 19% 20% 18% 17% 11% 10% 9% 7% 7% 8% 3% 3%

Traditional LCC Hotel Rail Car Rental Tour OTA Airline Operator

Suppliers Airlines According to UAF (Union des Aeroports Francais), French air traffic grew 2.3% in 2013 to 72 million passengers. Of these, nearly 26 million flew on an LCC, up 13% over 2012.13 Though LCC revenue is on the rise – with double-digit growth projected for the near term – the segment contributes just €246 million of the €21.2 billion in total airline gross revenue (see Figure 2.5), for a 1% share of the air market in 2013. What’s hurting the category is foreign carriers: They have so progressively attacked the long-haul segment that an estimated 50% of the market could be in foreign hands by 2020. Gross revenue figures for the air segment remain closely linked with the fortunes of industry giant Air France/KLM, which continues to struggle with both positioning and profitability. Growth slowed significantly in 2013 to 1%, but the size of the combined sector will continue to expand slowly in the short to medium term, with opportunities tightly aligned with recovery of the market as a whole. Mobile will capture a larger share of online sales for suppliers, as airlines encourage consumers to self-serve through mobile devices. Conversely, the OTA share of the French online air market is expected to decline slightly in the short term as airlines, particularly Air France/KLM, succeed in encouraging consumers to book directly. Taken together, these trends will result in

13) “Résultats d’activité des aéroports français 2013,” Union des Aéroports Français (2014).

stagnant online penetration figures for traditional carriers (at approximately 32% of gross bookings), reflecting the relative maturity of the product within the French online travel market.

Figure 2.5: French Airline Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 4.6 16.4 22% 21.0

2013 4.8 16.4 23% 21.2

2014 5.0 16.7 23% 21.6

2015 5.0 16.9 23% 21.9

2016 5.3 17.2 24% 22.5 Online Direct Penetration Supplier-Direct Online Other Channels

Air France/KLM Despite a restructuring plan, the Air France Group as a whole continued its six-year loss-making run, reporting a net loss of €1.8 billion in 2013.14 Gross bookings did grow slightly (<1%) to €19.9 billion, and will continue to rise modestly through 2016, to €21 billion. Although long-haul is performing well, short/medium-haul continues to dampen results. Such routes are key, however, as they feed long-haul flights from the company’s Paris-Charles de Gaulle hub. To address this challenge, Air France reorganized during 2013, selling CityJet and regrouping its three remaining brands (Brit Air, Régional and Airlinair) into a new entity called HOP.15 In addition to supporting the aforementioned feeder network, this new brand operates point-to-point flights to and from regional cities. The company also proposed accelerating the development of low-cost subsidiary Transavia, although a crippling strike in late 2014 led to less ambitious plans for the LCC. Despite this complication, other efforts to improve performance continue. A headcount reduction of 2,800 was scheduled for 2014, taking job losses over five years to nearly 8,000, with higher productivity being demanded from remaining employees.16 The aim is to return to profitability in 2014, although initial results indicate this goal will be difficult to achieve.

14) Fabrice Bugnot, “Air France-KLM continue à perdre de l’argent,” L’echo Touristique (Feb. 20. 2014). 15) Air France/KLM Annual Report, 2013. 16) “Air France confirme 2800 départs volontaires,” L’echo Touristique (Sept. 18. 2013).

Digital remains key to Air France’s development. In 2013, the group reorganized its commercial teams to make its digital presence simpler, more responsive and more customer-focused. Although committed to working with travel agency partners (both traditional and online), the group’s key objective is to grow online direct sales as well as profit from increased mobile usage. The carrier encourages customers to use self-serve options: In 2013, it tested new airport kiosks that would allow check-in, flight modifications and payment by credit card. Similarly, the company launched the dedicated flyingblue.com website in 2013, making it easier for loyalty club members to book rewards and upgrades. Mobile remains a priority, with the company supplementing its existing mobile presence with a dedicated site for its HOP! product. The carrier has also extended its social media efforts, offering 24/7 customer service on Face- book and Twitter in nine languages, and promising a response to user posts within an hour and a solution with 24 hours. These efforts appear to be working. Nearly one in four Air France bookings will be made through direct web or mobile channels in 2014, as opposed to approximately 10% through OTAs. The remainder flow through traditional travel agencies and tour operators, underlying the importance of offline channels within the French market and highlighting the airline’s dependence on the performance of the sector as a whole. Already high for the French market, Air France’s total online bookings are expected to remain stable (at approximately 32% of gross revenue) in the short term, as consumers adapt to the digital infrastructure that the company has already put in place.

Corsair Having struggled financially for several years, and despite the challenging economic environment, TUI Travel-owned Corsair managed to reverse its fortunes and almost break even in 2013. The carrier had an operating loss of just €1.2 million on gross revenue of €481 million. Corsair refurbished its fleet and introduced additional long-haul routes in 2013, as it struggled to shake off its charter airline roots and position itself as a mainstream scheduled player. The airline operates 15 routes departing from Paris, mostly to what could be called exotic destinations. The strategy appears to be working; only 7% of gross revenue flowed from TUI’s tour operating wing in 2013. Although the outlook for 2014 is positive, rival XL Airways has aggressively attacked Corsair’s core markets, resulting in lower- than-projected 1H14 financial results, although recovery is expected toward the end of the year.

XL Airways Owned by X-Air Aviation, XL Airways France was once highly dependent on the tour operator market. However, through an aggressive marketing strategy, it has successfully diversified and established itself as a B2C player, operating scheduled flights to long-haul destinations in Africa, the Middle East, the U.S. and the Caribbean, in addition to its charter business.

XL Airways’ unusually high growth rate will slow to 9% in 2014 from 19% in 2013, yet it will still lead the sector with high single-digit growth for the short term. Gross revenue totaled €380 million in 2013, about €100 million behind Corsair. Online sales continue to grow, although the company remains highly dependent on OTAs, which will represent an estimated 24% of gross revenue in 2014 versus 14% for online direct channels.

Transavia In effect the only ‘native’ LCC, Transavia (a subsidiary of Air France) appeared well positioned to profit from the growth of the low-cost market and generated €246 million in gross bookings in 2013, with growth rates in the double digits through 2015. Online direct bookings account for 90% of revenue. The carrier had ambitions to move from 11 aircraft in 2013 to 26 by 2016. But development plans are now in limbo following a two-week strike in Sep- tember 2014 by airline pilots’ union Syndicat National des Pilotes de Ligne (SNPL), which crippled parent company Air France. SNPL, concerned about deterioration in members’ working conditions, called for expansion plans to be abandoned. The airline and pilots reached a tentative agreement in mid-October, with expansion plans for Europe scaled back to just the French domestic market.17

Other Carriers Although dwarfed by Air France, a number of smaller airlines, including Aigle Azur, Air Car ¨aibes and Air Austral, also operate out of French airspace. These make up less than 1% of the market, with revenue projected to decline each year through 2016. An exception is the business class-only segment, pioneered by L’Avion, subsequently sold to British Airways and folded into OpenSkies. The latter has abandoned the concept, reopening the niche for a premium service. L’Avion founder Frantz Yvelin has raised €30 million and in July 2014, launched La Compagnie, an all-business class airline that operates flights between Paris and New York.18

Hotels With corporate travel budgets limited and fewer people traveling for leisure, 2013 was a difficult year for the French hotel industry. While upmarket hotels managed to maintain their performance due to increased international arrivals, economy and budget properties – more dependent on the domestic market – were harder hit, losing an average of two points in terms of occupancy. Room rates did increase slightly, although this was offset by the 3% increase in VAT. In addition, according to accounting firm KPMG, ancillary sales such as food and beverage fell as customers reduced their discretionary spending, putting further pressure on profitability.

17) “Air France, pilots see Transavia deal signed by mid-November,” Reuters (Oct. 16, 2014). 18) “Interview : La Compagnie Co-Founders Frantz Yvelin And Peter Luethi,” Business Travel News (Oct. 13, 2014).

These trends continued in 2014. According to In Extenso-Deloitte, occupancy levels fell significantly in the first quarter. This decline was followed by a drop in prices, leading to RevPAR declines of 3-6%, depending on hotel category. As a result, gross revenue for the sector, which was essentially stagnant in 2013, is expected to decline by more than 4% in 2014 to €11.2 billion (see Figure 2.6), and will only recover slowly in 2015 with a 1% growth rate.

Figure 2.6: French Hotel Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 1.2 10.4 10% 11.6

2013 1.3 10.3 11% 11.7

2014 1.4 9.7 13% 11.2

2015 1.5 9.7 14% 11.3

2016 1.8 9.7 15% 11.5 Online Direct Penetration Supplier-Direct Online Other Channels

Independent properties, which represent an estimated 72% of room inventory, continue to be impacted the most by the economic downturn. A study by con- sulting firm Coach Omnium on behalf of the French government revealed that many independent property owners would like to sell their properties, driven by repeatedly poor financial performance, difficulties in modernizing their properties to adhere to new security regulations, and stressful working conditions. The study showed that more than 60% of such hotels had occupancy rates below 50%, with 80% operating at a loss. At least two independent hotels shut down each day, reducing available bedstock and changing the structure of the French hotel sector.19 Distribution through OTAs remains a hot potato, with the increase in costs particularly problematic. According to a study by In Extenso-Deloitte, OTA commissions have risen 68% over the past five years and now represent 4.6% of hotel gross revenue.20 Hotels are already campaigning against what they claim to be the unfair business practices of the pan-European OTAs. The Union des Hoteliers Independents, established in 2013, was created primarily to help properties negotiate with OTAs. Similarly, in a move reminiscent of RoomKey, hoteliers have launched FairBooking.com – a demand-collection system to route customers to brand.com sites. Although not yet open to the public, by mid-2014 the site had signed up more than 1,900 properties (10% of the total

19) “Petite hôtellerie : 59% des propriétaires veulent vendre leur affaire,” L’echo Touristique (Dec. 18, 2013). 20) Linda Lainé, “Hôteliers: comment desserrer l’étau des OTAs,” L’echo Touristique (Oct. 25, 2013).

in France), promising results that would be ranked based on not commission but on criteria defined by the client – with bookings handled directly by the property. Clients will be encouraged to book by a 5-10% price reduction or a free breakfast or room upgrade. More significantly, the French government has begun paying attention to hotel distribution. In 2013, the French Ministers for Tourism and for the Digital Econ- omy called for increased regulation of online intermediaries. Citing the need to protect independent hotels from online players (especially international ones), they called for increased scrutiny of the sector and greater protection against abusive and anti-competitive behavior. In September 2013, the French courts made a ruling condemning certain clauses in OTA/hotelier contracts, most notably on price parity. As a result, a draft law was presented in May 2014, although it is not yet clear whether this will ultimately become law. Although gross revenue for the sector as a whole is falling, online penetration continues to grow, from 33% on €3.8 billion in bookings in 2013 to an expected 39% on €4.5 billion by 2016. Online direct revenue is beginning to catch up to the OTAs, thanks primarily to the efforts of Accor and Louvre Hotels to drive business through direct channels. The segment’s direct website and mobile bookings were €1.3 billion in 2013, for an 11% share of total gross hotel bookings, and are expected to reach €1.8 billion in 2016, for a 15% share. In contrast, OTAs are projected to grow from a 22% share in 2013 (€2.5 billion) to 24% (€2.7 billion) in 2016. Overall though, the relative importance of OTA bookings continues to increase, driven largely by the success of Booking.com.

Accor In contrast to the struggling independent hotel sector, Accor had a good year in 2013, opening more than 22,000 new rooms and returning to financial stability. Although gross revenue fell slightly (-2%) to €5.5 billion, profitability increased, and growth resumed in the first two quarters of 2014, with gross revenue increasing by 3%. Despite the weak French market, a reorganization gave Accor a boost in 2014. The company split into two divisions: HotelInvest, which will manage the real estate; and HotelServices, which will run hotel operations. This reorganization places the company on a solid financial footing, allowing it to focus on strategic priorities, including growing its property portfolio, enhancing the strength of its brands and rolling out its digital strategy. The company reaffirmed its commitment to all things digital with the appoint- ment of Vivek Badrinath, a recognized specialist in digital solutions and innovation, as Deputy CEO in 2014. Sales through online channels (direct and indirect) made up 28% of gross revenue in 2013. Accor has ambitious plans to grow online sales to 50% by 2016 by more intensively marketing the company’s brands and properties on online channels. In addition, the chain intends to better leverage its relationship with the more than 14 million members of its Le Club loyalty program. The company has already seen significant results, with 32% of reservations being made online in the first half of 2014: 17% through Accor’s portfolio of direct web-

sites and 15% through OTA sites. The latter are now regarded as partners rather than enemies, with Accor further developing its links with key players to drive business in markets where it does not have the capacity to go it alone.

Louvre Hôtels Group Created in 1976 and owned by Starwood Capital Group since 2005, the Louvre Hôtels Group (including subsidiary Golden Tulip) manages a portfolio of more than 1,200 hotels in 47 countries, representing a total capacity of over 90,000 rooms. With more than 820 properties carrying its Première Classe, Campanile and Kyriad brands in France, the company is heavily dependent on the currently lackluster French domestic market. Like its competitor Accor, Louvre has placed increased emphasis on moving its operating structure toward asset-light: less real estate ownership, more management contracts and franchises. As a result, it is focusing more on distribution, not just for operational reasons but also as a tool to justify its brands’ added value to owners and franchisees. Having invested substantially in recent years in driving business through online and mobile, the company now receives over one third of its gross revenue through online channels, relatively evenly split between direct and indirect sources. Already strong in mobile (the company was one of the first European chains to enable mobile bookings and estimates that one in five of its customers visit its sites using a mobile device), Louvre continues to push the French industry forward in this arena. In early 2014, the company launched dedicated mobile apps for each of its brands, including geolocalization, mobile adapted content and live reservation capability. These facilitate greater customer interaction, allowing the company to offer tailored services including breakfast or meals at reduced prices, information on places of interest or discounts on future stays.

Others Despite economic crises in its core markets, Disneyland Resort Paris performed well in 2013. Although the theme park estimates that it lost over 1 million visitors, gross revenue only fell by 1% to €1.3 billion. Hotel occupancy was down (-5%), as a result of lower visitor numbers as well as less conference business. The priority now is to stem the falloff in visitor numbers, which will help revive both park revenue and hotel performance. The remainder of the sector is highly fragmented, characterized by a large number of small and independent hotels with few resources to drive bookings through electronic channels. While the large chains have world-class online penetration metrics, the comparatively poor distribution performance of most independent hotels drags down both direct distribution percentages and overall online penetration. As noted, the majority of independent properties rely heavily on OTAs for their online business, creating resentment and challenges in terms of distribution costs. As such, both direct and indirect channels are expected to grow as the market expands. However, the former are expected to grow more quickly, as independent hotels finally bite the bullet and start making the investment needed to respond to market needs and drive direct bookings.

Rail Once thought to be unstoppable, France’s long distance rail business fell (albeit very slightly) in 2013 for the first time. Rail gross revenue declined 1% to€ 7.3 billion (see Figure 2.7) due to the combination of a depressed economy, fewer travelers willing to pay business tariffs and increased competition from LCCs. Marginal decline is expected in 2014, after which growth at 2-3% per year is forecast to return, along with the economic recovery expected in 2015 and beyond. Online sales, however, are doing well, with online direct bookings up 5% to €2.9 billion in 2013 for a 40% share of the rail market.

Figure 2.7: French Rail Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 2.8 4.6 37% 7.4

2013 2.9 4.4 40% 7.3

2014 3.0 4.3 41% 7.3

2015 3.1 4.4 41% 7.4

2016 3.1 4.5 41% 7.7 Online Direct Penetration Supplier-Direct Online Other Channels

National rail company SNCF, which accounts for 93% of the segment, is doing its best to combat the overall booking decline by expanding its network both domestically and in neighboring countries (an estimated 15% of revenue now flows from international routes). It is placing greater emphasis on its new discount product Ouigo, a business model highly influenced by LCCs. The service uses peripheral stations, limits both luggage and passenger amenities, and allows reservations only through online channels. The company has also introduced new services, most notably its door-to-door concept, with cars to and from departure and arrival stations. Renewal of the company’s high-speed iDTGV fleet is expected to commence in 2015, which will also have a positive effect on traffic. In contrast to the TGV’s declining fortunes, Eurostar continued to prosper in 2013, carrying more than 10 million passengers for the first time. Revenues grew 7% to £857 million, driven by increased business travelers as the U.K. financial markets recover, as well as the introduction of new routes. Revenue figures for 2014 and beyond are expected to grow at an accelerating rate as these trends continue to gain strength. For both SNCF and Eurostar, boosting online distribution and improving customer service through digital channels remain key priorities. Print-at-home tickets have become the norm, with true electronic tickets, enabled by loyalty cards or smartphones, accepted on many routes. Although the market

is now open to competition, most online sales occur through subsidiary Voyages-sncf.com (see Online Travel Agencies), which has been particularly successful at driving sales through web and mobile channels. Online penetration within the rail sector, which stood at 43% in 2013, is expected to continue to increase slowly, with the majority of growth being driven through the mobile efforts of Voyages-sncf.com.

Car Rental As the costs and the logistical challenges of maintaining a car in France continue to increase, many French consumers have chosen to forego vehicle ownership and to rent when the need arises. This drift has resulted in a larger-than-usual domestic market, with car rental companies maintaining retail locations not only at airports and train stations, but also in city centers. Global car rental companies Europcar, Avis and Hertz have a fairly even market share at 17-20% each in 2013, supplemented by Sixt (6%) and a variety of smaller local players that have a higher-than-average influence on the market. However, as in other segments, growth has been hurt by economic conditions as consumers travel less and reduce their discretionary spending. Due partially to an increase in international visitors, gross bookings grew slightly (1%) to €1.55 billion (see Figure 2.8) in 2013, after a prolonged period of stagnation. Growth will remain modest (1.4-2.5%) for the next several years, reaching €1.65 billion in 2016, as most international visitors tend to remain in the Paris region where good public transport makes a car unnecessary. This trend is driven to some extent by the growth in peer-to-peer car sharing services, as well as the popularity of the subscription-based Autolib’ system in Paris, which encourages consumers to rent for as little as a few hours at a time. Nationally, these types of services account for approximately 9% of rentals (up from 5% in 2012), with significantly higher usage in the Paris region.

Figure 2.8: French Car Rental Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016

Total 2012 0.44 1.10 28% 1.54

2013 0.45 1.10 29% 1.55

2014 0.46 1.12 29% 1.58

2015 0.47 1.14 29% 1.61

2016 0.48 1.17 29% 1.65

Supplier-Direct Online Other Channels Online Direct Penetration

Online sales continue to grow at a slow pace, driven more by overall market trends than by any concerted effort by car rental companies. With its mix of international brands and local players vying for supremacy, no company has sufficient market share to exert undue influence. As a result, online direct penetration remains stable at 29% (€450 million), with OTAs making a significant contribution (approximately 13%) by virtue of dynamic packaged and cross-marketing deals that pair car rental with rail or flight sales. Car rental mobile sales grew 121% in 2013, from €14 million to €31 million, which is not surprising given the segment’s large domestic component. Already three out of four (78%) rental reservations in the domestic market are made within a week of the date of travel, with 31% the day before. This lastminute trend is expected to continue as an increasing number of customers book through mobile rather than web or offline channels, with mobile revenue projected to reach €88 million by 2016.

Tour Operators The economic crisis, political unrest in destination markets, and changing consumer behavior all took their toll on tour operators in 2013. Most have been forced to re-examine their operations, cut production costs and reduce capacity in order to regain financial stability. According to SETO (the national tour operators association), the number of trips taken fell 10% in 2013. Although prices held up, the drop in volume resulted in lower revenue for most suppliers. Gross bookings for the segment also fell 10% in 2013 to €4.6 billion (see Figure 2.9), and are expected to decline another 4% in 2014, until finally turning around in 2015 and recovering to 2013 levels by 2016.

Figure 2.9: French Tour Operator Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 0.86 4.21 17% 5.1

2013 0.84 3.75 18% 4.6

2014 0.87 3.56 20% 4.4

2015 0.92 3.58 20% 4.5

2016 0.95 3.64 21% 4.6 Online Direct Penetration Supplier-Direct Online Other Channels

Not surprisingly, the mass market companies – primarily those serving North Africa and the Middle East – have been hardest hit. Although some have been successful in diversifying their product offerings, the vertically integrated nature of French tour operators, coupled with conservative consumer preferences, has made this diversification difficult to implement across the board. According to SETO, the majority of distribution is controlled – call centers, retail agencies and websites – with customers typically switching between channels multiple times before booking. Less than 40% of packages are sold through third parties. Thus, tour operator distribution in France is truly multi-channel, with ROPO figures comparatively high. Efforts to attract consumers to web offerings are paying off: Online channels represented an estimated 25% of gross revenue in 2013, totalling €1.2 billion. Such an emphasis is not surprising given the relatively high cost of using third parties (13% of revenue when commissions, commission overrides and marketing funds are considered, according to SETO). As for mobile, suppliers have begun to offer options for mobile bookings, but they have a long way to go. Mobile revenue for tour operators nearly doubled in 2013 to €27 million, but that accounted for just a 0.5% share of gross bookings. Expected growth will push mobile revenue to €70 million by 2016, for a 1.5% share of total bookings. Online penetration could be higher, but tour operator websites suffer from low conversion rates and high shopping cart abandonment. Part of the challenge is to counter the consumer shift from the traditional, long summer vacation to multiple (often domestic) shorter trips throughout the year, with an increased proportion of travelers reserving only flights or hotels (rather than an organized package) through online channels. As a result, a mis match has occurred between the tour operator product and market needs, pushing traditional vacation package buyers into the arms of the OTAs, which currently have a 7% share of gross bookings. Unless tour operators move toward a more flexible customer proposition, their market share will continue to diminish. Many are taking action, however, investing in technology to make their online offerings more dynamic. As a result, even though online direct bookings declined 2% in 2013 to €840 million, they are expected to increase 3-6% per year through 2016 to €953 million, with market share climbing to 21% of gross bookings. Unlike other segments, mobile is having less of an impact on web revenue due to the complexity of the tour operator product, although tablet-based apps are starting to make progress.

Club Med Having bucked the loss-making trend for the past two years, Club Med dropped into the red in 2013, announcing a loss of €9 million. Although North American and Asian sales were up, total results were down by 3.5% due to weak European demand. The core French market was badly affected, with gross revenue falling 5% to €618 million. As a result the company is accelerating its internationaliza- tion efforts, as well as continuing its strategy of moving upmarket by closing its less attractive properties.

Despite these efforts, initial indicators for 2014 are not good, with European and particularly French results lagging both in terms of revenue and future bookings. Gross revenue for the first quarter was down 0.5%, with cumulative reservations down 2.3% compared to summer 2013. The company is also battling a hostile takeover bid from Gaillon Invest, which has outbid last year’s offer by China-based Fosum.

Thomas Cook France After being on the brink of collapse, Thomas Cook France has succeeded in placing itself on a more solid financial footing. Although gross revenue fell 8% in 2013 to €507 million due to a reduced product offering, the company stemmed losses and expects to return to profitability in 2015, after another 3% drop projected for 2014. A two-year retrenchment has resulted in a strategic focus on the tour operator brand Jet Tours and distribution brand Thomas Cook, while abandoning Thomas Cook-branded packages, a la carte offerings and the discount brand Jumbo. In addition, Jet Tours will limit itself to just 15 destinations, with white-label products from third parties used to ensure an adequate product offering in agencies. Such changes come at a cost. For the second consecutive year the company has implemented voluntary redundancies and is considering closing additional retail agencies. While the company acknowledges that these remain vitally important in the French market, it would prefer to further develop its franchises (currently 323 out of 600 agencies operate under franchise contracts) rather than own these operations. To that end, Thomas Cook is standardizing its (until now) highly variable franchise contract for re-implementation by the end of 2014. The company is also rolling out a new IT system in 2014. This upgrade will allow customer data to be shared seamlessly between the brand and retail agencies, effectively prohibiting franchisees from simultaneously working with any other tour operator. Clients will be attached to agencies based on geography, with a commission of 3.5% paid even if the booking is made totally online. This additional income should help in renegotiating its franchise contract – a key challenge if Thomas Cook is to grow its relatively weak online sales. The French market is truly multi-channel, with consumers moving seamlessly among mobile, Internet and retail agencies, and expecting suppliers to cope. By resolving the payment issue, Thomas Cook hopes to facilitate this process and significantly grow its online sales.

TUI France Facing the same challenges as other players operating in the French market, and also reeling from a financial crisis involving two of its executives, TUI France has been forced to take drastic action to survive. Since early 2013, it has merged its disparate tour operating divisions, wielding the surgeon’s knife to eliminate nearly 50% of its staff and severely reducing its product offering.

Mainstream brand Marmara saw its capacity reduced by 45%, with certain destinations abandoned completely. Nouvelles Frontières also saw severe capacity reductions, with a heavier emphasis on distribution and sales through third- party travel agencies for the first time. Only the company’s upmarket brands – Passion des îles, Tourinter and Aventuria – escaped unscathed. The company has also closed 21 retail agencies and is moving 29 to a franchise basis, taking the latter total to 171. Relations with the agency network remain difficult, particularly since the company started distributing through third parties, and also in relation to how the company compensates agencies for web-to-store sales. Unlike its competitors, TUI does not pay a commission for bookings made online, instead paying each agency an annual sum of €3,150 to handle customer service on online bookings. This practice has been a bone of contention with franchisees, who claim they are not being adequately compensated for the work involved. The result has been improved profitability, or at least reduced losses, but with a severe reduction in revenue. Gross bookings plummeted 20% in 2013 and will decrease another 10%, dropping from more than €1 billion in 2012 to €745 million in 2014. The company expects growth to return in 2015. Online distribution remains key to TUI’s future plans. Marmara generates an above average 21% of revenue through online channels, with an objective to grow this to 28% in the short term. The brand will launch its mobile app with booking capability at the beginning of 2015. Online penetration for other brands is lower as the customer typically needs to work with an agent to customize their experience; nine out of 10 of such reservations flow through agencies. Yet the company has announced plans to generate 25% of gross revenue through online channels within the next two years, reducing the company’s dependence on offline routes.

Voyageurs du Monde As in previous years, specialist upmarket tour operator Voyageurs du Monde has bucked market trends, increasing both gross revenue and profitability in an unfavorable market. Gross revenue grew 18% to €335 million in 2013, driven primarily by the acquisition of trekking specialist Allibert and the continued expansion of its retail network. Online sales also grew, representing 41% of gross revenue, up from 31% in 2012, again largely due to the acquisition of Allibert, which generates more than 50% of its sales online. The company intends to put even more emphasis on online sales in the future. For example, paper-based brochures have been discontinued for certain brands, in effect forcing consumers to go online. Projections for 2014 and beyond are positive, with revenue expected to increase substantially in the short run thanks to the World Cup, for which Voyageurs du Monde was the exclusive distributor in France. In the medium term, having finished its acquisitions spree, the company is expected to pursue a strategy of organic growth and thus more moderate gains (6.5-7.5%) are expected, compared to recent years.

Transat France Transat France, a subsidiary of Canada-based Transat A.T. Inc., operates the tour operating brands Vacances Transat, Look Voyages and Amplitravel, the retail network Eurocharter and the charter airline Air Transat in the French market. The group underwent a significant reorganization in 2013, merging its support functions and creating transversal services to support its brands. This should reduce administrative complexity and generate cost savings, helping to relieve pressure on margins. The move is being supported by the implementation of a new €15 million back-office system which gives more flexibility to manage product inventory and dynamically service client needs. The new system has already been deployed in Vacances Transat, with Look Voyages and the other brands to follow in 2015. Having addressed its organizational challenges, the company is better positioned to attack the market, and thus growth will recommence in 2014 (3%) following two years of stagnation. Transat continues to develop its retail network to grow its 57 branded agencies to 120 (owned and franchised) by 2017. Unlike competitors, the company is not afraid to invest in agencies, perceiving them as showrooms that showcase what is best about its brands. Transat also continues to place emphasis on its online presence, stressing the positive impact of a multi-channel (web-to-store and store-to-web) approach. To date, these efforts have been successful, with gross revenue growing slightly to €505 million in 2014, placing the company among the biggest tour operators in the French marketplace. This positive movement is expected to continue in the short run, as economies of scale driven by the aforementioned fusion begin to kick in and the company recovers market share.

Fram Following two years of disastrous financial results and the intervention of a change management company, Toulouse-based Fram is now better positioned financially, even if black clouds continue to loom on the horizon. Gross revenue fell 10% to €408 million in 2013, as the company’s less profitable products were discontinued. But Fram managed to reduce its net loss to €1.8 million, as opposed to €35 million the previous year. This performance improvement will be essential if the company is to raise funds and attract new investors. The brand plans to reposition itself upmarket, which some view as a mistake that could isolate the company from its existing customer base and move it into an already overcrowded segment. Still, Fram has commenced the process, closing its discount Olé clubs and deemphasizing its less expensive Fram Eco brand. In light of the financial and operational uncertainty, the outlook for Fram is questionable. Gross revenue is expected to continue to decline as the company struggles to find a place in the market, although at increasingly slower rates. The arrival of new management at the end of 2014 may help stabilize the situation, but the risk for the company, essentially the last independent French tour operator, continues.

Others A long tail of tour operators, each of which services a niche segment, typifies the French leisure travel sector. The majority of these smaller brands are struggling as a result of the depressed market, and many sit on the brink of bankruptcy. While in other circumstances industry consolidation would be highly likely, the weak financial position of most tour operators to a large degree precludes such an option. As a result, even though these operators contributed €1.4 billion to gross revenue for a 31% share of the total French tour operator market in 2013, many are expected to fold, reducing the size and relative importance of the segment as a whole.

Online Travel Agencies French OTA gross bookings are growing at a rate of 4-6% annually, from €7.3 billion in 2013 to an anticipated €8.3 billion by 2016 (see Figure 2.10). With suppliers struggling as a result of the ongoing economic crisis, OTAs have consolidated their position within the French market and continue to grow at a faster rate than online direct channels, capturing increased market share across most segments (with the exception of air tickets). With their well-adapted product offering, OTAs are also capturing the majority of growth in mobile sales.

Figure 2.10: French Online Travel Agency Gross Bookings (FB), 2012-2016 8.3 7.7 7.9 6.9 7.3

Priceline’s Booking.com was the only OTA in the French marketplace to achieve double-digit growth in 2013, and leads the sector with a 35% share (see Figure 2.11). Already an industry colossus, Booking.com has been able to profit from high fragmentation in the French hotel sector to drive its growth. [Note that Voyages-SNCF, which has also exhibited strong growth, is included in the Rail section and therefore not represented in Figure 2.11] Results for the other OTAs were less favorable, with Expedia, Voyage Privé, Karavel/Promovacances and Orbitz displaying low-to-mid single-digit growth. Others lost ground in a highly competitive marketplace, including Travelocity/ Lastminute and Odigeo which, despite a 4% revenue loss, still held onto its number two position with a 22% market share.

Figure 2.11: Online Travel Agencies in the French Market, Estimated Market Share, 2013

14% 15% Expedia/Hotels.com 6% Priceline/Booking Odigeo 6% Orbitz/Ebookers 3% 35% Karavel/Promovacances Voyage Privé 22% Others

As always, the line between OTAs, tour operators and even retail travel agencies remains blurred. Companies in these supposedly distinct categories remain deeply interconnected, selling one another’s products through multiple online and offline points of sale. White-label deals are common, with developments in technology enabling integration into the booking path. As a result, establishing distinct figures is becoming increasingly complex, often leading to misconceptions regarding the relative importance of players in the marketplace as a whole.

Voyages-SNCF The largest OTA in the French market, whether measured by traffic or gross revenue, Voyages-SNCF (a subsidiary of rail company SNCF) primarily sells train tickets, which for methodological reasons are included in the rail section of this report. Gross revenue for 2013 exceeded €4 billion (+4%), with nearly 85% originating in France.21 Online sales are tightly linked to the rail market which, as discussed, is relatively mature and facing increased competition from alterna- tives, forcing the company to look elsewhere for growth. Its existing agreements with Expedia (for hotel and car rental) and Promovacances (for packages) remain in place and are its principal sources of non-train supply. Non-train sales remain stable at approximately 10% of the total, thanks primarily to a refocus on France and a small number of European cities as key destinations. Such products are extensively cross-sold with air and hotel, allowing Voyages-SNCF to profit from the high traffic interested in its core rail product. The company’s investment in mobile over the past few years has paid off, with mobile sales now estimated to be over €300 million and growing. In addition to its mobile website, the company has apps for all of the major platforms; nearly two thirds of sales occur through Apple’s iOS platform. In early 2014, the company supplemented its offering by making its Mytripset metasearch site available on mobile.

21) Linda Lainé, “Voyages-sncf.com réalise 300 millions d’euros sur le mobile,” L’echo Touristique (May 6, 2014).

Booking.com The spectacular growth seen by Booking.com in 2012 (nearly 45%) has decelerated slightly, dropping to 18% in 2013. The decline has been mainly driven by industry fallout regarding what some see as its near monopolistic position, as well as hoteliers’ resistance to mandatory price-parity clauses in its contracts, which are widely perceived to be unfair. French gross bookings totaled €2.5 billion in 2013 and are projected to reach nearly €3.4 billion in 2016, with annual growth rates continuing at or near double digits. Mobile bookings are projected to jump from €216 million in 2013 to €687 million in 2016, accounting for 20% of gross bookings. Following the 2013 condemnation of Expedia for uncompetitive business practices by the DGCCRF (Direction Générale de la Concurrence, de la Consommation et de la Répression des Fraudes), a similar suit was lodged against Booking.com in May 2014.22 Judgement is not expected before 2015 and is likely to be highly influenced by the tribunal’s ruling in the Expedia case. The company is trying to build a more positive profile within the French industry, hiring a PR company and participating in industry events.

Odigeo Formed from the merger of three companies (Go Voyages, eDreams and Opodo/TravelLink), Odigeo has been primarily focused on integrating its disparate divisions and its April 2014 IPO. Many of its brands, however, have lost resonance with consumers in the face of increased competition from the global players: Gross revenue dropped in the French market in 2013 to €1.6 billion (-4%) and is expected to remain relatively stable in the short term. Despite this, Odigeo continues to expand, acquiring French metasearch site Liligo from SNCF in late 2013.23 Liligo has a sizeable presence in Europe, with multiple local language sites and estimated gross revenue of €100 million. To preserve the independence needed to operate as a metasearch company, Liligo is run as a separate division within Odigeo. However, in the future, Odigeo may need to reduce its brand portfolio. This reduction will be difficult as each has its unique strengths, geographical coverage and, to a certain extent, dedicated client base.

Expedia With a new president, Expedia France had a twin focus in 2013: improving hotel supply and further developing its mobile strategy. Unfortunately, the company’s relationship with French hotels worsened, with hotel union UMIH (Union des Metiers et des Industries d’Hotellerie) reporting the company to the DGCCRF for what it claims to be anti-competitive practices. Expedia maintains that it complies with all French legislation and provides good value to hotels through access to incremental customers in far-flung markets. It also

22) Aaron Vehling, “French Gov’t Sues Booking.com Over Hotel-Pricing Practices,” Law360 (May 28, 2014). 23) Kevin May, “Odigeo joins the big boys in travel search, buys Liligo from SNCF,” Tnooz (Oct. 9, 2013).

claims the complaint was lodged because of competition with another hoteliers union for members. A ruling on the case is expected in 4Q14. Overall, things still look positive for Expedia within the French market. The company seems to finally have divested itself of its former association with Voyages-SNCF and established itself as a consumer brand in its own right. Gross revenue is expected to continue to grow, increasing from an estimated €1.08 billion in 2013 to over €1.2 billion by 2016. In late 2013, Expedia signed a major white-label agreement with Air France, taking over hotel booking from rival Travelocity (car rental remains linked with Air France’s long time strategic partner Hertz). Work is underway to integrate the hotel offering into the customer booking path, which should help to boost sales through this route. Perhaps to help diversify away from hotels, Expedia acquired French company Auto Escape Group in early 2014 for an undisclosed sum, boosting the company’s presence in the European online car rental market.

Promovacances The last major independent player in the French online travel space, Promo- vacances broke its silence in 2014, speaking to the press and participating in industry events, leading some to speculate about an impending IPO or other form of buyout. Unlike other French OTAs, the company operates online and offline, with a portfolio of prominent websites as well as more than 40 retail stores, which generated an estimated 15% of its revenue. The company also acts as a tour operator in certain key destinations, negotiating directly with suppliers and assembling packages that are sold through its own points-of- sale as well as through its Megavacances B2B brand. Promovacances had gross revenue of €430 million in 2013 (+2.4%), with growth rates between 3.5-4% expected in the short term. In an effort to attain its stated objective of €500 million in gross revenue by 2017,24 the company plans to add 35 additional retail outlets, primarily outside Paris, and intends to reposition its core brand away from low-cost and toward a more mid-market product. A redesigned Promovacances website will reflect this change, with the company’s Un Monde à Deux brand being positioned above and Partir Pas Cher below the core brand. By better segmenting the market, Promovacances is hoping to drive increased online sales, an effort it is reinforcing with an extensive online and offline marketing campaign.

Travelocity/Lastminute In December 2014, Bravofly Rumbo Group announced its intent to acquire Lastminute.com and its global OTA operators from the Sabre Corporation. Last- minute still has extensive consumer brand recognition in France; approximately 20% of the brand’s desktop traffic originates in France. However, it has suffered from a lapse in investment as Sabre has focused more on its technology business. For instance, Lastminute.com has a restricted hotel product offering, with fewer than 100,000 hotels compared with half a million listed on Booking.com.

24) “Promovacances veut casser son image low-cost,” Le Parisien (June 17, 2014).

Another challenge for the brand is outdated back-end technology. In an effort to cut costs, Lastminute.com is consolidating operations by eliminating its white-label and peripheral products such as restaurants and attractions. Gross revenue slipped 4% in 2013 to €53 million. If the sale to Bravofly goes through, Lastminute.com could potentially catch a second wind, depending on longer-term strategic decisions on the part of Bravofly.

Others While the global players dominate, a variety of smaller innovative players continue to operate in the French market. Although undoubtedly affected by the challenging conditions, in many cases their size and agility have allowed them to prosper while their larger cousins struggle. Weekendesk, an offshoot of giftbox provider Smartbox, grew revenue 28% to reach €45 million, and broke even for the first time in 2013. With more than 100 employees, the company has positioned itself as the short break specialist, essentially selling prepackaged experiences that include hotel but not transportation. The company recently discontinued its white-label product (which generated as much as 20% of its gross revenue) to ensure that its product offering is unique. It has a dedicated mobile presence, with an app for iOS in development. Similarly, membership site Vente-privee.com – with 18 million opt-in members and over 2.5 million unique visitors per day – continues to increase its focus on travel. Widely credited as being the inspiration behind the daily deals phenomenon taken global by Groupon, Vente-Privee has a dedicated travel division which generates over €100 million in revenue through private sales. With customers increasingly searching for value, the company sees this business growing as it creates more travel-related offers in response to customer demand. Thirty percent of sales originate from mobile devices, with 61% of this figure coming from its dedicated app.

Conclusion The French travel market is still suffering from the global economic downturn, with many companies reporting lower gross revenue figures, both as a result of reduced capacity as well as depressed consumer demand. Still, the outlook for the market is more positive than in recent years, as most companies have made the changes necessary to return to profitability when the market picks up. Online, particularly mobile, remains a key priority for most companies. Many are focused on mastering this channel, but at the expense of traditional web-based revenues – both direct and indirect – which are expected to slow in the short term. Driving significantly larger amounts of business through online channels, even with mobile’s fast growth, remains unlikely. The multi-channel nature of the French travel market makes achieving increased online distribution difficult, especially since ROPO is so common. Despite efforts by suppliers and intermediaries, the importance of retail agency networks, as well as other routes such as call centers, is not diminishing as rapidly as suppliers would like.

The relatively mature French travel market will see online penetration continue to grow slowly but surely, and is expected to reach 45% of gross revenue by 2016. As in the past, the majority of this growth is being captured by OTAs rather than by suppliers, further cementing the already well-established importance of intermediaries in the French marketplace. The combination of a major supplier with significant fragmentation within each segment makes further progress on direct sales difficult to achieve. Although struggling, the airline, hotel and rail segments are expected to continue to grow, albeit slowly, with car rental remaining stable. French tour operators, on the other hand, are in crisis. Having experienced cumulative losses over several years, many are consolidating operations and shedding assets, all at a time when they should be focused on growth. This segment is expected to severely contract, both as a result of planned capacity reductions as well as companies exiting the market due to sale or bankruptcy. m

The German Online Travel Overview

Lead Analyst: Ralph Merten Contributors: Luke Bujarski, Karen Burka, Feliça Eisenbeis, Cathy Schetzina Walsh

Overview Bolstered by the country’s relatively stable economy and low unemployment, Germany’s travel market remains the largest in Europe. Gross bookings totaled €55.4 billion in 2013, and will increase 2% to reach €56.3 billion in 2014. German online travel bookings grew 10% in 2013, and are expected to rise another 8% in 2014 to €21.5 billion. Germany is in the top tier of European countries in terms of Internet connectivity, with widespread broadband availability. Eighty-three percent of the German population has Internet access, trailing only the Netherlands, Luxembourg and Sweden.1 When it comes to travel, Germans are less online- centric compared to other European markets. Online travel penetration (the share of travel booked online) is projected to increase to 39% in 2014, up from 33% in 2012. By comparison, online penetration in the European market as a whole will reach 44% in 2014. Airlines are Germany’s largest travel supplier segment with gross bookings of €29.4 billion in 2013. Although revenue dipped slightly in 2013, corporate restructuring and cost-cutting programs will enable air suppliers to grow 2% to €30.1 billion in 2014. Germany’s hotel segment continued its steady growth in 2013, as higher occupancy rates and an increase in the average daily room rate (ADR) lifted revenue 3% to €12.3 billion. Each of Germany’s travel supplier segments will experience shifts in distribution from offline to online channels. Supplier-direct online bookings for German airlines will reach €7.8 billion in 2014, representing 26% of total revenues. For hotels, supplier-direct online bookings will rise to €1.2 billion in 2014, accounting for 10% of total hotel gross bookings. For the rail segment, online bookings became Deutsche Bahn’s largest sales channel in 2013, representing 29% of total revenue.

1) Internet World Stats.

Online Distribution Dashboard

Figure D.1: German Share of Gross Bookings by Channel, 2013 vs. 2016

Airline 25% 13% 62% 2013 28% 13% 59% 2016 Hotel 8% 21% 71% 2013 12% 22% 66% 2016 Rail 26% 1% 73% 2013 31% 1% 68% 2016 Car Rental 29% 13% 58% 2013 31% 14% 55% 2016 Tour Operator 7% 9% 84% 2013 8% 10% 82% 2016

Supplier-Direct Online OTAOther Channels

Figure D.2: German Share of European Total and Online Travel Markets, 2013 (FB)

GERMANY 23% 55.4 GERMANY 20% 20.0

Rest of Europe 81.4 Rest of Europe 187.5 Online Travel Market Total Travel Market 101.3 242.9

Figure D.3: Total Online Penetration 2012-2016: German and European Travel Markets

50% 47% 44% 45% 45% 42% 39% 40% 42% 40% 35% 38% 36% 30% 33%

25%

20% 2012 2013 2014 2015 2016 Germany Europe

Key Findings 0 Bolstered by the country’s stable economy and low unemployment, Germany’s travel market remains the largest in Europe. Gross bookings totaled €55.4 billion in 2013, and will increase 2% to reach €56.3 billion in 2014.

0 Online travel bookings grew 10% to €20 billion in 2013, and are expected to rise another 8% in 2014. Eighty-three percent of the German population has broadband Internet access, trailing only the Netherlands, Luxembourg and Sweden. Online penetration in 2014 is projected to increase two percentage points to 38%. However, online booking share remains low compared to other European markets due to lower credit card penetration, lingering discomfort with online payments and the popularity of packaged travel, often purchased via traditional travel agents.

0 Supplier-direct online bookings totaled €11.8 billion in 2013, compared to €8.1 billion for OTAs. Travel suppliers captured 59% of the online market, and that share will remain constant through 2016 as rising OTA sales of hotel and tour products counter declining OTA air bookings to maintain a steady balance between suppliers and OTAs.

0 German mobile travel revenue totaled €1.8 billion in 2013, as the share of Germans using a smartphone or tablet to access the Internet climbed to 40%.2 Mobile bookings in 2014 will grow to €2.8 billion, representing 13% of online sales. By 2016, that share will increase to 23%.

2) Verband Internet Reisevertrieb.

0 The German airline market dipped slightly in 2013 to €29.4 billion, as increasing competition from foreign carriers, including United Arab Emirates-based Etihad Airways and Emirates Airline, and LCCs such as Ryanair and easyJet cut into revenue. Industry restructuring and cost- cutting programs will help the segment rebound in 2014 to €30.1 billion, a 2% increase.

0 Higher occupancy rates and an increase in the average daily room rate (ADR) helped the German hotel market grow 3% to €12.3 billion in 2013. Revenue growth has been sluggish in 2014, due in part to economic concerns outside of Germany limiting business travel gains.

0 Growth has slowed for Germany’s rail operators, as increasing competition, labor union unrest and natural disasters disrupt rail travel. The German rail market will remain flat at €6.2 billion in 2014.

0 Innovative car-sharing services will help boost German car rental revenue 3% to €2.2 billion in 2014. Supplier-direct online revenue represented 29% of 2013 gross bookings and will grow slightly to 30% in 2014. Mobile bookings, however, are projected to jump 56% in 2014.

0 Tour operators are enjoying steady revenue growth, as packaged travel remains popular with value-conscious German families seeking fun in the sun. Gross bookings increased 3% in 2013 to reach €17.5 billion, and are projected to rise another 2% in 2014.

0 Germany’s highly fragmented OTA market is experiencing solid growth, as more consumers make the jump from online researching to online buying. Revenue climbed 10% in 2013 to €8.1 billion, and is projected to increase another 8% in 2014 to €8.8 billion. Mobile revenue for the segment nearly doubled in 2013 to €688 million, representing 8% of all gross bookings.

Macro Landscape

Germany continues to enjoy a relatively positive economic and political outlook, in sharp contrast to the malaise that afflicts some of its European neighbors. While average GDP across the European Union (EU) declined 0.4% in 2013, Germany’s GDP grew 0.4%, and the country’s GDP is projected to increase 1.7% in 2014.3 At 5.3%, German unemployment is half of the EU average and is projected in 2015 to drop to 5.1% – the lowest in Germany’s history. Among EU nations, only Norway has lower unemployment at 3.5%.4 All leading German economic figures, including production rate, income and purchasing power are expected to remain positive in 2014. The German

3) Eurostat. 4) Ibid.

population grew for the third consecutive year, reaching 80.8 million near the end of 2013, as more immigrants sought the security of Germany’s strong economy. Germany is the most populous country in the EU, with an average life expectancy of 80.3 years. However, Germany’s fertility rate of 1.4 children per woman is one of the lowest in the world.5

Size of the Market Economic prosperity is driving increased travel spending, with gross bookings in 2014 projected to grow 2% to reach €56.3 billion. German travel market gains will accelerate versus 2013, when gross bookings increased less than 1% (see Figure 3.1).

Figure 3.1: German Travel Market (FB) and Online Growth Rates (%), 2012-2016 Total 2012 10.7 7.4 36.8 55.0

2013 11.8 8.1 35.4 10% 55.4

2014 12.7 8.8 34.9 8% 56.3

2015 13.8 9.5 34.4 8% 57.6 Online Growth 2016 14.8 10.1 34.2 7% 59.0

Supplier-Direct Online OTA Other Channels

Germany’s online travel market is projected to reach €21.5 billion in 2014, up 8% versus the previous year. Seven in 10 German travelers shopped on a website via computer in 2014, and almost half reported that they usually or always book travel online.6 The country’s online market is Europe’s second largest, trailing only the U.K.’s at €29 billion. German online gross bookings will reach €25 billion in 2016, as German consumers grow increasingly comfortable with online shopping and suppliers more savvy about online distribution. Online penetration will rise to 38% in 2014 – well below the 44% European average. In fact, although Germany will represent 22% of Europe’s overall travel market in 2014, the country contributes just 20% of European online travel bookings. While a majority of German travelers research their holidays online, a significant share continues to complete their purchases offline for some or all of their trips, often due to habit, a desire for personal service or a belief that offline channels offer better deals and customer service.7

5) World Population Statistics. 6) European Consumer Travel Report Fifth Edition, Phocuswright (November 2014). 7) Ibid.

Online supplier-direct bookings totaled €11.8 billion in 2013, compared to €8.1 billion for OTAs. Travel suppliers control 59% of the online market, and that share will hold steady through 2016 as rising OTA sales of hotel and tour products counter declining OTA air bookings to maintain a steady ratio between suppliers and OTAs (see Figure 3.2). OTAs will also capitalize on the fragmented German hospitality market and the tour segment’s continuing shift to online channels. OTA gross bookings are projected to grow 8% in 2014 to €8.8 billion.

Figure 3.2: German Online Travel Market, OTA vs. Supplier- Direct Share, 2013 and 2016

2013 2016

OTA 41% 41% Supplier- 59% Direct 59%

Airlines owned 62% of Germany’s supplier-direct online market in 2013 (see Figure 3.3). Online air bookings totaled €7.3 billion, representing one quarter of all airline revenue. Rail is Germany’s second-largest supplier-direct online segment at 14%. Rail website bookings represented 26% of German rail revenue in 2013 at €1.6 billion and the channel will capture 31% of rail gross bookings by 2016. Tour operators, which currently account for 10% of the German supplier- direct online market, are aiming to boost bookings via their websites by imple- Figure 3.3: German Supplier Direct menting new packaging Online Market, 2013 tools that provide customers with more customized 10% options, particularly in 5% Airline selecting flights. 14% Hotel Germany’s hotels stand to Rail 62% gain the most from distri- Car Rental Tour Operator bution shifts in the online 9% market, as increasing chain penetration, more accessible technology Note: 2014-2016 projected. and favorable legal deci- Source: German Online Travel Overview Tenth Edition ©2014 Phocuswright Inc. All Rights Reserved. sions related to rate parity

help both chains and independent hotels compete against OTAs. Supplier- direct online hotel bookings reached €1 billion in 2013 and will increase to €1.2 billion in 2014. Car rental represented 5% of the supplier-direct online market in 2013. The share of total car rental bookings transacted via car rental supplier websites will increase one percentage point in 2014 to 30%.

Mobile Mobile travel revenue totaled €1.8 billion in 2013, as the percentage of Germans using their smartphone or tablet to access the Internet climbed to 40%.8 Thirteen percent of German online travel gross bookings will be transacted via the mobile channel in 2014, and that share will grow to 23% by 2016. Suppliers and intermediaries are seeing rapid growth in mobile bookings, via both mobile websites and apps. Hotel-direct mobile bookings will grow rapidly over the next two years, rising from 10% of online hotel-direct sales in 2013 to 29% in 2016 (see Figure 3.4). Mobile hotel-direct revenue doubled in 2013 to €98 million, as more German hoteliers developed customized mobile apps with technology partners such as Bookassist.

Figure 3.4: German Mobile Share of Online Supplier-Direct and OTA Bookings by Segment, 2013 vs. 2016

2013 2016

29% 26% 21% 22% 19% 17% 11% 10% 8% 7% 8% 5%

Airline Hotel Rail Car Rental Tour OTA Operator

All of the leading German airlines now offer mobile websites and/or apps. Visitors to Lufthansa’s mobile website, for example, are automatically directed to its mobile app (if downloaded), where they can find flight options and save personal data including frequent flyer numbers. Airline mobile sales will comprise a growing share of airline supplier-direct bookings, rising from 11% in 2013 to 26% in 2016.

8) Verband Internet Reisevertrieb.

OTA mobile revenue is projected to increase 58% in 2014 to reach €1.1 billion. OTAs such as HRS and Opodo already have well-developed mobile capabilities and have launched marketing campaigns to drive mobile usage. For example, HRS introduced an app that allows hotel partners to offer mobile users a 10% discount for same-day arrivals. Mobile device ownership among German travelers and engagement in travel- related mobile activities continue to rise. Nearly eight in 10 German travelers now own a smartphone, and four in 10 own a tablet.9 Mobile travel conversion in Germany is lower than in some other European markets due in part to fears over the security of online shopping in general – only half of Germans feel confident about making online purchases.10 However, mobile booking adoption is continuing to grow. In 2014, 13% of German travelers reported that they had purchased an airline ticket via smartphone in the past 12 months and 14% had booked a hotel.11

Suppliers Airlines German airline gross bookings declined slightly in 2013, amid increasing competition from foreign carriers, including United Arab Emirates-based Etihad Airways and Emirates Airline, and LCCs such as Ryanair and easyJet. Industry restructuring and cost-cutting programs, however, will help the segment rebound in 2014, with gross bookings projected to increase 2% to €30.1 billion (see Figure 3.5).

Figure 3.5: German Airline Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 6.6 22.9 22% 29.5

2013 7.3 22.1 25% 29.4

2014 7.8 22.3 26% 30.1

2015 8.4 22.5 27% 30.9

2016 9.0 22.9 28% 31.8 Online Direct Penetration

Supplier-Direct Online Other Channels

9) European Traveler Technology Survey, Phocuswright (August 2014) 10) Verband Internet Reisevertrieb, Mobile Endgeräte sind die Buchungskanäle der Zukunft (March 5, 2014). 11) European Consumer Travel Report Fifth Edition, Phocuswright (November 2014)

Supplier-direct online air bookings reached €7.3 billion in 2013, representing one quarter of all airline revenue. Online-direct air penetration will increase to 28% in 2016, as airline website bookings climb to €9 billion. Mobile airline bookings accounted for 3% of total airline bookings in 2013, and that share will rise to 7% by 2016 as airlines continue to enhance their mobile offerings. For example, Air Berlin in 2014 became the first airline to offer a digital boarding option via smartwatch, enabling users of its iPhone app to display their boarding pass barcode, as well as flight details (e.g., departure time, gate number, seat), on a Pebble smartwatch. The short-haul market has become less profitable for Germany’s traditional airlines. In response, Lufthansa, for example, has begun replacing its fleet on short-haul routes with new low-cost subsidiaries and joint ventures under its Wings group, which incorporates Germanwings.12,13 Germany’s only LCCs are the U.K.-based Ryanair and EasyJet. Ryanair flies from second-tier airports primarily for leisure travel, while EasyJet provides flights out of major German airports including Cologne and Duesseldorf. Condor and TUIfly round out the German airlines market. Condor is owned by tour operator Thomas Cook, which restructured and consolidated the airline in September 2013 into a division that also includes its air operations in the U.K. and Belgium. Condor will tap partnerships with Italy’s Air Dolo- miti and the Czech Republic’s Czech Airlines for future growth in Germany. In 2015 TUIfly will implement a cost-savings program to remain competitive, eliminating free services to passengers along with reductions in staff costs. Parent company TUI, however, also plans to expand TUIfly’s fleet from 38 to 43 airplanes.

Lufthansa Lufthansa, which owns Germanwings, Swiss Airlines and Austrian Airlines, is Europe’s largest airline. An estimated 30% of Lufthansa’s German customers book their tickets through the airline’s website (Lufthansa.com), representing 24% of Lufthansa’s German sales volume. To further increase online sales, in early 2014 Lufthansa implemented shopping cart functionality that recogniz- es site visitors and analyzes their preferences to personalize the site experience and create customized offers. Mobile bookings, which accounted for about 4% of overall 2013 revenue, are growing rapidly. But the airline is losing ground to LCCs such as Ryanair and easyJet, which have expanded beyond their traditional leisure customer base to target the lucrative corporate travel market with services such as business-class seating and preferred check-in. Middle East carriers including Emirates and Etihad Airways are also cutting into Lufthansa’s market dominance by adding routes and investing in European airline alliances.

12) “Lufthansa Group Unveils Raft of Quality and Innovation Actions,” Lufthansa Press Release (July 9, 2014). 13) With Germanwings now offering flights from all major German airports and Air Berlin operating as a hybrid airline, Phocuswright no longer breaks out the German airlines market into traditional airlines and low-cost carriers (LCCs).

To solidify its position, Lufthansa is considering the launch of a no-frills, long- haul airline offering price-sensitive and leisure-oriented routes to Seychelles and second-tier Chinese destinations, for example. The airline also plans to introduce a premium economy class for long-haul flights in December 2014 in response to declining business-class demand. Germanwings may be the lynchpin to Lufthansa’s future growth. With more than 1,200 weekly flights, Wings is quickly approaching AirBerlin (1,700 weekly flights) as Germany’s second-largest airline. Lufthansa is shifting some of its European routes – excluding its Frankfurt and Munich hubs – to Wings and expects 2014 financial performance to improve by€ 90 million as a result. In fall 2014, Wings became the world’s first airline to use both Amadeus’ full and light ticketing GDS functionality for distributing fares and ancillaries through agents. As a result, it has become easier and more profitable for travel agency partners to make Wings bookings via Amadeus.

Air Berlin Germany’s second-largest airline is in the second year of a cost-savings program called Turbine, which has included a 10% reduction in staff. The airline is looking for relief from United Arab Emirates-based Etihad Airlines, which owns a 30% share of the company. However, German law limits Etihad to a minority stake in Air Berlin; the airline would lose its ability to provide flights on non-European routes if Etihad’s share were to exceed 50%. Air Berlin also is in danger of losing a major government contract for transporting German civil servants between Bonn and Berlin due to the fact that more of Germany’s ministries are moving out of Bonn and into the German capitol. Without a capital infusion, Air Berlin’s future remains uncertain.

Hotels Higher occupancy rates and an increase in average daily rate (ADR) helped German hotel gross bookings increase 3% to €12.3 billion in 2013 (see Figure 3.6). The number of overnight stays jumped to a record 411.8 million,14 while ADR rose to €94, which, although below the European average of €101, leaves room for further growth. As sluggish growth in business and leisure travelers limits hotel revenue gains, the introduction of a tourist tax (i.e., Bet- tensteuer) in 16 cities and municipalities and new minimum wage requirements may impact hotel profits. Supplier-direct online bookings will represent 10% of total hotel gross bookings in 2014, up from 8% in 2013. More than half of Germany’s 55 million Inter- net users already research hotels online; an estimated 30% of those users also book hotel rooms online.15 Hotel-direct mobile bookings will nearly double in 2014 as hoteliers continue to develop customized mobile apps.

14) Hospitality Inside. 15) German International Hotel Association (IHA), Hotelmarkt Deutschland 2014 (2014).

Figure 3.6: German Hotel Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 0.9 11.03 8% 12.0

2013 1.0 11.24 8% 12.3

2014 1.2 11.22 10% 12.4

2015 1.4 11.20 11% 12.6

2016 1.6 11.24 12% 12.8 Online Direct Penetration

Supplier-Direct Online Other Channels

Mid-market hotels dominate the German landscape with a 53% share.16 However, the bulk of hotel investment is in the high- and low-end of the market, and budget hotels in particular are rapidly gaining momentum. Motel One, the leader in the budget hotel segment, expanded its German portfolio to 50 hotels in 2014. In 2013, German-based hotel chains comprised 12% of all hotel properties and 40% of all room capacity.17 Accor is Germany’s largest hotel chain with 340 hotels and 44,326 rooms. By 2016, the company plans to open 100 additional hotels in Germany. Best Western and InterContinental Hotels Group (IHG) follow as the second- and third-largest chains, respectively. With 63 hotels and 13,000 rooms, Germany is one of IHG’s key European markets. Since 2007, the number of hotel chain rooms increased by 31% in Germany, well above the average 20% increase for Europe overall. The impact of hotel chains is most noticeable in the budget segment, where Motel One and B&B Hotels are major players. While there are numerous independent hotels in Germany, their growth has been dwarfed by the chains’ financial investments to compete in the market. OTAs have a strong presence in the German hotel market, representing 21% of all hotel gross bookings and nearly three quarters of online hotel revenue in 2013. OTA hotel revenue for 2014 is projected to rise 7% to €2.7 billion, thanks largely to mobile booking capabilities. OTA mobile apps offer fast, easy navigation and results, as well as click-to-call functionality. These optimized apps frequently outperform the mobile websites of small chains and independent hotels. However, OTA growth may be compromised in the near future by a number of legal challenges to the industry’s rate-parity policies. German legislators banned Hotel Reservation Service (HRS) from requesting price parity from its partner hotels in 2013. The French government has also taken legal action

16) Hospitality Inside. 17) German International Hotel Association (IHA), Hotelmarkt Deutschland 2014 (2014).

against Booking.com’s rate parity policy. As these types of challenges spread across Europe, hoteliers will be able to gain ground versus OTAs by providing better supplier-direct online pricing and promotions.

Rail Growth has slowed for Germany’s rail operators, as increasing competition, labor union unrest and natural disasters (i.e., damage sustained due to severe storms) disrupt rail travel. The German rail market is projected to remain flat in 2014 at €6.2 billion (see Figure 3.7).

Figure 3.7: German Rail Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 1.5 4.64 25% 6.2

2013 1.6 4.56 26% 6.2

2014 1.7 4.47 28% 6.2

2015 1.8 4.43 29% 6.3

2016 1.9 4.38 31% 6.3 Online Direct Penetration

Supplier-Direct Online Other Channels

Deutsche Bahn (DB), Germany’s national railway, holds a 92% market share, but is losing ground on its local and regional routes. Rail operators such as Veo- lia and Netinera now represent one quarter of Germany’s regional rail traffic, which grew to 644 million kilometers in 2013. Germany’s rail network is serviced by an estimated 370 rail operators, including several national companies from neighboring countries (i.e., France’s Keolis and the Netherlands’ Abellio Regio NRW). Long-distance bus tours from companies such as MeinFernbus and Flix- Bus also are eating away at DB’s revenue by appealing to students and seniors with inexpensive pricing. Online bookings are key to the segment’s future distribution. Supplier-direct online sales accounted for 26% of rail revenue in 2013 and will reach 31% by 2016. For DB, online bookings became the company’s largest sales channel in 2013, representing 29% of all revenue. By 2020, the railway’s offline bookings, including counter and kiosk sales, are expected to drop from 57% to 41% of sales. At the same time, online bookings will grow to over half of all sales.

DB is keenly focused on increasing mobile revenue. In 2013, the company sold more than 300,000 mobile tickets per month – a nearly 100% jump over 2012. DB executives estimate that half of the company’s website traffic comes from mobile devices and that share is expected to reach 60% by 2015. The rail operator also introduced the Flinkster car sharing program through its subsidiary DB Rent GmbH. Flinkster is available in more than 140 German cities and includes over 800 train stations. The service offers hourly, daily or weekly car rental bookings sold online, via mobile app or over the phone.

Car Rental Innovative car sharing services will help boost German car rental revenue 3% to €2.2 billion in 2014 (see Figure 3.8). Supplier-direct online revenue will represent 30% of car rental gross bookings in 2014, up from 29% in 2013. Mobile bookings, however, are projected to jump 56% in 2014.

Figure 3.8: German Car Rental Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 0.60 1.47 29% 2.07

2013 0.62 1.49 29% 2.11

2014 0.65 1.53 30% 2.17

2015 0.68 1.55 30% 2.23

2016 0.71 1.57 31% 2.28 Online Direct Penetration

Supplier-Direct Online Other Channels

Market leader Sixt’s DriveNow joint venture with BMW is one of the fastest- growing car sharing services in the country. Year-over-year membership tripled from 75,000 to more than 200,000 in 2013. In 2013, Sixt accounted for 32% of the car rental market and posted a 16% increase in pre-tax profit to €137 million. The company was quick to embrace online and mobile bookings and was one of the first car rental companies in the market to offer an iPhone app. More than half of all Sixt rentals are booked online (including via mobile devices). In June 2014, Sixt signed a global partnership with Expedia to provide Expedia, Hotwire and CarRentals.com with access to Sixt’s fleet at more than 2,000 worldwide locations. With 23% market share, Europcar has 560 German branches and a fleet of 40,000 vehicles. The company executes an estimated 3 million car rental contracts annually. Europcar executives made the decision in 2013 to

optimize the company’s digital marketing strategy by implementing real- time customer analytics and intelligence. The result has been a 15% lift in online visitor conversions and a 12% increase in sales of add-on services at checkout. These positive developments have led Europcar’s primary investor, Eurazeo, to consider taking the company public. Mobile bookings doubled for Avis in 2013 and represent one of the company’s fastest-growing channels. In 2013, Avis had a 12% share of the German car rental market, its third-largest European market following France and Italy. A mobile app launched in March 2014 provides customers with an enhanced user experience, greater transparency and mobile access to the company’s most popular ancillary products and services, including GPS device rentals and various insurance coverage options.hertz Through its North Star Project, Hertz is modernizing and renovating all 8,800 of its rental stations worldwide over the next two years. This goal includes expanding its German presence from 300 to 400 rental stations. Hertz has been severely impacted by the European economic malaise, with a €55 million net loss in 2013. The company holds a leadership position in the commercial vehicle and truck rental business, but needs to spur growth in the car rental segment. One option is to partner with a German car manufacturer, a move that could jumpstart bookings.

Tour Operators Tour operators are experiencing steady revenue growth, as packaged travel remains popular with value-conscious German families. Gross bookings increased 3% in 2013 to reach €17.5 billion, and are projected to rise another 2% in 2014 (see Figure 3.9).

Figure 3.9: German Tour Operator Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 1.1 15.9 6% 17.0

2013 1.2 16.3 7% 17.5

2014 1.4 16.6 8% 17.9

2015 1.5 16.9 8% 18.4

2016 1.6 17.4 8% 19.0 Online Direct Penetration

Supplier-Direct Online Other Channels

German demand for beach vacations continued to climb in the 2013-2014 holiday season, with top destinations including the Canary Islands, Tunisia, Greece and Turkey. German travelers prefer buying packages to leverage early booking discounts and favorable flight schedules. They also largely prefer doing business with offline travel agents; supplier-direct online bookings are relatively small at 7% of 2013 gross bookings. Mobile accounted for less than 1% of sales in 2013, and will remain below 2% through 2016. TUI, DER Touristik (formerly Rewe Touristik) and Thomas Cook are Germany’s leading tour operators, followed by FTI and Alltours. Germany’s tour operator market is the largest in Europe, and each of these companies is using a mix of product innovation, online partnerships and corporate restructuring to maintain and grow their market positions.

TUI TUI, Germany’s largest tour operator, announced strong financial results for the third quarter of fiscal 2014, recording profits of€ 163 million. TUI credits improved performance to hotel business growth, including higher occupancy rates, and a more efficient operating structure within the RIU Hotels and Resorts and Robinson brands. The company will expand the number of Robinson Clubs from 24 to 40 in the next few years to further its international presence. TUI Cruises also is making a larger contribution to the company’s profits, and TUI plans to expand its cruise business with two new ships slated to launch in the U.K. in 2016. TUI’s consolidation program resulted in a 30% cost reduction in the company’s operations. TUI AG and its majority-owned subsidiary, TUI Travel, are planning a corporate merger to become the world’s largest tour provider. TUI also renewed a multi-year partnership with Amadeus to support its online marketing strategy. Only 18% of all TUI travel products are booked online, and the company intends to grow its share of online sales by enhancing its customers’ online booking experience. Utilizing Amadeus’ core flight content and search technology, TUI plans to offer more personalized packages and a broader array of ancillary services.

DER Touristik (formerly Rewe Touristik) In October 2013, Rewe repositioned its six tour operators – ITS, Jahn Reisen, Tjaereborg, Dertour, Meier’s Weltreisen and ADAC Reisen – under the umbrella brand of DER Touristik. The company remains Germany’s second-largest tour operator with 2013 revenue of €3.5 billion. Gross bookings are expected to increase 3% to €3.6 billion in 2014 on the strength of DER Touristik’s 2,100 brick- and-mortar travel agencies. In a move to increase online bookings, DER Touristik entered the Dutch OTA market in July 2014 by acquiring a 50% stake in Prijsvrij Holding NV. The Dutch tour operator market has experienced a massive shift toward online promotion and bookings. The deal represents DER’s first major OTA investment; the tour operator already owns a minority stake in HolidayInsider.

Thomas Cook Political turmoil in Egypt – a popular holiday destination – disrupted Thomas Cook’s revenue growth, as the company reported a 7% drop in bookings to €3 billion for the six-month period ending March 31, 2014. However, the tour operator rebounded with a 4% increase in summer bookings for the 2013-2014 fiscal year. Thomas Cook has begun expanding its line of branded hotels, including Sen- tido Hotels and Resorts and SunConnect Resorts, with plans to add 325 more properties by 2017. The company signed nearly 136 new hotel contracts in late 2013 and early 2014. With a supplier-direct online conversion rate of less than 1%, compared to 50% in store, Thomas Cook has implemented online initiatives such as Resort Advisor to increase online bookings. Resort Advisor’s goal is to encourage travel agents to use their downtime to shift more of their destination expertise online. Overall, Thomas Cook wants website bookings to represent 50% of its business by 2015.

Online Travel Agencies (Note: The OTA market size estimate for Germany was revised downward from Phocuswright’s previous estimate published in the European Online Travel Overview, 9th Edition. This difference was caused primarily due to new information available on total gross bookings for a global OTA operating in the German market.) Germany’s highly fragmented OTA market is experiencing strong growth, as more consumers make the jump to do-it-yourself travel planning and booking. Gross bookings climbed 10% in 2013, and will grow 8% in 2014 to reach €8.8 billion (see Figure 3.10). Mobile revenue for the segment nearly doubled in 2013 to €688 million, representing 8% of all OTA gross bookings.

Figure 3.10: German Online Travel Agency Gross Bookings (FB), 2012-2016 9.5 10.1 8.8 8.1 7.4

Booking.com, with 21% of the 2013 market, is gaining share at the expense of HRS (including Hotel.de), which fell to 13% of gross bookings (see Figure 3.11). Still, the two hotel-only OTAs dominate online hospitality bookings with a combined 80% share of that market. Their stature dwarfs other online hotel portals and could lead to further consolidation and higher commissions.18

18) German International Hotel Association (IHA).

Figure 3.11: Online Travel Agencies in the German Market, Estimated Market Share, 2013

Expedia 7% 3% 12% Priceline/Booking/Agoda 3% Odigeo (Opodo, Edreams, Go Voyages) HRS/Hotel.de 7% Unister 2% 3% 21% HolidayCheck 2% L’tur Tourismus AG Comvel Group 8% RTK-Gruppe 4% Schmettering Travix (BCD) 14% 13% Travel Viva Others

Legal action will further complicate the outlook for OTAs in the hotel market. In December 2013, the German Federal Cartel Office declared HRS’s contractual terms and conditions for partner hotels to be non-binding. Previously, all HRS partner hotels were obligated to provide HRS with their best rates, availabilities and conditions on all online and offline channels. The legal judgment now provides hoteliers with more freedom to choose rates, availabilities and conditions in their partnership with HRS. The German government is now investigating other OTAs, including Booking.com and Expedia, for possible anti-competitive hotel industry practices.19 These legal developments, along with the growing importance of metasearch in the online hotel segment, will have a significant impact on the future size and shape of the German OTA landscape.

Booking.com (Priceline) Booking.com’s market share in the German OTA market has jumped over the past three years from 14% in 2011 to 18% in 2012 and 21% in 2013. The hotel- only portal, now the largest hotel OTA brand in Germany, quickly gained ground on HRS and its three hotel portals (HRS.de, Hotel.de and Tiscover). Since the beginning of 2013, Booking.com has doubled the number of German hotels listed to 26,000. The company is pursuing an aggressive promotion strategy and launched its first television commercial in 2014.

HRS/Hotel.de With its German market share declining, HRS is focused on diversifying its business and seeking growth in targeted travel markets including China and Central/Eastern Europe. The company’s acquisition of Hotel.de and Tiscover will further its goal to become an international travel group. HRS also is expanding its hotel services for corporate customers to cover hotel procurement, bookings, payment options and expense analysis.

19) Ibid.

Mobile revenue is increasingly important to HRS’s growth strategy, as the OTA seeks to increase mobile bookings from 12% in 2013 to 20% in 2014. To achieve that goal, HRS introduced an exclusive app that allows hotel partners to offer mobile users a 10% discount for same-day arrivals. In April 2014, HRS joined Booking.com in offering a commission override tool, called Ranking Booster, which allows hoteliers to influence their property’s visibility by increasing their commission to the OTA. HRS acquired the capability through its purchase of Hotel.de. The company also aligned itself with the German Federal Cartel Office and has taken legal action against Booking.com and Expedia to bind its competitors with the same contract terms and conditions that it must now offer its partner hotels.

Expedia Expedia is enjoying three consecutive years of revenue growth in the German market. Gross bookings increased 14% in 2013 to €990 million, while market share improved to 12%. The company launched a European branding campaign in June 2014 that included television commercials, print and online advertising and digital promotion through social media. Through its Travel Agency Affiliate Program (TAAP), Expedia is expanding its strategic partnerships with travel agencies by providing them with updated Expedia branding. An estimated 400 German travel agencies have already enrolled in the program.

Unister With 14% of the German OTA market, Unister is a leading player in the prepackaged travel niche. The company uses content provided by TravelTainment, Amadeus’ leisure tour operator. In May 2014, Unister began a partnership with former Google subsidiary DailyDeal to expand its market reach. Unister brand U-Deals now oversees the offers presented on the DailyDeal travel portal. Unister experienced a setback in March 2014, when a German district court banned the OTA from advertising with non-transparent prices on its Fluege.de website. Until that time, Unister only provided pricing inclusive of all fees and surcharges at the end of the booking transaction. The court also reprimanded Unister for improperly selling travel insurance.

eDreams Odigeo eDreams Odigeo and its German OTA Opodo.de are targeting mobile users to grow the brand’s German market share. In June 2014, Opodo launched an updated Android app that is faster and more user-friendly. Travelers can use the app to book flights, hotels, rental cars, packages and last-minute offers, as well as view customer reviews. Returning customers also can save their travel product preferences for future bookings.

Comvel Denmark’s ProSiebenSat1, which owns the travel portals Weg.de and Ferien.de, acquired Comvel in December 2013. Comvel’s travel brands – Tropo, Wetter.com, Billiger-Mietwagen, MyDays, Holiday-Insider and Reise.com – will be marketed with ProSiebenSat1’s properties under the umbrella brand, House of Travel.

L’tur L’tur’s revenue fell 5% in 2013 to €429 million as the OTA stopped offering flights to metasearch engines in an effort to reduce credit card processing costs, and Hlx.com is no longer part of L’tur’s business. The OTA caters to luxury travelers – nearly 70% of its customers book four- and five-star hotels. More than half of L’tur customers book travel packages, while 80% book beach holidays. Online revenue represents 40% of the company’s bookings, with mobile generating more traffic and transactions than desktop. L’tur strengthened its partnership with Sixt, which is now its exclusive online car rental provider. Sixt’s mobile features will be integrated into L’tur’s websites to boost last-minute bookings.

HolidayCheck HolidayCheck is taking a global approach to its business, with plans to combine and centralize all of its European hotel databases, including the Netherlands’ Zoover and Tjingo, as well as France’s Ecotour. The company is becoming more of a metasearch site than an OTA, with premium promotions that allow hotel partners to post special offers linked to their supplier- direct websites. Hotel fees are based on the number of rooms featured. With one fifth of its site traffic coming from mobile devices, HolidayCheck has established a “mobile first” philosophy for future product launches. The company anticipates 15% mobile traffic growth in 2015 and has used responsive design to optimize its sites for mobile visitors.

Conclusion With relatively low online travel penetration, Germany’s online travel market has plenty of room to grow. Further, Germany is enjoying record-low unemployment and inflation, leading more German consumers to open their wallets and spend freely on travel products and services. Eighty-three percent of the population has Internet access, trailing only The Netherlands, Luxembourg and Sweden in the European Union. However, even though online travel penetration will rise from 33% in 2012 to 38% in 2014, half of German consumers are not confident about the security of online purchases. Germany is the largest travel market in the EU, yet only accounts for 20% of online travel revenue. This dynamic presents a critical opportunity for travel suppliers and OTAs to foster and grow consumer confidence in online travel bookings. All of the major German airlines now offer mobile websites or apps, and Air Berlin became the first airline to offer a digital boarding option via smartwatch in 2014. Seven in 10 German travelers shopped on a website via computer in 2014, and almost half reported that they usually or always book travel online.20 To increase that percentage even further, hoteliers are partnering with technology services

19) European Consumer Travel Report Fifth Edition, Phocuswright (November 2014).

such as Bookassist to develop customized mobile apps. HRS, for example, is focused on increasing mobile bookings from 12% in 2013 to 20% in 2014 by introducing an exclusive app that allows hotel partners to offer mobile users a 10% discount for same-day arrivals. Growth also will come from new corporate structures and travel partnerships that respond more efficiently to consumer demand. Lufthansa integrated LCC Germanwings into its domestic network to become more competitive with rivals Ryanair and EasyJet as the profitability of short-haul routes declines. Car rental companies are winning a new generation of customers with unique car-sharing services that cater to millennials who want to rent vehicles by the hour. Expedia, which increased its share of the German OTA market to 12% in 2013, is expanding its strategic partnerships through its Travel Agency Affiliate Program (TAAP). The OTA is providing travel agency partners with updated Expedia branding; an estimated 400 German travel agencies have already enrolled. m

The Italian Online Travel Overview

Lead Analyst: Stanislas Feminier Contributors: Luke Bujarski, Karen Burka, Colie Hoffman

Overview Despite Italy’s gloomy economic and political environment, there is room for cautious optimism about the future of the country’s travel market. Italy remains a highly desirable inbound destination that receives a robust volume of international visitors each year. In addition, the country has benefited from the rising number of low-cost carrier (LCC) routes flying to and from major Euro- pean cities, as well as the growing number of travelers from emerging markets such as Russia and China. Italy also has a pervasive informal economy, which accounts for more than a quarter of the country’s GDP. This circumstance has helped cushion some of the direct impact of high unemployment on local travel demand. Despite large numbers of international visitors, suppliers in Italy still depend heavily on domestic revenue: Italians get more than five weeks of annual holiday leave, and 80% travel domestically. After three consecutive years of contraction, Italy’s travel market is projected to improve 4% in 2014 to E20.3 billion. Every travel segment will see an increase in bookings. Rail will lead the way (7%), followed by airlines (4%). Online travel penetration (the share of travel booked online) remains low in Italy compared to other European markets. By 2016, this figure is projected to reach 40%, up four percentage points from 2014. All of Italy’s airlines are aggressively driving customers to their websites with price promotions and low booking fees, and social media’s influence on the travel market is quickly increasing – both suppliers and online travel agencies (OTAs) are using Google, TripAdvisor and Facebook to promote their products and services. As suppliers shift a greater portion of their marketing budgets online, more will enable booking through social media networks. Mobile will also help online travel sales: Italians are embracing the wide availability of high-speed mobile networks and will increasingly begin booking online. Currently, 92% of Italy’s mobile phone users are covered by 3G networks.1 By the end of 2013, Italy was home to 36.6 million Internet users (60% of the population).2 Migration to new online channels will create an opportunity to capture market share, despite the lagging economy.

1) AGCOM. 2) Istat.

Online Distribution Dashboard

Figure D.1: Italian Share of Gross Bookings by Channel, 2013 vs. 2016 Traditional Airline 26% 13% 61% 2013 28% 12% 60% 2016 LCC 26% 9% 66% 2013 33% 10% 57% 2016 Hotel 5% 24% 71% 2013 9% 27% 65% 2016 Rail 28% 72% 2013 30% 2% 68% 2016 Car Rental 18% 10% 72% 2013 21% 11% 68% 2016 Tour Operator 2%2% 96% 2013 5% 3% 93% 2016

Supplier-Direct Online OTAOther Channels

Figure D.2: Italian Share of European Total and Online Travel Market, 2013 (EB) ITALY 8% 19.4 ITALY 6% 6.5

Rest of Europe 94.9 Rest of Europe 223.5 Online Travel Market Total Travel Market 101.4 242.9

Figure D.3: Total Online Penetration 2012-2016: Italian and European Travel Markets

50% 47% 44% 45% 42% 39% 40%

38% 39% 36% 30% 33%

29%

20% 2012 2013 2014 2015 2016 Italy Europe

Key Findings 0 After three years of contraction, Italy’s travel market is poised to expand in 2014. Gross bookings are projected to rise 4% in 2014 to E20.3 billion as a thriving inbound market and increasing online bookings spur growth.

0 Online gross bookings will increase 13% to E7.3 billion in 2014. Online penetration will climb to 36%.

0 Investments in website development and promotion are paying off for Italy’s travel suppliers, which are projected to gain market share at the expense of OTAs through 2016. Supplier websites accounted for 40% of Italy’s online travel market in 2013, and OTAs represented the remaining 60%. By 2016, supplier websites will grow their share to 44%.

0 Mobile bookings are critical to growth in Italy’s travel market, as Italians are avid users of high-speed mobile devices. The mobile travel market is forecast to reach E372 million in 2014, a 98% increase over 2013. By 2016, mobile bookings will total nearly E835 million and represent 11% of all online sales.

0 Airlines will turn the tables on three years of revenue losses in 2014. Al- though gross bookings for traditional airlines and LCCs combined fell 10% in 2013 to E4.5 billion, they are projected to increase 4% to E4.6 billion in 2014, led by growth in inbound and corporate demand.

0 Like airlines, Italian hotels will see a reprieve in 2014 after enduring two years of declining revenue. Gross bookings will rise 4% to E10.8 billion. The main drivers will be an increase in online bookings and an influx of

visitors from Northern Europe and the BRIC countries (Brazil, Russia, India and China), which together will compensate for a slight decline in domestic bookings.

0 Rail operators’ investments in high-speed routes, which have greatly improved travel times and passenger comfort, are aiding the segment’s growth. Gross bookings for rail were E2.5 billion in 2013, a 2% increase over 2012. Boosted by new routes and innovative offers (for example, packages that combine rail travel with cruises), revenue will leap 7% to E2.6 billion in 2014.

0 A jump in inbound leisure travel is helping Italy’s car rental market rebound from anemic domestic demand. Gross bookings totaled E1.1 billion in 2013, a 3% improvement over 2012, and will increase 2% in 2014.

0 A combination of market forces have led tour operator revenue to fall 20% since 2011. The forecast for 2014 shows slight improvement, however. Tour operators are improving their business strategies, and traveler perception of safety in Egypt – a major outbound destination for Italians – has improved in recent years. As a result, gross bookings for 2014 will increase 3% to E4.3 billion.

0 OTA gross bookings grew 17% to E3.9 billion in 2013, and another 11% increase is projected for 2014. OTAs continue to capitalize on rising demand among foreign leisure travelers, fragmentation in the Italian hotel market, and their advantage over LCC websites (unlike LCC sites, OTAs allow consumers to shop and book tickets on different airlines).

Macro Landscape Macroeconomic and political factors are putting a damper on Italy’s travel market. The Italian economy remains mired in a recession, and three consecutive years of GDP losses are not expected to turn around until 2015. Public debt is on track to reach more than 133% of GDP in 2014, despite government efforts to reduce budget deficits through fiscal austerity and tax increases. Overall unemployment hit a record high of 12% in June 2014; among youth, this figure climbed to an unprecedented 44%.3 Lacking a majority in the Italian parliament, Prime Minister Matteo Renzi has been unable to relieve the economic malaise. Waves of qualified students and workers are fleeing Italy for the prospect of jobs in Northern Europe. Italy’s population grew 0.5% to 59.7 million in 2013,4 though it would be declining if not for the ongoing arrival of immigrants from Africa, the Balkans and South America. Italy has one of the oldest populations in the world and a low birth rate (8.84 births per 1,000 members of the population).5

3) Ibid. 4) Ibid. 5) CIA World Fact Book.

Size of the Market After three years of contraction, Italy’s travel market is poised to expand in 2014. Gross bookings fell 3% to E19.5 billion in 2013, representing 8% of the European travel market. Revenue is projected to increase 4% in 2014, reaching E20.3 billion as a thriving inbound market and increased online bookings spur growth (see Figure 4.1).

Figure 4.1: Italian Travel Market (EB) and Online Growth Rates (%), 2012-2016 Total 2012 2.5 3.3 14.2 20.1

2013 2.6 3.9 13.0 10% 19.5

2014 3.0 4.3 13.0 12% 20.3

2015 3.5 4.6 13.2 11% 21.3

2016 3.8 4.9 13.4 Online Growth 8% 22.1

Supplier-Direct Online OTA Other Channels

Online penetration will climb to 36% in 2014 and continue a healthy ascent to 40% in 2016, still trailing the European market as a whole. Penetration in the U.K. and Scandinavia is considerably higher, as these areas have more consolidated supplier segments with deep-pocketed brands that have robust presence and functionality online. Consequently, they bolster penetration for the overall Euro- pean market (44% in 2014 and 47% in 2016). Online gross bookings will increase 13% to E7.3 billion in 2014. Investments in website development and promotion by Italy’s travel suppliers are paying off,

Figure 4.2: Italian Online Travel Market, OTA vs. Supplier- Direct Share, 2013 and 2016 2013 2016

OTAs 40% 44% Supplier- 56% 60% Direct

giving suppliers market share formerly controlled by OTAs. Online supplier direct channels accounted for 40% of Italy’s online travel market in 2013; OTAs represented the remaining 60% (see Figure 4.2). By 2016, supplier websites will increase their share to 44%. Traditional airlines accounted for 39% of all online Figure 4.3: Italian Supplier-Direct direct bookings in 2013 (see Online Market, 2013

Figure 4.3). All of Italy’s air- 3% lines are aggressively driving 7% customers to their websites Traditional Airline with price promotions and 39% LCC low booking fees. Online 26% Hotel Rail direct sales for traditional Car Rental E airlines totaled 1 billion in Tour Operator E 2013 and will grow to 1.1 19% 5% billion in 2014. Note: Totals may not add to 100% due to rounding. Although LCCs represent Source: Italian Online Travel Overview Tenth Edition just 5% of the online direct ©2013 Phocuswright Inc. All Rights Reserved. market, website and mobile bookings represented a quarter of all LCC bookings in 2013. The 2012 bankruptcy of Wind Jet created a major vacuum in the industry, and Italian-owned LCCs continue to lose market share in the wake of its departure. Meanwhile, other European carriers, such as the U.K.’s Ryanair and easyJet, have expanded their Italian routes. Buoyed by the dominance of the Trenitalia and NTV websites, rail operators garnered 26% of Italy’s online direct bookings in 2013. Mobile rail bookings are small now, but increasing rapidly. Both Trenitalia and NTV offer mobile boarding passes. A popular new feature on Trenitalia’s mobile app (Pron- toTreno) allows travelers to plan their journeys using an interactive map that displays points of interest near destination stations. Hotels have the third-largest share (19%) of Italy’s online direct market. Sup- plier websites and OTAs both benefit from fragmentation in the segment, which includes some 48,600 hotels. Seven percent of online direct bookings are car rentals. Supplier websites are becoming a critical distribution channel for car rental companies in Italy: Avis’ website, for example, brought in 22% of the company’s 2013 gross bookings; this share will increase to almost 24% in 2014. Mobile car rental bookings will double in 2014. Italy’s 400 tour operators are in a tougher position than other segments, and will need to increase their slim online share in order to survive. Tour operators still rely on Italy’s 8,000 travel agencies for the vast majority of distribution, and very few have taken advantage of online channels – either directly or through OTAs. Most believe it is less expensive to pay an 8% average sales commission than to invest in online development and promotion.

Mobile Given Italians’ strong affinity for mobile technology, bookings via this platform are critical to the future of Italy’s travel market. More than half of the country’s population has access to 4G LTE, and 92% of Italy’s mobile phone users are covered by 3G networks.6 In 2013, 48% of Italian mobile phone owners had smartphones. Tablets and phablets have also become popular for browsing travel websites. Mobile traffic on supplier and OTA sites is high – an estimated 20-30% of all online travel traffic – and bookings via mobile are growing fast. In 2014, mobile supplier bookings in Italy will reach E372 million, a 98% increase over 2013. By 2016, mobile supplier bookings will total E835 million, representing 10% of all online travel sales. Each segment’s mobile bookings are poised to climb significantly in the next several years (see Figure 4.4). Mobile represented 5% of the online rail market in 2013, a share that will jump to 17% in 2016. ProntoTreno, Treni- talia’s mobile app for smartphones and tablets, allows travelers to check timetables and train punctuality, purchase tickets, change reservations, and request refunds. Both Trenitalia and NTV also offer ticketless boarding via mobile device. A popular new ProntoTreno feature lets rail travelers plan their journeys using interactive maps that display points of interest near their destination stations.

Figure 4.4: Italian Mobile Share of Online Supplier-Direct and OTA Bookings by Segment, 2013 vs. 2016 2013 2016 29% 25% 22% 22% 20% 17% 17% 15% 11% 9% 4% 4% 5% 5%

Traditional LCC Hotel Rail Car Rental Tour OTA Airline Operator

Large investments in mobile will also bear fruit for Italy’s OTAs, whose mobile bookings are projected to reach 22% of sales in 2016. Italian hotels are increasing geolocalization functionality on their mobile apps, which allows tourists traveling by car or train to make last-minute bookings. This appeal to mobile users will help spur growth: Mobile bookings, which accounted for 17% of online direct hotel sales in 2013, will reach 25% by 2016.

6) AGCOM.

Suppliers Airlines Gross bookings for traditional airlines and LCCs combined fell 10% in 2013 to E4.5 billion, but 2014 will bring a 4% increase to E4.6 billion, a welcome change after three straight years of losses (see Figure 5). According to the Italian Civil Aviation Authority (ENAC), traditional airlines represented 59% of all Italian airport traffic in 2013; LCCs accounted for the remaining 41%. In total, 143 million passengers departed from Italy’s airports in 2013, a 2% decrease from 2012.

Figure 4.5: Italian Airline Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 1.3 3.7 26% 5.0

2013 1.2 3.3 26% 4.5

2014 1.3 3.4 27% 4.6

2015 1.4 3.5 28% 4.9

2016 1.5 3.7 29% 5.1 Online Direct Penetration Supplier-Direct Online Other Channels Note: 2014-2016 projected. Source: Italian Online Travel Overview Tenth Edition ©2014 Phocuswright Inc. All Rights Reserved.

In 2013, LCC gross bookings plummeted 32% to E530 million. The bankruptcy of Wind Jet in 2012 created a major drag on the airline industry. Italian-owned LCCs continue to lose market share to European carriers such as Ryanair and easyJet, which have expanded beyond their traditional leisure customer base to target the lucrative corporate travel market with services such as business-class seating and preferred check-in. Ryanair became Italy’s leading LCC with 23 million passengers in 2013. EasyJet, Italy’s third-largest airline, carried 13.4 million travelers and opened its third operating base at Naples airport in March 2014. Two Spanish LCCs – Vueling and Volotea – are also expanding their Italian presence and have opened numerous routes to Spain and France over the past two years. (Note: Gross bookings for Ryanair and easyJet are allocated to the U.K. market, and Vueling and Volotea to the Spanish market.) Online bookings represented 39% of traditional airline sales in 2013 and are projected to reach 40% in 2014. Both traditional airlines and LCCs are looking to boost direct online sales to improve margins. To this end, carriers are aggressively driving customers to their websites with price promotions and low booking fees. Alitalia offered one-way tickets to various domestic and European cities for as low as E39 (including taxes) in the spring. For traditional airlines, online supplier-direct sales are expected to grow to 27% of gross bookings in 2014; OTA share will remain flat at 13%.

In 2013, 26% of LCC gross bookings came through supplier websites and 9% through OTAs. More than half of LCCs’ remaining sales come from tour operators such as Alpitour and Eden Viaggi. Mobile will play an integral role in the airline industry’s turnaround as carriers develop mobile websites and apps to ease booking and check-in. Mobile bookings for traditional airlines will jump 169% in 2014 to E105 million. Among LCCs, mobile will grow from 1% of total bookings in 2013 to 6% in 2016.

Traditional Airlines Alitalia The August 2014 acquisition of the ailing Alitalia by Abu Dhabi-based Etihad Airways breathed new life into Italy’s largest airline. Etihad purchased a 49% stake in Alitalia for almost E1.8 billion. The Etihad deal is an ideal match. Alitalia’s 2013 revenue fell 5% to E3.4 billion; the company had not been profitable since 2002. Its 24 million passengers traveled primarily on short- and medium-haul routes. Etihad, in contrast, is a long-haul carrier that connects Europe, the Middle East and Asia. Alitalia’s network will give Etihad access to new destinations in the U.S., West Africa and South America. Expected streamlining as a result of the acquisition includes 2,000 layoffs – an estimated 16% of Alitalia’s workforce. The carrier plans to terminate many of its unprofitable routes and to restructure its 130-aircraft fleet by eliminating some short-haul planes and adding long-haul ones. Beginning in 2015, Alitalia will add flights to Abu Dhabi from Venice, Catania and Bologna, which will feed into Etihad’s long-haul routes.

Meridiana The outlook for Meridiana (operating as Meridiana fly until its rebrand in March 2013) is not so rosy. Italy’s second-largest carrier continues to operate at a net loss, with 2013 revenue of E530 million. Meridiana’s fleet is down to 27 aircraft – 24 short-haul and three long-haul – which carried 5 million passengers in 2013. The bulk of the carrier’s business is comprised of leisure flights to Sardinia, Sicily, Naples, and major holiday destinations in the Medi- terranean, the Caribbean, and the Indian Ocean. During the first half of 2013, Meridiana went through a number of trans- formations, one of which was a cash infusion of E180 million from the Aga Khan Fund for Economic Development, a current stockholder. In May 2013, Meridiana was retired from the Milan Stock Exchange. The airline finalized its operational merger with long-haul charter carrier Air Italy in June 2013, and then began restructuring in an effort to stem significant losses and recapital- ize. The plan involves reducing the airline’s fleet size and focusing on mid- and long-haul leisure routes to Sardinia, Milan, Malpensa and Naples.

Low-Cost Carriers Blue Panorama Despite adjustments to its business model, Blue Panorama is barely hanging on. The carrier currently has seven Boeing 737s and six Boeing 767s, and has added more long-haul charter flights to Caribbean destinations (Cuba, the Dominican Republic, Jamaica and Mexico). It has also added low-cost flights to Albania from eight Italian cities under the brand name Blu-express. Still, revenue tumbled 21% to E220 million in 2013.

Livingston Livingston suspended operations after ENAC revoked its operator license in July 2014. In 2013, the airline generated E90 million in revenue but was plagued by financial problems. It had previously offered charter flights for Italian tour operators and scheduled European flights from various Italian airports. The airline’s future remains uncertain.

Neos Neos, owned by Alpitour (Italy’s largest travel company), is experiencing some success targeting the leisure market. The airline carried 1 million passengers on its eight-plane fleet (six short-haul aircraft, two long-haul) in 2013, earning E240 million. Half of Neos’ business comes from Alpitour tour operators such as Alpitour, Francorosso, Villaggi Bravo, Viaggidea and Karambola. The company is optimistic about its future and plans to add three Boeing 787 Dreamliners to its fleet by 2018.

Hotels After two years of declining revenue, the Italian hotel market will see a reprieve in 2014. Gross bookings are projected to increase 4% to E10.8 billion, spurred by an increase in online bookings and a healthy influx of visitors from Northern Europe and the BRIC countries (Brazil, Russia, India and China) (see Figure 4.6).

Figure 4.6: Italian Hotel Gross Bookings (FB) and Online Direct Penetration, 2012-2016 Total 2012 0.3 10.1 3% 10.5

2013 0.5 9.9 5% 10.4

2014 0.7 10.1 6% 10.8

2015 0.9 10.4 8% 11.3

2016 1.0 10.6 9% 11.6 Online Direct Penetration Supplier-Direct Online Other Channels

With revenue of E3.4 billion, online bookings are forecast to capture 31% of Italy’s hotel market in 2014. The vast majority of the country’s 48,600 properties are small and family-owned, with an average of 20 rooms. Even the largest Ital- ian hotel chains – Una Hotels (30 hotels), Star Hotels (22) and Ata Hotels (20) – have fewer than 5,500 rooms under management, a low figure by international standards. Naturally, OTAs benefit greatly from this fragmentation – in 2014, they will account for a quarter of all online hotel bookings. International OTAs in particular are capitalizing on their position in the market, offering inbound travelers the ability to book smaller Italian hotels easily and online. Independent tourists traveling by car or train are booking hotels on geolocation-equipped OTA apps (e.g., Booking.com, Expedia, Initalia.it) that offer last-minute sales, giving mobile sales a boost. Online direct share remained small in 2013 (5% of gross bookings), as most Italian hoteliers lack the means to make strong investments in website and mobile app development and promotion. Faced with OTAs’ rapid growth and high sales commissions (which cut into hotelier margins), Federalberghi – the Italian hotel industry’s trade association – asked the Italian Antitrust Authority (AGCM) to launch an inquiry into whether the contractual agreements between OTAs and hotels adhere to the law. In May 2014, AGCM started investigating Booking.com and Ex- pedia regarding alleged vertical agreements with partner hotels that may have violated Article 101(1) of the Treaty on the Functioning of the Euro- pean Union. The investigation is focused on the inclusion of “most favored nation” clauses (MFN clauses) and “best price guarantees” that forbid partner hotels from offering better fees and conditions (including special offers) to competing OTAs and other distributors. While the inquiry isn’t yet resolved, it could still hamper growth in OTA hotel sales and enable Italian hoteliers to offer better deals directly to customers. Online direct channels will increase their share of total bookings to 6% in 2014, partly as a result of OTAs’ legal issues. The outlook for the hotel market is further complicated by the political crisis in Ukraine, an important source market for inbound visitors to Italy (400,000 per year) and Russia (1.7 million). Arrivals from both markets slowed in July and August 2014 – prime tourism months. Global hotel chains are still jostling for successful positions in Italy. Lead- ing brands such as Best Western, NH Hotels, IHG and Accor are restricted by high taxation and regulation, and are burdened by excess supply in the budget end of the market. These companies are now adjusting their business models to focus on franchises rather than direct management and are eyeing smaller, less financially stable local chains as targets for acquisition. All hotel brands are losing business to the growing number of B&Bs and rural agriturismi which are capturing much of the segment’s organic growth thanks to websites like Airbnb.

Rail Travelers are rewarding rail operators for their investments in high-speed routes, which have greatly improved travel times and passenger comfort. Trenitalia, Ferrovie dello Stato’s passenger division, forecasts that by 2017, the Milan-Rome journey will take just two hours and thirty minutes. The railway also predicts that its share of that route will grow from 52% to 57%. Rail gross bookings were E2.5 billion in 2013, a 2% increase over 2012. Boosted by new routes and innovative packages (such as rail and cruise trips), revenue is projected to leap 7% to E2.7 billion in 2014 (see Figure 4.7). For example, a new door-to-door partnership between Costa Cruises and Trenitalia enables cruise guests to book train and cruise tickets together, travel in reserved coaches, and enjoy other services such as door-to-cabin baggage transport.

Figure 4.7: Italian Rail Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 0.66 1.76 27% 2.4

2013 0.68 1.78 28% 2.5

2014 0.75 1.89 28% 2.6

2015 0.82 2.01 29% 2.8

2016 0.89 2.11 30% 3.0 Online Direct Penetration Supplier-Direct Online Other Channels Note: 2014-2016 projected. Source: Italian Online Travel Overview Tenth Edition ©2014 Phocuswright Inc. All Rights Reserved.

Direct online rail bookings accounted for 28% of the segment’s total bookings in 2013, and are projected to increase slightly in 2014. The Trenitalia and NTV websites enjoy near-monopoly status and offer hotel rooms and car rentals in addition to train tickets. OTAs struggle to compete in this environment – currently, most OTA rail bookings come from inbound travelers. OTAs’ share of the rail market, which was virtually nonexistent in 2013, will reach 2% in 2016. Although mobile bookings comprise only a small share of the rail market, that share will grow quickly – from 1% in 2013 to a projected 5% in 2016 – as new apps are introduced.

Trenitalia Revenue fell 2% to E2.3 billion in 2013 for Trenitalia, Italy’s largest rail operator (a division of the Italian government’s Ferrovie dello Stato). The railway lost its monopoly in 2012 and has since sought growth by expanding service classes and catering to passengers by adding Wi-Fi connectivity to all of its trains. Although regional bookings have declined, Trenitalia is benefiting from its highly diversified Freccia high-speed routes, which are boosting revenue on medium- and long-haul routes. Plans are underway to build out additional high-speed rail

service over the next three years that would serve three of Italy’s major airports in Rome, Milan and Venice. Trenitalia’s revenue is forecast to grow 5% in 2014 to E2.4 billion. Twenty-eight percent of the carrier’s bookings will come from its website in 2014; this share will jump to 29% in 2016 due to an increase in mobile bookings. ProntoTreno, Treni- talia’s app for smartphones, tablets and the Samsung Smart TV, allows travelers to check timetables and train punctuality, purchase tickets, change reservations, and request refunds.

Nuovo Trasporto Viaggiatori (NTV) NTV serves nine cities and 12 stations in Northern and Central Italy with Italo, its high-speed train. Italo can travel up to 360 kilometers per hour and offers free Wi-Fi. NTV carried 6.2 million passengers in 2013, boosting its gross bookings 111% to E188 million. However, profitability remains elusive. The company experienced net losses of E77 million in 2012 and E78 million in 2013.

Car Rental A jump in inbound leisure travel is helping buoy Italy’s car rental market amid anemic domestic demand. Gross bookings totaled E1.1 billion in 2013, a 3% improvement over 2012, and will climb another 2% in 2014 (see Figure 4.8). Thanks to the success of LCC ancillary sales, online car bookings will experience strong growth in 2014; revenue will reach E326 million and comprise 29% of the car rental market.

Figure 4.8: Italian Car Rental Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 0.18 0.89 16% 1.07

2013 0.19 0.91 18% 1.10

2014 0.21 0.90 19% 1.12

2015 0.23 0.93 20% 1.15

2016 0.25 0.95 21% 1.19 Online Direct Penetration Supplier-Direct Online Other Channels Note: 2014-2016 projected. Source: Italian Online Travel Overview Tenth Edition ©2014 Phocuswright Inc. All Rights Reserved.

Three global car rental companies, each with a robust presence throughout Europe, dominate the Italian market. Europcar, Avis and Hertz each control 20- 25% of the national market. Maggiore, the Italian partner of National and Alamo, is the largest domestic car rental company and accounts for 13% of the market. Its fleet comprises 12,000 cars, which it rents through a network of 150 agencies in 100 towns, including major airports and train stations. In addition to the major players, Italy has dozens of small, local companies that target leisure travelers on tight budgets.

Supplier websites are a critical distribution channel for all of Italy’s car rental companies. Avis’ website represented 22% of the company’s 2013 gross bookings; that figure will reach 25% in 2016. Overall, supplier websites represented 18% of the segment’s gross bookings in 2013 and will account for 19% in 2014. Mobile’s share of online bookings is set to double in 2014 to 14%. Car rental companies are also taking advantage of the boom in LCC travel. Air- line websites, particularly for LCCs such as Ryanair and easyJet, are driving online car rental bookings through aggressive promotion of direct sales and ancillary revenue streams. OTA growth in the car rental segment is hampered by the success of rental companies’ online direct strategies. Though OTA share grew slightly in 2013, it will remain flat at 10% of all gross bookings in 2014. Suppliers are reducing OTA commissions by offering exclusive price promotions on their own websites and trying to inflate OTA prices by not offering net rates.

Tour Operators Tour operators continue to suffer from a wide range of negative market forces, which have together reduced the segment’s revenue by 24% since 2011. Secu- rity fears about travel to Egypt – a popular seaside destination for Italians – have cut into outbound business, as have reductions in the number of charter flights available from struggling Italian airlines. The tour market is also struggling against increasing competition from cruise companies, LCCs, OTAs and hoteliers. Gross bookings fell 9% in 2013 to E4.2 billion (see Figure 4.9). Things will start looking up a bit in 2014, however, as tour operators evolve their business strategies to accommodate changes in the market. Gross bookings will increase 3% to E4.3 billion.

Figure 4.9: Italian Tour Operator Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 0.07 4.6 1% 4.6

2013 0.09 4.1 2% 4.2

2014 0.12 4.2 3% 4.3

2015 0.16 4.3 4% 4.5

2016 0.21 4.4 Online Penetration 5% 4.6

Intense competition in the declining tour market led to several bankruptcies in 2013 and 2014, including LovelyCuba, Eurotravel and Seven Worlds. Other tour operators, such as Settemari and iGrandiViaggi, have experienced significant losses. Eden Viaggi, Italy’s second-largest tour operator, saw 2013 revenue

tumble 16% to E293 million. Revenue fell 30% in 2013 for Hotelplan Italia, a subsidiary of the Swiss Hotelplan Group, due to a major overhaul in production and the termination of several unprofitable business lines. Even Alpitour Group, Italy’s largest travel company, has not been immune to the segment’s woes: The company’s 2013 revenue dropped 2% to E994 million. Alpitour Group owns charter airline Neos; a 50% stake in the Welcome Travel Group; and popular tour operators Alpitour, Francorosso, Villaggi Bravo, Viaggidea and Karambola. Online bookings, which grew to 5% of the tour operator market in 2013, will be essential to the segment’s turnaround. Italy’s 400 tour operators still rely on the country’s 8,000 travel agencies as their primary distribution channel. Very few take advantage of online channels – directly or through OTAs – as they believe it is less expensive to pay an 8% average sales commission than to invest in online development and promotion. Consequently, frugal Italian tour operators are limited by both their small size – E10 million on average – and by declining profitability. Supplier websites represented 2% of all tour gross bookings in 2013, and this percentage will increase slightly to 3% in 2014. OTA market share will remain flat through 2015; tour operators typically use OTAs to unload excess capacity on club and charter flights. At just 0.1% of the total market in 2013, mobile is still an untapped opportunity in this segment. Strong product differentiation will also be important in future profitability. All- inclusive clubs, customized trip planning, and wedding management could provide a much-needed spark for tour operator growth. Through its network of VeraStores, an exclusive set of partner agencies, Veratour was able to grow 4% in 2013 to E188 million. The company garners more than 70% of its business from early bookings. 2014 revenue is expected to reach E205 million. Eden Viaggi is attempting to offset losses in the Middle East by opening new Ca- ribbean resort villages. The company also is offering travel agents a dynamic booking tool that provides greater flexibility. Orovacanze, which acquired the Valtur Group in October 2013, plans to open as many as 10 new travel villages by 2019.

Online Travel Agencies OTA gross bookings grew 17% to E3.9 billion in 2013, with an 11% increase projected for 2014 (see Figure 4.10). OTAs continue to capitalize on rising inbound leisure travel, fragmentation in the Italian hotel market, and their trump card over LCC websites: the ability to allow consumers to shop and book tickets on different airlines. As a result, OTAs captured 60% of the total online market in 2013. Strong investments in mobile websites and apps are bearing fruit: Mobile bookings jumped from 5% of OTA sales in 2012 to 9% in 2013. The channel will continue to drive business through 2016, when mobile bookings will represent 22% of the OTA market.

Figure 4.10: Italian Online Travel Agency Gross Bookings (FB), 2012-2016

4.9 4.6 4.3 3.9 3.3

The Italian OTA landscape is dominated by four companies – Priceline, Expedia, Bravofly Rumbo, and Odigeo – which together represent 91% of the market (see Figure 4.11). Several foreign OTAs are trying to make inroads by launching Italian websites, including Germany’s Unister Travel and TUI, Spain’s Logitravel, and Sweden’s Gotogate. Smaller Italian OTAs such as Borsaviaggi, CTS, UniTravel and Lastminute.com are struggling to gain market share. Success so far has been dependent largely on market positioning. Hotel-focused OTAs are growing more quickly than those that rely on car rentals and airlines – segments that undercut intermediaries with exclusive price discounts through direct websites.

Figure 4.11: Online Travel Agencies in the Italian Market, Estimated Market Share, 2013

9% 10% 25% Expedia/Venere 8% Priceline/Booking Odigeo Bravofly Rumbo Group Others

48%

OTA growth may have reached its peak, however, depending on the outcome of the government’s ongoing antitrust investigation (see the Hotels section). The popularity of metasearch in Italy is also chipping away at OTA margins. Airlines are beginning to partner directly with sites such as Liligo, Kayak, Easyvi-

aggio and Skyscanner to drive traffic to their websites. Trivago is gaining market share in the hotel segment. As a result, OTA share of the online market will decline slightly over the next few years, dropping to 56% in 2016. Double-digit growth rates of the past three years will slow to single digits as OTAs attempt to forge new partnerships that will differentiate their products in an increasingly crowded online arena.

Priceline Priceline captured 48% of the OTA market in 2013, driven by Booking.com, aggressive promotion, and recruitment of sales reps throughout Italy. Booking. com now boasts more than 65,000 Italian accommodations, among them private rentals: villas, homes, apartments and B&Bs.

Expedia With 25% of the market, Expedia Group lost share to Priceline in 2013. Marketed under the Expedia and Venere brands, the company’s strategy in Italy is to grow its package business by bundling flights, hotels, car rentals and excursions. Ex- pedia’s goal is to become a credible alternative to tour operators in the desirable outbound market – travelers who want to visit the rest of Europe’s cultural icons.

Bravofly Rumbo Group The Bravofly Rumbo Group, including the Volagratis and Bravofly brands, is slowly gaining share thanks to its aggressive pricing strategy and booking tools that allow customers to choose between traditional airlines and LCCs for the best fares on return trips. Bravofly’s market share stood at 10% in 2013. As Italian airlines become more aggressive about selling directly online, Bravofly Rumbo plans to set its sights on growing via ancillary car rental and hotel sales.

Odigeo Odigeo has been hurt by airlines’ direct online strategies – in 2013, its market share dropped to 8%. Odigeo’s brands – eDreams, Govolo and Opodo – previously focused on selling air travel, but are expanding their offerings to include accommodations, car rentals, rail travel (specifically, Freccia high-speed rail) and excursions such as ski holidays. In 2014, eDreams signed an agreement with Barcheyacht to sell yacht rental and airline packages directly to customers.

Conclusion A robust inbound market and double-digit online growth will help bring about resurgence in Italy’s beleaguered travel industry. Led by rail, which is projected to jump 7% to E2.6 billion in gross bookings in 2014, every supplier segment will experience growth in the coming year. All signs point to a comeback for airlines as consolidation among LCCs and aggressive online promotions entice travelers to fly. Airport traffic was up almost 4% in the first seven months of 2014,7 and in August 2014, Italian flag carrier

7) ENAC.

Alitalia gained a much-needed cash infusion during its acquisition by Etihad Air- ways. Gross bookings for traditional airlines are expected to increase 4% in 2014 to E4.1 billion, while LCCs will turn two years of losses into 2% growth. Online sales, which will represent more than a third of all travel gross bookings in 2014, will drive growth for Italian travel suppliers. Online gross bookings will rise 13% to E7.3 billion as suppliers satisfy customers’ thirst for innovative online features and mobile apps. Italian hotels are increasingly using geolocation-equipped mobile apps to allow independent tourists (traveling by car or train) to make last-minute bookings. This effort will spur mobile bookings to grow from 17% to 25% of online direct hotel sales by 2016. Strong investments in mobile websites and apps are also bearing fruit for OTAs: Mobile bookings jumped from 5% of sales in 2012 to 9% in 2013. The platform will continue to drive OTA business through 2016, when mobile will account for 22% of bookings. Even troubled tour operators are reluc- tantly embracing online bookings, which grew to 5% of sales in 2013. M

The Scandinavian Online Travel Overview

Lead Analyst: Friederike Schwarz Contributors: Sandra Voscort, Donna M. Airoldi

Overview The travel market in Scandinavia (Sweden, Norway and Denmark) will climb 2.1% in 2014 to reach F15.4 billion, and is projected to grow to F16.3 billion by 2016. All supplier segments show positive growth, with low-cost carrier (LCC) revenue expanding the fastest – driven partially by Norwegians’ growing desire for domestic travel. The region is the leading European market in terms of online travel penetration, at 58% in 2014. In 2013, nearly nine in 10 Scandinavian households had broadband Internet access.1 More than eight in 10 used the Internet on a daily basis, while 54-61% of each country’s population used the Internet for travel-related purposes. Scandinavia also boasts some of the highest smartphone penetration rates in Europe, with 59% in Denmark, 63% in Sweden and 68% in Norway. By comparison, Germany’s smartphone penetration is 40%.2 Yet mobile accounted for just 8% of online travel bookings in 2013, which is comparatively low as the U.K., Germany and France each reported mobile shares of 10-13%. Scandinavian consumers typically use mobile phones for small purchases of inexpensive goods and services, and desktop computers and laptops for more expensive, complex products.3 Another factor in the relatively low share of mobile travel bookings is payment method preferences, which vary widely. Eighty percent of Danes and 67% of Norwegians like to make digital payments with a credit or debit card. However, only 32% of Swedes like this method.4 Still, new and improved mobile websites and apps are poised to push mobile travel purchases to 19% of online bookings by 2016.

1) Households with broadband access, Eurostat (2013). 2) Smartphone Penetration 2013, Our Mobile Planet, Google. 3) “One in 10 Digital Purchases in Norway Are Made on Mobile Phones,” eMarketer (Aug. 22, 2014). 4) “Digital Buyers in the Nordic Countries Differ on Preferred Payment Methods,” eMarketer (Aug. 15, 2014).

Online Distribution Dashboard

Figure D.1: Scandinavian Share of Gross Bookings by Channel, 2013 vs. 2016 Traditional Airline 29% 18% 53% 2013 30% 19% 52% 2016 LCC 74% 9% 17% 2013 79% 9% 12% 2016 Hotel 9% 20% 71% 2013 12% 23% 65% 2016 Rail 39% 6% 55% 2013 40% 8% 52% 2016 Car Rental 21% 13% 67% 2013 22% 14% 64% 2016 Tour Operator 49% 6% 44% 2013 50% 7% 44% 2016

Supplier-Direct Online OTAOther Channels

Figure D.2: Scandinavian Share of European Total and Online Travel Markets, 2013 (FB)

SCANDINAVIA 8% SCANDINAVIA 6% 8.6 15.1

Rest of Europe 92.8 Rest of Europe 227.8 Online Travel Market Total Travel Market 101.4 242.9

Figure D.3: Total Online Penetration 2012-2016: Scandinavian and European Travel Markets

70% 60% 61% 57% 58% 60% 54%

50% 47% 40% 44% 45% 42% 39% 30%

20% 2012 2013 2014 2015 2016 Scandinavia Europe

Key Findings 0 Gross travel bookings in Scandinavia will total F15.4 billion in 2014 and are expected to reach F16.3 billion by 2016. As the market is fairly mature, growth rates for all supplier segments will be in the low single digits from 2014-2016, except for LCCs and OTAs, which in 2014 will grow at 6% and 7%, respectively.

0 At 58%, online penetration is the highest in Europe, with F9 billion in total online revenue in 2014. Despite growth rates leveling off as the market nears saturation, total online travel bookings are projected to increase to F9.9 billion by 2016 – a 61% online penetration rate. Though suppliers account for two thirds of the online market in 2014, OTAs are growing faster, and will account for 34% of the online market by 2016.

0 In contrast to other European countries, tour operators had the highest online direct penetration rate (89%) among supplier segments in Scandi navia. In addition, they account for the largest share of the region’s online direct bookings (29%), partly due to TUI and Thomas Cook’s strong online presence.

0 In 2013 airlines accounted for 48% of Scandinavia’s online direct travel bookings, with traditional carriers and LCCs each claiming a 24% share; but the similarities between these two segments end there. LCC revenue grew 12% in 2013 and will reach F2 billion in 2014, led by Norwegian Air. Converse ly, traditional airline revenue declined 5.3% in 2013 to F4.8 billion, as SAS struggled with added capacity. But the airline has focused on customer loyalty, and in 2014 the segment recovered and will grow 1.2% to F4.9 billion.

0 OTAs continue to capture the lion’s share of the online hotel market in 2014, at 70%. However, hotels now face increasing competition not only from OTAs, but also from metasearch engines and alternative lodging sites such as Airbnb, which are putting pressure on prices. Consequently, the data show a trend toward consolidation, as small and independent properties often lack the resources to invest in and adopt new technologies.

0 The growth of the metasearch market not only impacts suppliers, but these players are now challenging the position of OTAs themselves. As a result, OTAs like Reisegiganten are moving into the metasearch business in the hope of generating higher margins. Denmark-based metasearch player Momondo reported a 29% growth rate for 1Q14.5

0 Strong rail growth of 5.9% in 2013 brought gross bookings to F1.9 billion in 2013, with supplier direct bookings set to capture 39% of gross revenue in 2014, compared to just 7% for OTAs.

0 Green travel solutions are reviving the car rental segment. Avis ordered 400 Nissan Leaf electric cars for its fleet in Denmark, and Hertz actively promotes car-sharing programs throughout the region. Gross bookings will reach F661 million in 2014, and are projected to grow at an average of 2% per year through 2016.

0 Mobile bookings’ share of online revenue was just 8% in 2013. But with companies quickly adding and optimizing their mobile websites and apps, mobile transactions are climbing fast and will exceed F1 billion for the first time in 2014.

Macro Landscape Scandinavia has a stable and slightly expanding economy: GDP grew in all three countries in 2013 and is on track to do so again in 2014.6, 7 All three are among the top 10 European countries in terms of per capita purchasing power; Norway’s is three times as high as the European average.8 Scandina- via’s 6% average unemployment rate has remained stable and is well below the Eurozone rate of 10%.9 This fact is especially impressive given that the population has increased by a million since 2013, to just over 20 million. Scandinavian travelers often prefer local destinations; if they cross country borders, they primarily stay in the region.10 In Norway, the share of travelers planning domestic travel for their main holiday jumped to 46% in 2013 from 36% in 2012, and its top three non-domestic destinations were Sweden, Spain and Denmark.11 Even though Sweden’s share of domestic holidays

5) “Momondo Group reports strong first quarter,” Travolution (April 16, 2014). 6) “Quarterly national accounts – third GDP estimate,” Eurostat (Sept. 5, 2014). 7) Gabriele Steinhauser, “The UE’s GDP Is Bigger Than Thought — But Hold the Bubbly,” The Wall Street Journal (Sept. 22, 2014). 8) “GfK Purchasing Power Europe, 2013/14,” GfK press release, (Nov. 4, 2013). 9) Eurostat (September 2014). 10) DZT Market Information Denmark, Norway and Sweden reports (2014). 11) DZT Market Information Norway (2014).

slipped in 2013, it was still the highest in Scandinavia at 48% boding well for the domestic travel sector. One factor that could hamper growth, however, is the increased eruption risk associated with Iceland’s Bardarbunga volcano. With billions of dollars lost from halted air traffic due to the ash cloud from the Eyjafjallajokull eruption in 2010, another major eruption could seriously impact European air travel, especially in Scandinavia.

Size of the Market After dropping more than eight percentage points in 2013 to 1.1%, the Scan- dinavian travel market’s growth rate is climbing once again. Growth is pegged at 2.1% in 2014, with gross bookings totaling F15.4 billion. In 2013, Scandinavia accounted for 6.2% of Europe’s total travel market and 8.4% of its online market (see Online Distribution Dashboard ). With low unemployment and GDP projected to rise, Scandinavian gross bookings will increase to F16.3 billion by 2016 (see Figure 5.1).

Figure 5.1: Scandinavian Travel Market (FB) and Online Growth Rates (%), 2012-2016 Total 2012 5.5 2.6 6.9 14.9

2013 5.7 2.9 6.6 6% 15.1

2014 5.9 3.1 6.4 5% 15.4

2015 6.2 3.2 6.4 5% 15.8

2016 6.5 3.4 6.3 5% Online Growth 16.3

Supplier-Direct Online OTA Other Channels

Internet usage has historically been strong in the Nordic region. The online travel penetration rate will climb to 58% in 2014 – higher than any other Europe- an market and well above the European average of 44%. Total online bookings will increase 5.1% to F9 billion in 2014, and grow to F9.9 billion in 2016. Online bookings got their biggest boost from airlines and tour operators. Air- lines (traditional and low-cost carriers combined) constitute 45% of the region’s online revenue in 2014. Tour operators generate more than half of their revenue via online channels, for 21% of the region’s online bookings. The split between online supplier direct channels and intermediaries in 2013 was 67% versus 33%, respectively, with OTA revenue accounting for F2.9 billion of the market’s F8.6 billion in online bookings (see Figure 5.2). The projected

growth rate for intermediaries exceeds supplier sites, eroding the online direct share to 66% by 2016. However, with consolidation occurring across all segments, as well as a fast-evolving technology environment, this trend can quickly shift, particularly if suppliers continue efforts to promote and enhance their websites.

Figure 5.2: Scandinavian Online Travel Market, OTA vs. Supplier- Direct Share, 2013 and 2016

2013 2016

33% OTA 34% Supplier- 67% Direct 66%

Though the share for supplier websites is being eroded by the shift to mobile, overall supplier direct shares for most travel segments are holding steady or projected increasing. Tour operators in Scandinavia are less threatened by intermediaries than in other European countries, since vacation packagers already have a strong online presence in the region. Eighty-nine percent of online bookings for this segment were made directly with suppliers in 2013, and these bookings accounted for 29% of the region’s online supplier-direct market (see Figure 5.3). Figure 5.3: Scandinavian Supplier-Direct Traditional airlines and Online Market, 2013 LCCs weren’t far behind, with each claiming a 24% share of Scandinavia’s 24% online supplier direct 29% Traditional Airline bookings. The combined LCC airline segment will see Hotel online penetration reach Rail 3% Car Rental 59% in 2014, primarily due 24% Tour Operator 13% to LCC Norwegian Air’s 7% strong performance and

online presence. While Source: Scandinavian Online Travel Overview Tenth Edition SAS’s online direct share ©2014 Phocuswright Inc. All Rights Reserved. is low by comparison, the carrier’s newly launched website is expected to boost growth for traditional carriers, which account for more than seven in 10 air bookings. User-friendly booking websites and new mobile apps helped rail suppliers attract 86% of the segment’s online bookings in 2013, and a 13% share of

the region’s online supplier direct market, which will remain flat through 2016 even as mobile picks up. The ratio of bookings generated by suppliers versus intermediaries is inverted for hotels: OTAs claimed a lion’s share (69%) of the F1.3 billion in 2013 online bookings, while hotels continue to struggle to attract more direct bookings. Hotel websites and mobile channels captured just 7% of the online supplier direct market in 2013. This imbalance will persist if hotels do not bolster their marketing spend and invest in new technologies (including optimizing their booking engines) to reduce their dependency on OTAs. Though it represents a small share of the total Scandinavian travel market, online direct car rental bookings represented 62% of online bookings for the segment in 2013, and 3% of the region’s online direct bookings. Within this segment, there’s a clear difference between the global players and smaller regional providers, with brands like Avis and Hertz more easily generating online direct bookings than the smaller regional players, which continue to leverage OTAs for distribution. Overall, as the shift to mobile solutions continues, large well-known brands will capture additional direct online bookings, while growth figures will stagnate for smaller regional suppliers with limited marketing and technology budgets.

Mobile Scandinavia has one of the highest smartphone penetration rates in Europe: 59% in Denmark, 68% in Norway and 63% in Sweden.12 Not surprisingly, combined supplier and OTA mobile revenue in 2014 is climbing fast and forecast to exceed F1 billion for the first time – up from justF 365 million in 2012. Although growth will level off by 2016, total mobile bookings are expected to nearly double to F1.9 billion by then. Mobile’s growth comes at the expense of desktop website bookings. Nearly one fifth of online bookings will be via mobile devices by 2016, up from 11% in 2014. Meanwhile, bookings made via the desktop web will grow only slightly from 2014 to 2016, and the channel’s share of total online revenue will drop significantly from 89% to 81%. Every market segment will see its share of direct mobile bookings quickly climb over the next few years. Hotels will lead the way, jumping from 10% of online supplier direct bookings in 2013 to 33% by 2016 (see Figure 5.4). Direct mobile rail bookings will account for 24% of the segment’s online direct bookings by 2016, followed by 20% for direct mobile car rental bookings. In 2013, direct mobile bookings for traditional airlines totaled F119 million, or 9% of the segment’s total online direct bookings. This share will climb to 19% by 2016. On the other hand, while only a fraction of LCCs’ online direct bookings came through mobile in 2013, these bookings will increase rapidly in the next several years. Norwegian Air is the only LCC to offer a mobile website, and in the traditional air segment, SAS has the most robust mobile offerings.

12) Smartphone Penetration 2013, Our Mobile Planet.

Among tour operators, just 4% of the segment’s online direct bookings were made through mobile in 2013, but this will increase to 14% by 2016. Mobile adoption in this segment is slow because holiday packages and all-inclusive travel reservations are often more complicated than other types of travel. While share is relatively small, the tour operator market is the second-largest in direct mobile bookings, with F139 million in revenue projected for 2014. OTAs are a strong driver of mobile bookings. The intermediaries will generate F429 million via mobile in 2014, for a 42% share of mobile gross bookings. This figure will jump more than 80% toF 777 million in 2016.

Figure 5.4: Scandinavian Mobile Share of Online Supplier-Direct and OTA Bookings by Segment, 2013 vs. 2016

2013 2016 33%

24% 23% 19% 20% 14% 14% 12% 10% 11% 9% 7% 4% 1% Traditional LCC Hotel Rail Car Rental Tour OTA Airline Operator

Nearly 50% of Scandinavian smartphone users search travel information via their mobile devices. However, because many Scandinavians still do not trust mobile payment solutions, one third make their purchases online via a desktop computer. In Sweden, two thirds conduct their purchases completely offline. Though device sizes are increasing, many users still consider mobile screens as too small for researching and purchasing products and services.13 Norwegians are more likely to purchase inexpensive goods and services via mobile phones, whereas more expensive and relatively complex products are typically bought via desktop computers and laptops.14 A 2012 study revealed that 77% of Scandinavian business travelers use a smartphone for work, and they’re likely to use their mobile phones to search for travel-related information and manage their travel bookings. Travel applications have been downloaded by 45% of Scandinavian business travelers and are particularly used by frequent travelers.15 Scandinavians are somewhat more likely to use apps than other Europeans. On

13) Our Mobile Planet, Google (2013). 14) “One in 10 Digital Purchases in Norway Are Made on Mobile Phones,” eMarketer (Aug. 22, 2014). 15) “Amadeus launches mobile booking app for business travellers,” Amadeus press release (Oct. 25, 2013).

average, Scandinavian mobile devices have 35 apps installed; 13 have been used within the last 30 days and eight apps are paid. The average number of apps used by Europeans in the last 30 days is 10. Among smartphone owners, daily usage of the Internet via app versus mobile website is about the same.16 Even though they don’t leave home without them, more than three in four Swedes and nearly three in five Danes switch their mobile phones off while on vacation, thereby limiting mobile’s potential impact on ancillary or in-destination activity revenue. Fifty-three percent of Norwegians, however, elect to keep their phones turned on while on holiday.17

Suppliers Airlines Scandinavia’s air market is divided between traditional airlines, led by SAS, and LLCs, dominated by Norwegian Air. Capacity is growing within the segment as more carriers start to service the region. SAS remains the market leader of the combined segments, with F3.7 billion in gross bookings in 2014, for a 54% share of the overall air market. However, competition has intensified with Norwegian Air, which holds a sizeable 27% market share. Overall, growth declined by 5.3% in 2013 for traditional carriers, due mainly to a 7.3% drop in gross bookings for SAS. The segment slowly recovered in 2014, with just 1.2% growth. LCC bookings, however, grew 11.8% in 2013, as Norwegian Air climbed 14.6%. Even though the growth rate slowed in 2014, LCC bookings are projected to reach F2.2 billion in 2016, for a 30% share of the combined market. Combined bookings for traditional carriers and LCCs will total F6.9 billion in 2014 (see Figure 5.5).

Figure 5.5: Scandinavian Airline Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 2.7 4.1 40% 6.8

2013 2.8 3.9 41% 6.7

2014 2.9 3.9 43% 6.9

2015 3.1 4.0 44% 7.1

2016 3.3 4.0 45% 7.3 Online Direct Penetration Supplier-Direct Online Other Channels

16) Our Mobile Planet, Google (2013). 17) “Nordic travel habits revealed in new survey,” TTG Nordic (Aug. 15, 2014).

Online bookings – transacted primarily on suppliers’ websites – will account for nearly half (48%) of traditional airline revenue in 2014. Online penetration in the LCC segment is much higher, at 85%. Supplier website and mobile bookings are each projected to grow, while OTAs will lose market share.

Traditional Airlines Scandinavian Airlines Group (SAS) Although bookings declined 7.3% in 2013 to F3.7 billion amidst significant restructuring, SAS remains the region’s market leader with a share of 54% of Scandinavian’s domestic air travel. The carrier served 120 destinations and tranported 28 million passengers in 2013.18 SAS is on the rebound in 2014, with growth expected to pick up between now and 2016, when revenue is projected to reach F3.9 billion. The carrier intends to launch several new routes in an effort to increase growth. However, one reason for the slowdown has been the significant increase in capacity as other carriers shift service to the Scandinavian market; this reshaping continued through the first half of 2014.19 Online bookings will reach F2.1 billion in 2014, for total online penetration of 57%. OTAs account for 21% of the carrier’s gross bookings, while the SAS website and mobile outlets represent 36% of total bookings in 2014. As in other supplier segments, customers are shifting from the supplier’s website to its mobile site: website share of direct online bookings is projected to drop from 87% in 2014 to 81% in 2016, while mobile will grow from 13% to 19%. SAS also is strengthening its position in the marketplace by investing in its EuroBonus frequent flyer program, which has attracted 200,000 new members since its relaunch in February 2014.20 Frequent flyers comprise about 70% of the total air travel market to, from and within Scandinavia, and they make more than five trips per year. Direct online revenue accounts for 36% of gross bookings in 2014 and is expected to grow as SAS has launched a new website along with apps for smartphone and tablet devices. Customers can use the apps to book and rebook flights, check-in, download boarding cards, check flight status, redeem EuroBonus Points and more. Malmö Aviation With the Scandinavian airline market at overcapacity, it’s difficult for smaller carriers to grow. Malmö transports about 1 million passengers per year,21 mainly on regional flights within Sweden and a few to neighboring countries such as Denmark, Finland, Belgium and Germany. Online direct bookings (7% of total revenue) account for about 40% of all online bookings. Malmö launched a new

18) SAS Group Annual Report 2012/2013. 19) “SAS reduces forecast for fiscal year 2013/14 as capacity and price pressure exceed expectations,” Business Wire (May 8, 2014). 20) SAS Interim Report Q2 2014. 21) Quick Facts, Malmö Aviation website.

mobile application in March 2014, enabling booking, payments and ticketing via smartphone. Mobile’s share of revenue is expected to more than double from 2% in 2014 to nearly 5% by 2016. Tour Operator Airlines Thomas Cook Airlines Scandinavia and TUIfly Nordic are the region’s main tour operator carriers and together will represent 19% of traditional airline bookings in 2014. Ving Airlines operates Thomas Cook flights and is the largest charter airline in the Scandinavian market, with F602 million in revenue in 2014. Growth rates over the next few years are relatively low, at 1.5-2%. Flights with Ving are either packaged by Thomas Cook brands within Scandinavia or sold individually. Stockholm-based TUIfly Nordic exclusively operates holiday charter flights for TUI’s tour operator brands in Scandinavia. It carried nearly 1.4 million passengers in 2013 with a fleet of 10 aircraft.22 Bookings, however, are flat, up justF 2 million to F324 million in 2013, and will grow slowly through 2016. Direct website shares are steady at 7% for each company; OTAs account for about 12% of gross bookings. Neither charter company has significant mobile bookings, nor do they promote a mobile solution for the Scandinavian market. Ving, however, is upgrading its fleet and intends to replace half of its 12 aircraft between October 2014 and February 2015.23

Low-Cost Carriers Norwegian Air Norwegian Air is the third-largest LCC in Europe after EasyJet and Ryanair. Its fleet of 91 aircraft serves 128 destinations, including international flights to the U.S. and Asia. Even though growth rates will slow to 7% in 2014 and about 6% in 2015 and 2016, Norwegian Air remains the fastest growing Scandinavian carrier, with revenue reaching F1.8 billion in 2014 and just over F2 billion by 2016. The LCC has strong ancillary sales (baggage and other services), which comprised 14% of its 2Q14 revenue.24 Online bookings will capture 83% of passenger revenue in 2014 and are expected to reach 85% in 2016. Nearly 80% of the carrier’s gross bookings come via the user-friendly corporate website. Mobile website bookings are slowing picking up; Norwegian Air’s Travel Assistant mobile app does not offer booking. Cimber A/S The Danish-owned Cimber, founded in May 2012 following the bankruptcy of Cimber Sterling, operates contract flights for SAS. The nascent company is already facing financial troubles as SAS ended its contracts for two of Cimber’s six aircraft in early 2014. Gross revenue for 2013 was down 11% to F160 million, and will remain stagnant for the foreseeable future. The company still does not

22) Facts About TUIfly Nordic, TUIfly Nordic. 23) “Nya flygplan till Vings flygbolag Thomas Cook Airlines Scandinavia,” Thomas Cook Airlines press release (Feb. 10, 2014). 24) Norwegian Air Q2 2014 report.

offer bookings via its website or a mobile app; OTAs provide the company’s only online revenue, which dropped to F23 million in 2013, with only nominal growth projected through 2016.

Hotels Regional operators continue to dominate Scandinavia’s hotel market, as domestic travelers are loyal to homegrown brands such as Rezidor, Scandic and Nordic Choice Hotels. These local players have strengthened their positions through acquisitions of smaller chains. Scandinavian room revenue reached F4.6 billion in 2013 and will grow 2% in 2014 to F4.7 billion (see Figure 5.6). Growth will steadily increase over the next two years, and bookings will reach F4.9 billion by 2016. Online supplier direct bookings accounted for 9% of revenue in 2013. Direct website bookings increased just over 1% to F372 million in 2013, but are expected to drop by 2% in 2014 as consumers shift to mobile bookings. Mobile bookings will nearly triple by 2016, for a 4% share of the total market.

Figure 5.6: Scandinavian Hotel Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 0.38 4.14 9% 4.5

2013 0.41 4.18 9% 4.6

2014 0.43 4.25 9% 4.7

2015 0.49 4.30 10% 4.8

2016 0.57 4.35 12% 4.9 Online Direct Penetration Supplier-Direct Online Other Channels

OTA growth slowed considerably in 2013 – dropping to 7% from 27% in 2012, as several leading hotel chains cancelled their contracts with Expedia and Hotels.com at the end of 2012. This growth rate is expected to remain stable at around 7% per year. Still, OTAs generate more than two thirds of online hotel bookings, which will account for more than 30% of all hotel bookings in 2014. Average occupancy rate is stable at 50.3% in 2013, average RevPAR increased slightly by 0.4%.25

25) Hotellåret 2013.

Rezidor Hotel Group Rezidor operates 59 hotels in the company’s Nordic region (including Iceland and Finland), and these properties account for 19% of the group’s 94,800 hotel rooms across its 429 properties in Europe, the Middle East and Africa. Nordic occupancy increased 1.7 percentage points to 70.9% in 2013; RevPAR grew 4.2%, led by Denmark’s 5.5% increase, which was due in large part to renovations in Copenhagen properties and strong convention and event business. Norway’s RevPAR increased 4.8%, while Sweden rose less than 1%. Total revenue dipped by 0.5% in 2013, mainly due to the strengthening of the euro and the loss of two leased hotels in Sweden at the end of 2012.26 Regional brands include Radisson Blu, Park Inn by Radisson, and two brands introduced in February 2014: Radisson Red, targeting the millennial market, and Quorvus Collection in the luxury category. The company has ended its partnerships with Regent Hotels & Resorts and Missoni.

Scandic Hotels Stockholm-based Scandic acquired Rica Hotels in February 2014, expanding its portfolio to 223 hotels, with more than 85% of them in the Scandinavian region. The merger added seven hotels in Sweden and 65 in Norway, where Scandic previously had only 19 properties.27 After a decline in leisure bookings following the termination of contracts with Expedia and Hotels.com in 2012, Scandic renegotiated the deal in 2013 and was able to reverse its losses and increase bookings. Scandic expanded its mobile check-out solution across all properties in Novem- ber 2013. Guests can review their invoices, add minibar consumption and pay directly through the app. Guests then receive an electronic receipt and need only to return their keys at reception. In September 2013, Scandic launched its new HTL hotel chain, which focuses on prime city center locations, best prices, smart digital solutions and quality-design features. One HTL hotel is open, in Stockholm; two are planned in Oslo for early 2015. Scandic aims to establish 20 HTLs within the next five years.28 The company also introduced a portable hotel product dubbed “Scandic to Go” in 2014. It consists of a two-room container with beds, TV, free Wi-Fi, A/C, a minibar and a patio that Scandic will deliver upon request, even to remote locations.29

Nordic Choice Hotels Nordic Choice’s six brands – Comfort Hotels, Quality Hotels, Quality Resorts, Clarion Hotels, Clarion Collection and Nordic Hotels & Resorts – comprise 170 hotels, mostly in Sweden and Norway, where the Sustainable Brand Index ranked Nordic Choice as the most sustainable hotel company in the country. The company opened seven new properties in 2013 and took over two in Denmark and one in Sweden, which contributed to its 11.2% revenue increase over

26) Rezidor Hotel Group Annual Report, 2013. 27) “Scandic acquires Rica Hotels – Strengthens its portfolio with 72 new hotels in Norway and Sweden,” Scandic press release (Feb. 11, 2014). 28) “Scandic Invests for the Future and Strengthens Its Market Position,” Scandic Annual Report Summary, 2013. 29) “Mobile hotel rooms – available anywhere,” TTG Nordic (June 19, 2014).

2012. RevPAR increased 4.2%. The company launched redesigned versions of its computer and mobile websites. Fifteen percent of total gross bookings are generated via the desktop web; mobile captured 15% of online bookings.30

First Hotels This Scandinavian chain, which offers an easy-to-use mobile website, has 55 hotels in Sweden, Norway and Denmark. The company, however, is struggling with high rents in Denmark. Hotel Østerport in Copenhagen has declared bankruptcy and has been suspended from the group.31

Thon Hotels Thon Hotels is part of the Olav Thon Group and includes 64 hotels in Norway and Sweden as well as six in Belgium and the Netherlands. Since 2010, Thon Hotels and First Hotels have a cooperation agreement in Scandinavia that allows the two companies to collaborate on sales, distribution and marketing. Thon is one of the hotel companies that continues to boycott Expedia and Hotels.com; the withdrawal from these portals did not negatively impact bookings.

Smaller Hotel Chains Small chains struggle to compete against the majors; price competition is intense, and the larger chains gain strength by acquiring smaller brands (i.e., Scandic acquired Rica Hotels in 2013). Zleep Hotels, a Danish budget chain of six properties (with a seventh in Hamburg, Germany), expands its portfolio through franchise agreements. While it focuses on direct website bookings, the company does not yet offer a mobile website or an app – only a mobile local guide for Copenhagen. With 12 privately-owned and centrally-located hotels in Copenhagen, Arp-Hansen Hotel Group is the largest hotel provider in the city with 3,187 rooms, accounting for approximately 22% of the city’s capacity.32 Other regional players include Elite Hotels of Sweden (27 hotels), ProfilHotels (12 hotels) and Norlandia Hotel Group (16 hotels).

Rail Scandinavia’s three dominant rail operators – Statens Järnvägar (SJ), Norges Statsbaner (NSB) and Danske Statsbaner (DSB) – together reported a1.9 billion in passenger revenue in 2013, a 6% increase over 2012 (see Figure 5.7). Growth will slow to about 2% annually over the next several years. The region’s 46% online penetration rate for rail bookings in 2014 is second only to Spain (67%), which has a stronger OTA presence in this segment than other European markets. The online supplier direct channel will capture nearly four in 10 bookings in 2014. Mobile will account for 7% of total rail revenue for 2014 – leading all supplier segments in mobile booking share – and is projected to approach 10% by 2016. High-speed services now represent more

30) Interview with Susanne Lindqvist, e-Commerce Manager, Nordic Choice Hotels (October 2013). 31) “Bankruptcy petition against First Hotels,” TTG Nordic (May 13, 2013). 32) Arp-Hansen.

than a fourth of all rail traffic in the European Union, due to increased demand from international travelers as well as the fact that some major European rail operators no longer operate as purely state-owned public monopolies.

Figure 5.7: Scandinavian Rail Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016

Total 2012 0.70 1.13 38% 1.8

2013 0.75 1.19 39% 1.9

2014 0.77 1.20 39% 2.0

2015 0.80 1.21 40% 2.0

2016 0.83 1.22 40% 2.1 Online Direct Penetration Supplier-Direct Online Other Channels

Statens Järnvägar (SJ) SJ transports approximately 100,000 passengers per day, serving 160 stations. The Swedish rail company reported F778 million in gross bookings for 2013, and revenue is projected to climb 2% to F791 million in 2014. Growth is expected to remain at 2% for the next two years as the market is fairly saturated. Online bookings increased 10% in 2013, reaching F358 million, and are projected to reach F376 million in 2014. Online is expected to surpass offline volume by 2016. SJ’s website generates about one third of total sales. This share will slowly decline as customers shift to mobile bookings which doubled in 2013 to F31 million, or 4% of total revenue. Mobile’s share is expected to increase by about two percentage points per year, surpassing 9% in 2016. In March 2013, the company updated its “Min Resa” (My Journey) app, which enables customers to purchase tickets directly via mobile. In the second half of the year, SJ simplified its website and launched several new and improved mobile functions, including the ability to store tickets in Apple’s Passbook app, book return journeys and forward e-tickets. Three in four tickets were sold via digital channels in 2013.33

Norges Statsbaner (NSB) NSB transported 60.5 million passengers in Norway in 2013. This figure represents a jump of 7.3% over 2012, mainly due to a capacity increase resulting from timetable restructuring and the purchase of new trains.34 Projected revenue for 2014 is F671 million – a 2% increase over 2013.

33) SJ Annual Report and Sustainability Report, 2013. 34) NSB Group Annual Report, 2013.

NSB’s website share of revenue (35%) exceeds that of the other Scandinavian rail operators. Online penetration stands at 46% in 2014, and will inch up to 47% by 2016. The rail operator’s OTA bookings in 2014 are relatively low at 4%, compared to 7% and 10% for DSB and SJ, respectively. Mobile is becoming increasingly important for NSB: about 7% of bookings were generated via mobile devices in 2013, and this share is projected to grow to 10% by 2016. With additional timetable restructuring planned and 70 new trains to be delivered by 2015, further growth of Norway’s rail market is expected. However, it will remain modest at roughly 2% per year. NSB’s future challenges include the impact of unstable weather conditions on rail infrastructure and population growth concentrated in saturated urban areas, along with increasing traffic congestion and the need for a more efficient public transport system.

Danske Statsbaner (DSB) DSB’s gross bookings are expected to reach F508 million in 2014, a 1% increase over 2013 due to planned efficiency enhancements and savings measures. With increased competition anticipated due to changes in EU legislation,35 the annual growth rate is projected to remain in the 1-2% range for each of the next two years. Even though more than four in 10 DSB bookings are generated online, the operator’s online penetration trails both SJ and NSB. With the well-received relaunch of its mobile app in 2013,36 mobile’s share of revenue is projected to rise from 6% in 2013 to 10% by 2016.

Car Rental The rental car market in Scandinavia is the smallest in Europe, and represents just 4% of travel supplier bookings in the region. Gross bookings will reach F661 million in 2014 and are projected to grow at an average of 2% per year through 2016 (see Figure 5.8). Regional brands – including OKQ8, Statoil, ScandinavianCarRental.com, Dansk Auto Rent, One2Move, Bislet Car Rental, Auto Europe and Driveon.net – continue to dominate the market. They account for nearly two thirds of revenue, while the rest comes from major international car rental companies (e.g., Avis, Hertz, Europcar and Sixt). One third of car rental bookings were made online in 2013, with six in 10 of these coming from supplier website and mobile channels. In 2014, online supplier direct channels will account for 21% of revenue, while OTAs will contribute 14%. Both segments are projected to have marginal annual growth through 2016. Hertz leads in both website direct and mobile bookings for the segment.

35) DSB Annual Report, 2013. 36) DSB Interim Report 2014 (May 13, 2014).

Figure 5.8: Scandinavian Car Rental Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 0.13 0.51 20% 0.64

2013 0.13 0.52 21% 0.65

2014 0.14 0.52 21% 0.66

2015 0.14 0.53 21% 0.68

2016 0.15 0.54 22% 0.69 Online Direct Penetration Supplier-Direct Online Other Channels

In April 2014, Avis ordered 400 Nissan Leaf electric cars for its fleet in Denmark. Electric cars are already well accepted in Scandinavia; the Leaf was the third best-selling car in Norway in 2013. Other car rental companies are expected to follow Avis’ example and add electric offerings to their fleets.37

Regional Brands OKQ8 in Sweden and Statoil in Norway are the best-known car rental brands in Scandinavia. OKQ8 is also one of Sweden’s largest fuel companies with about 700 stations located throughout the country. It uses Thermeon’s car rental software platform to facilitate online bookings. Statoil provides an intuitive and user-friendly online booking platform. Revenue for regional players is expected to reach F425 million in 2014 and grow at a flat 1% for the next two years. The split between online supplier direct and OTA bookings was even in 2013, with each claiming about 14% of total gross bookings. Despite their higher volumes compared to international chains, regional players have less mature mobile offerings. Still, regional suppliers’ mobile bookings made an impact for the first time in 2013, atF 1 million, and are projected to quadruple to F4 million in 2014 and more than double again to F9 million by 2016.

Avis Avis led the major international suppliers in 2013, with F104 million in gross bookings, with 4% growth projected for 2014. Online penetration is at 38% and will reach 40% by 2016. After launching a new mobile application in 2013, reservations from mobile devices have doubled and will account for 4% of gross bookings in 2014. The mobile share is projected to climb to 8% of total revenue by 2016. Avis has the lowest share of OTA car bookings in the region, at 7%.

37) Rachel Boagey, “Nissan sells a record 400 LEAF to Avis,” Automotive World (April 4, 2014).

In an effort to appeal to environmentally-conscious consumers, Avis ordered 400 Nissan Leaf vehicles – one of the world’s best-selling electric cars – for the Danish market. They will be available at a reduced monthly rate of F468, thanks to funding from the Danish Energy Agency.38

Hertz Hertz leads the Scandinavian market in online bookings, which will generate 55% of its revenue in 2014. Overall revenue will total F99 million in 2014, and this will climb 4-5% in the next two years, with the online share increasing to 57%. Hertz also leads in website and mobile bookings as a share of total revenue, at 33% and 7%, respectively. Hertz generated F5 million in mobile bookings in 2013, and that figure is projected to double by 2016 and reach 9% of total gross bookings. OTAs, at F15 million in 2014, account for 15% of total revenue. Hertz offers various car-sharing programs, including Hertz BilPool in Norway – which rents cars equipped with the latest eco-friendly technology – and Hertz Erhvervs- Delebilen in Denmark, for companies to organize car-sharing and rentals more efficiently and economically.

Europcar Europcar’s regional revenue remained flat atF 18 million in 2013, with future growth stagnating at 0-1% through 2016. Online bookings account for 31% of the total, below the industry average of 35%. As with its competitors, mobile bookings are expected to grow, from 2% of total revenue in 2013 to 5% by 2016. Since 2010, Europcar has been the annual winner of the World Travel Awards “World's Leading Green Transport Solution” prize. To support Europcar’s green development, the company enhanced its “Car Selector” functionality to filter on CO2 emissions, enabling users to select A-rated environmentally- friendly rentals.39

Sixt Scandinavia is the German-based Sixt’s second-smallest market compared to its other European operations. The company will generate F12 million in gross bookings in 2014; online penetration is at 31% and is expected to reach one third by 2016. Mobile bookings accounted for 5% of total revenue in 2013. This segment is expected to grow one percentage point per year to reach 8% by 2016.

Tour Operators Three major players dominate the Scandinavian tour operator market: TUI Nor- dic, Thomas Cook Scandinavia and Kuoni Scandinavia. Together they account for 84% of tour operator gross bookings in the region, which in 2014 will reach F3.3 billion (excluding air), up less than 1% from 2013 (see Figure 5.9). Kilroy and smaller players comprise the remainder of the market. Overall, online supplier direct bookings account for half of all bookings and are expected to remain stable through 2016.

38) Rachel Boagey, “Nissan sells a record 400 LEAF to Avis,” Automotive World (April 4, 2014). 39) Europcar Norway.

Figure 5.9: Scandinavian Tour Operator Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 1.57 1.66 49% 3.23

2013 1.64 1.68 49% 3.32

2014 1.66 1.66 50% 3.33

2015 1.66 1.70 49% 3.36

2016 1.70 1.72 50% 3.42 Online Direct Penetration Supplier-Direct Online Other Channels

Online penetration among the large, pan-European tour operators will average 62% in Scandinavia in 2014 – more than double the 24% average for Europe overall. The number of retail locations operated by pan-European brands like Thomas Cook has traditionally been relatively small compared to other European countries.40 This well-established online presence makes tour operators less vulnerable to competition from OTAs, which will capture just 6% of the tour market in 2014. This share will remain relatively unchanged, provided that tour operators keep pace with technology enhancements and online platforms.

TUI Nordic After reporting double-digit growth rates the past two years, TUI Nordic’s advance has leveled off due to a number of factors, including increased competition and unrest in key destinations such as Egypt and Thailand. Revenue is projected to drop 1% in 2014. Still, with more than F1.1 billion projected in gross bookings, TUI remains the strongest player in the Scandinavian tour operator market with a 33% market share. Online channels account for 64% of TUI’s gross bookings in Scandinavia. The shift to mobile will continue through 2016 as most TUI websites and booking portals are mobile-optimized. In addition, the international rollout of TUI’s new digital assistant app, MyThomson (currently available only in the U.K. and Germany), will drive more travelers to the mobile platform. Overall, mobile’s share of revenue will climb to 8% in 2016, offsetting losses on the desktop web side, with the online supplier direct share holding steady at 58%, the same as in 2013. Booking packaged travel can be complex, and after TUI launched its app in Germany, customer reviews called for more functionality and a simplified booking process. Direct distribution via the company’s own online and offline agencies increased by two percentage points in 2013 to 89%.41

40) Luke Bujarski, Identity Crisis or Innovation? Update on Europe’s Tour Operators and the Battle for Travel Market Dominance, Phocuswright (July 2014). 41) TUI Travel Annual Report & Accounts, 2013.

TC Scandinavia Thomas Cook Scandinavia comprises the brands Ving in Sweden and Norway, Tjäreborg in Finland and Spies in Denmark. Globetrotter is also a Thomas Cook brand, although it does not appear under the company’s sunny heart identity launched in October 2013. After growth stagnated in 2013 following a major restructuring in 2012, bookings are on the rise again in 2014. Growth is projected to reach 1-2% by 2016, nearly equal to TUI’s. Thomas Cook will generate F873 million in 2014 for a 26% market share. The company remains strong in traditionally packaged holidays, and leads the tour operator segment with its share of website bookings (56% in 2013). This rate will decline, however, as mobile will more than triple from F22 million in 2013 to F71 million in 2016, for an 8% share of all bookings. Controlled distribution through owned websites, shops and call centers is at 88% in 2014.42 Thomas Cook’s Ving brand offers several apps with different services, including a charter booking app, a kid’s app and a travel magazine.

Kuoni Scandinavia Kuoni Scandinavia is the third-largest tour operator in the region, with a 24% market share on gross bookings of F802 million in 2014. Bookings dipped 3% in 2013, mainly due to the termination of trips to Egypt in the second half of the year as well as flight overcapacities that resulted in lower average prices. But Kuoni is rebounding in 2014, and growth is projected to reach 2.5% by 2016. The company’s main business areas are destination and accommodation services, tour operating/package holidays and visa processing services. Kuoni’s customers in Scandinavia travel primarily to European destinations, followed by the Middle East and Africa, and the Asia/Pacific region. Online bookings will account for 51% of Kuoni’s revenue in 2014. As with TUI and Thomas Cook, website bookings are giving way to mobile and are projected to drop from 42% of gross bookings in 2014 to 39% of gross bookings by 2016. The company’s mobile share of revenue is on par with the two other major players. Kuoni’s Apollo brand is number three in Sweden among traditional tour operators. Other Kuoni brands in the region include Lime Travel, Falk Lauritsen, Krone Golf and Golf Plaisir, as well as the airline Novair.

Kilroy Kilroy provides individual and group package holidays for the youth and student market. Denmark is the tour operator’s most important market, generating 42% of revenue, followed by Norway (21%) and Sweden (14%). Kilroy takes a balanced approach to offline and online distribution: It opened three new physical sales offices in Denmark since 2013, but also invested in optimizing its mobile website, which is why mobile bookings are expected to triple from F2 million in 2013 to F6 million in 2016. Gross bookings will reach F219 million in 2014 and are projected to grow at 3% annually for the next two years as the company aims to expand through mergers and acquisitions.43

42) Thomas Cook Annual Report & Accounts, 2013. 43) Kilroy Annual Report, 2013.

Ticket Leisure Travel Ticket Leisure Travel is Scandinavian’s leading travel agency chain. (Note: Due to Phocuswright’s methodology, Ticket Leisure Travel’s gross bookings, generated through resales, are not included in the overall Scandinavian market sizing to avoid double counting.) Travel services are sold via 72 brick-and-mortar agencies in Sweden and Norway, as well as through online distribution channels and call centers. Ticket Leisure Travel produces annual revenue of about F508 million.44

Stay.com Braganza AS owns 78% of Stay.com, a web-based social travel guide and service provider. Stay launched its 3.0 app in May 2014, featuring more than 150 destinations and 1,000 travel guides from local experts. Users can create personalized guides and find tips for various services such as hotels, restaurants, things to do and more. While the app does not provide booking services, travelers can add their own guides or recommendations, and all the information is then available offline.45

Online Travel Agencies Similar to the hotel market, consolidation is occurring in the Scandinavian OTA market, which is split between regional (41%) and pan-European (59%) players. Total revenue is projected to reach F3.1 billion in 2014 and grow 6-7% in each of the next two years (see Figure 5.10). Booking.com extended its lead over competitors throughout Europe in 2013, and is the only OTA with strong growth rates in every country for 2014 and 2015. It’s the top OTA in the Scandinavian market, closely followed by the regional player Etraveli; other OTAs trail far behind the two leaders. Both are also ahead in generating mobile revenue. Overall, mobile will contribute F429 million, or 14% of gross bookings in 2014. That share is expected to grow to 23% by 2016, as OTAs add and optimize mobile websites and apps.

Figure 5.10: Scandinavian Online Travel Agency Gross Bookings (FB), 2012-2016 3.4 3.1 3.2 2.9 2.6

2012 2013 2014 2015 2016

44) Braganza Group Annual Report, 2013. 45) Rafael Lemarchand, “Catching up with Norwegian travel app Stay’s 3.0 release,” ArcticStartup (Aug. 12, 2014).

To counter the competition from metasearch engines and the threat of lower margins, some OTAs (e.g., Etraveli) have moved into or beefed up their presence in the meta market. Competition is fierce in advertising as well. OTAs spend about half of their online marketing budgets on search engine marketing (SEM), with a small portion attributed to search engine optimization (SEO) in an effort to attract potential bookers to their portals.

Booking.com (Priceline) Booking.com is the highest grossing OTA in Scandinavia – controlling 32% of the 2013 market – with projected revenue of F1 billion in 2014 (see Figure 5.11). Along with the local Flygstolen, Booking.com’s growth rates are the strongest among all OTA players active in Scandinavia. It remains the region’s sole hotel- only platform, yet Scandinavia is the smallest market for the company, representing just 5% of its European revenue in 2014, down from 6% in 2013. Mobile revenue more than doubled in 2013 to F176 million, is projected to reach F238 million in 2014, and will soar to F426 million by 2016. The growth will push its already above-average mobile share of revenue from 23% in 2014 to 35% in 2016.

Etraveli AB With F838 million in revenue projected for 2014, Etraveli is the strongest of the regional players in Scandinavia and the number two OTA after Booking.com. But annual growth rates are projected to slow from 13% in 2013 to 3% by 2016 due to a drop in demand. To counter this decline, the company – which comprises about a dozen brands, mainly focused on air – is expanding into new markets with stronger growth opportunities, like Russia.46 In January 2014, to strengthen its position as meta sites gain traction, Etraveli purchased Svenska Resenätverket AB, owner of Flygresor.se and the market leader in travel price comparison in Sweden. After the acquisition, Etraveli reported an increase of 6% in net revenue for the first half of 2014, attributable to added revenue from the acquired company.47

Figure 5.11: Online Travel Agencies in the Scandinavian Market, Estimated Market Share, 2013

3% 3% 3% 9% 2% 4% Expedia Priceline/Booking/Agoda Odigeo (Opodo, Edreams, Go Voyages) Orbitz/Ebookers 32% ETI (Seat24, Supersavertravel) 28% VIA Tours (VIA Egencia - Viatours.no) Restplass/Reisegiganten Flygstolen Flygpoolen Others 5% 10%

46) Etraveli Interim Report April – June 30, 2014. 47) Etraveli Interim Report April – June 30, 2014.

Etraveli feeds its portals with hotel content from Expedia and car content from Rentalcars.com, a Priceline brand. The company launched mobile-optimized websites for all its brands in 2013 and saw mobile’s share of gross bookings jump from 5% in 2012 to 9% in 2014. The expected share by 2016 is 17%, or F153 million in mobile bookings.

eDreams Odigeo (Travellink) Among the pan-European OTAs, Odigeo – which operates its Opodo brand as Travellink in Scandinavia – is the second largest in terms of gross bookings with F313 million in 2014. Still, it trails far behind the market leader, Booking.com. Compared to other European markets, Scandinavia contributes 8.2% to the company’s total gross bookings; only Spain has a smaller share, at 8.0%.

Expedia As anticipated, Expedia’s gross bookings remained flat in 2013 atF 270 million due to the boycott of the OTA by four major hotel chains at the end of 2012. However, Scandic Hotels renegotiated its deal and once again supplies rooms to Expedia. Revenue began to recover in 2014 and will grow 4% to F283 million. Projected growth is 5% over the next two years. White-label bookings generated through Etraveli, which uses Expedia’s content, are included in the totals. The company’s mobile share of revenue is 15% in 2014, and expected to grow to 25% by 2016.

MrJet/Ebookers (Orbitz Worldwide) Orbitz operates under the MrJet brand in Sweden and Denmark, and as Ebookers in Norway. While the company’s dependence on traffic from metasearch sites is high in other European countries, half of the bookings in Sweden are made directly on the MrJet website.48 Scandinavian gross bookings grew 5% in 2013 to F144 million, but anticipated growth will drop to about 1% annually in 2015 and 2016, as the OTA struggles to keep pace with Expedia and Booking.com. Mobile transactions, however, will continue to climb, quadrupling from a 3% share of revenue in 2013 to 10% by 2016. Orbitz’ travel app, available also for MrJet and Ebookers customers, offers hotel, flight and car rental bookings. The app provides hotel discounts of up to 65%, along with last-minute alerts and bookings. Orbitz has redesigned all three of its regional sites, making them more user- friendly. In an effort to drive customer loyalty, the OTA also has begun to prominently advertise its customer retention programs – MrJet Rewards and Ebookers Bonus+.

Restplass/Reisegiganten Among the regional players, Reisegiganten holds the second biggest share of the market, with F122 million in gross bookings projected for 2014. Mobile generated 12% of gross bookings in 2013 and is expected to grow to 22% by 2016. The company started in 2000 as an OTA for airline tickets and a metasearch engine for packages with the brands Restplass and Solfaktor. Today, Reisegiganten consists of 10 portals across Scandinavia – including

48) “Mobilen först för Mr Jets Nordenchef,” Travelnews.se (Oct. 9, 2013).

Destination.se, a Swedish metasearch engine acquired in January 2014 – and has shifted its focus mainly toward metasearch for holiday packages. It has become the largest player in this niche in Scandinavia, with brands including Restplass.no, Sistaminuten.se, Destination.se and Afbudsrejser.dk. The company continues to offer dynamic tour operation packages to city and Mediterranean destinations through the brand Solfaktor, as well as through Reisegiganten’s original OTA business. Although this sector is very competitive and has low margins, Reisegiganten aims to be a major player in Scandinavia, selling airline tickets as well as hotel accommodations and rental cars.

Flygstolen Flagstolen gross bookings grew 15% in 2013 to F79 million, and are expected to jump 20% in 2014 to F95 million, the majority of which will come from flights. Re- maining revenue comes from packages, car rentals and hotels. The company has already generated a significant share of mobile bookings (8%), which is expected to nearly double by 2016. Despite increasing competition from metasearch engines, revenue growth rates are projected to stay in double digits through 2016, with Flygstolen surpassing Reisegiganten’s OTA revenue as the latter increases its focus on metasearch.

Flygpoolen The Italian company Uvet acquired Flygpoolen in 2013. With F90 million in gross bookings anticipated for 2014, Flygpoolen is one of the smaller Scandinavian players, focusing on selling airline tickets, group and conference business, as well as wholesale products through travel agents. The company does not yet have a mobile website or application.

VIA Egencia VIA Egencia, created when Egencia (Expedia) acquired VIA Travel Group in 2012, focuses on the corporate and managed business travel category. VIA Tours still exists as a separate brand, but it does not have a major impact on the Scandinavian leisure market. Revenue will reach F68 million in 2014, but growth will slow from 7% to 2% by 2016. VIA Tours has a mobile website for request forms only. Online bookings are not yet available.

Conclusion A stabilized economy coupled with low unemployment rates will help push steady growth in the Scandinavian travel market. Gross bookings will total F15.4 billion in 2014 and are expected to reach F16.3 billion by 2016, led by Norwegian Air’s growth. Scandinavia already has the highest online penetration rate in Europe, at 58% in 2014. This rate is poised to increase to 61% in 2016, as the mobile platform picks up steam in all supplier segments and will account for 19% of the total Scandinavian online market. Even though mobile booking growth rates are already leveling off from 90% to 30-40% per year, most suppliers have not yet fully exploited the mobile opportunity.

While mobile is a strong driver of online hotel bookings, most are made through OTAs as opposed to hotels’ mobile websites or apps. Suppliers need to realize that the mobile market is still growing at the expense of desktop web bookings, and if they do not develop a proper mobile strategy, OTAs will further increase their market share. The airline Malmö has grasped this movement and reacted by providing mobile services for all phases of the customer journey – from booking to payment to ticketing. Scandic is an example of a hotel chain that has responded to this trend by offering a mobile check-out solution. Suppliers who fail to take a holistic approach and are not visible on a variety of channels and bookable via different devices, risk falling behind in this highly competitive environment. m

The Spanish Online Travel Overview

Lead Analyst: Jesús Salgado Criado Contributors: David Juman

Overview Travel is one of the key engines of the Spanish economy. In 2013, Spain welcomed nearly 61 million international visitors, up 5.6% year over year.1 And according to the Spanish Ministry of Tourism, tourism revenue in 2013 climbed to an all-time high of more than A59 billion, making the country the second- largest incoming tourist market worldwide. 2 This strong inbound performance is indicative of the economic recovery that has taken hold throughout much of Europe. Unfortunately, the same recovery has not completely lifted Spain out of the economic doldrums; continuing high unemployment and massive public debt continue to weigh on the domestic travel landscape. But the scenario has improved greatly in the past year. Unemployment is down, consumer confidence is up, and Spaniards – for whom travel represents an important lifestyle component – are more optimistic than they have been for some time. Overall, Spain’s travel market will climb 5% to A21.3 billion in 2014, following a decline in 2012 and a marginal uptick in 2013. Solid growth through 2016 will take the total market to just under A24 billion. Online distribution channels – both web and mobile – are growing at the expense of offline. In nearly every travel segment, online bookings are increasing significantly. Online direct and online travel agency (OTA) bookings are both climbing, though this expansion varies considerably by segment. Low-cost carriers (LCCs), along with the country’s sole rail operator, are heavily dependent on their online direct channels, while OTAs have a clear edge in the accommodations segment. Despite impressive online growth, Spain’s share of Europe’s online travel bookings (7%) trails its share of the continent’s total travel bookings (8%). This gap indicates that Spain’s online travel market is still evolving and remains underdeveloped in relation to other European nations. The gap is closing, however; as Spaniards grow more comfortable making significant purchases online, the country’s online travel marketplace will continue to mature. In 2013, about a third of all travel bookings were made on supplier and OTA websites and mobile platforms. This percentage will climb to 39% by 2016.

1) Spain reaches number 3 on tourism charts,” 02B (Jan. 21, 2014). 2) “Tourism revenue in Spain peaked to A59 billion in 2013,” 02B (Jan. 27, 2014).

Online Distribution Dashboard

Figure D.1: Spanish Share of Gross Bookings by Channel, 2013 vs. 2016 Traditional Airline 18% 20% 62% 2013 22% 20% 59% 2016 LCC 65% 16% 19% 2013 65% 18% 17% 2016 Hotel 8% 24% 68% 2013 10% 32% 58% 2016 Rail 40% 21% 40% 2013 60% 22% 18% 2016 Car Rental 13% 18% 69% 2013 16% 14% 71% 2016 Tour Operator 8% 92% 2013 10% 90% 2016

Supplier-Direct Online OTAOther Channels

Figure D.2: Spanish Share of European Total and Online Travel Markets, 2013 (EB) SPAIN 8% 20.3 SPAIN 7% 6.6

Rest of Europe 94.8 Rest of Europe 222.6 Online Travel Market Total Travel Market 101.4 242.9

Figure D.3: Total Online Penetration 2012-2016: Spanish and European Travel Markets

50% 47% 45% 44% 45% 42% 39% 39% 40% 37% 35% 35% 32% 29% 30%

25% 2012 2013 2014 2015 2016 Spain Europe

Key Findings 0 Amid signs of hope in the Spanish economy, travel bookings are poised for a recovery. Following a flat performance in 2013, total bookings are projected to climb 5% in 2014, to A21.3 billion. Additional growth of about 6% is expected in both 2015 and 2016.

0 With offline retail travel agencies (including several large agency net works) succumbing to challenging market conditions, travelers are increasingly turning to the Internet to plan and purchase their trips. From 2013 to 2016, online bookings will jump 40%, compared to just 7% for offline channels.

0 While OTAs have commanded a larger share of online bookings during tough times (when consumers are more likely to seek out bargains), travel suppliers in Spain are aggressively promoting their online direct channels. By 2016, online supplier-direct bookings will capture 54% of the online market, as OTAs slip to 46%.

0 After taking a beating during the downturn, Spain’s flag carrier Iberia is mounting a notable comeback. The airline has implemented a major restructuring plan, reinstating some long-haul routes that it had suspended due to high costs and lack of demand. Overall, the traditional airline market will climb 7% in 2014, to A4.7 billion.

0 The LCC market is growing faster than any other travel segment in the country, with strong double-digit gains expected to generate A1.5 billion in bookings in 2014. Homegrown carriers Vueling and Iberia Express

are challenging the once-dominant Ryanair and successfully exploit ing the online direct channel – which accounts for two thirds of their bookings.

0 With A12.2 billion in gross bookings projected for 2014, hotels represent Spain’s largest travel segment by far. But recovery has been uneven, with resort destinations performing well while big cities that rely on business and domestic travelers are still struggling (with the notable exception of Barcelona). Some international chains have let their management contracts lapse for under-performing Spanish properties, focusing instead on expanding to countries with stronger growth potential.

0 Despite the success of its high-speed rail services, Renfe – a state-run rail monopoly – has accumulated US$5 billion in debt. Following a major restructuring in 2013, Renfe has embarked on a long-awaited privati zation plan that will gradually introduce competition into the market.

0 After dropping nearly 11% in 2013, tour operator gross bookings are heading for another year of double-digit losses in 2014. The segment has been hurt by OTAs, which have been more nimble in introducing tour- package content online, and by the necessity of distributing through traditional agencies, which themselves are suffering.

Macro Landscape Changes in Spain’s travel market are unfolding against a backdrop of a weak economy, crippling government debt and continuing political and social unrest. The government is under significant pressure to streamline the budget and reduce the debt, which is driving some key deregulation and privatization initiatives in the transportation sector. In 2013, the government debt-to-GDP ratio was 92.1%, compared to an average of just 50% from 1980 to 2012.3 On the other hand, signs of economic recovery have been clearly evident in 2014. The economy grew 0.5% in the third quarter – the fifth consecutive quarter in which the economy expanded. And as of September 2014, the country’s annual economic growth rate of 1.6% was the highest rate in more than six years.4 Apart from the uncertain economy, corruption scandals have rocked the Spanish government. As of November 2014, nearly 2,000 politicians were being investigated for corruption.5 Widespread charges of embezzlement do not sit well with the public, which has endured more than three years of government- imposed austerity measures. The scandals have extended as far as Spain’s royal family. In the wake of a serious corruption investigation, King Juan Carlos

3) Spain Government Debt to GDP, Trading Economics (Nov. 24, 2014). 4) Angela Monaghan, “Spain’s economic recovery gathers momentum,” The Guardian (Oct. 30, 2014). 5) Miguel-Anxo Murado, “Corrupt Spanish politics faces shock therapy from an angry electorate,” The Guardian (Nov. 3, 2014).

abdicated the throne in June 2014, passing the crown to his son, the former Prince Felipe. In addition, a secessionist movement has been gaining strength in Catalonia, creating considerable political tension between regional leaders and the central government. In November 2014, a straw poll was held in which more than 80% of Catalans voted in favor of independence. While unauthorized by the central government, the results nonetheless underscore a key challenge for the Span- ish government in addressing the future of the region, which comprises four provinces in the northeast corner of the country. Ongoing political instability in North Africa, Egypt and Turkey has indirectly benefited Spain’s inbound market, as would-be visitors to those destinations have instead chosen to spend their vacation euros in Spain. However, this exter- nal boost is temporary at best. Clearly, one of the key components of a healthy travel market in Spain – in addition to continued inbound strength – would be a stable underlying economy that lifts consumer confidence and helps drive domestic demand.

Size of the Market Spain’s economic rebound is having a direct impact on the health of the country’s travel market. Following a significant decline in 2012 and more or less flat performance in 2013, the total Spanish travel market is poised for a notable increase in 2014, with gross bookings projected to climb 5% to A21.3 billion (see Figure 6.1). Buoyed by a strong inbound market and signs of domestic recovery, including lower unemployment and a slight uptick in consumer confidence, the total market is expected to advance at around 6% annually in both 2015 and 2016. Total gross bookings in 2016 are projected to climb to A24 billion.

Figure 6.1: Spanish Travel Market (EB) and Online Growth Rates (%), 2012-2016 Total 2012 2.8 3.0 14.4 20.2

2013 3.2 3.4 13.7 13% 20.3

2014 3.6 3.8 13.9 12% 21.3

2015 4.2 4.0 14.3 12% 22.6

2016 5.0 4.2 14.7 Online Growth 12% 24.0

Supplier-Direct Online OTA Other Channels

Online channels – i.e., supplier websites and OTAs – will continue to grow at the expense of traditional offline channels. Spanish consumers have grown increasingly comfortable conducting transactions online (including on mobile devices). While offline bookings will grow just 1-3% annually through 2016, online channels will enjoy 12% growth over the same period. As a result, online penetration will jump significantly – from 33% in 2013 to nearly 39% in 2016 – as the country takes its place among more mature online travel markets elsewhere in Europe. A closer look at the online market reveals a somewhat uneven split between OTA and supplier-direct bookings. OTAs have enjoyed an edge for the past several years, as recession-strained travelers spent more time shopping around for bargains (actual or perceived) on flights and accommodations. In 2013, OTAs captured 52% of online bookings, compared to 48% for supplier-direct websites and mobile platforms (see Figure 6.2). However, with consumer confidence on the upswing and accelerated efforts by suppliers to improve their own customer platforms, brand loyalty is taking its place alongside price as a key influencer, driving travelers back to their preferred supplier sites. In addition, some OTAs have suffered due to a per ceived lack of transparency in terms of how they display prices and fees, prompting suppliers to pull inventory from these brands. Meanwhile, suppliers are promoting and investing in their online direct channels more aggressively than ever, and by 2016 they will account for 54% of all online bookings, while the OTA share will slip to 46%.

Figure 6.2: Spanish Online Travel Market, OTA vs. Supplier- Direct Share, 2013 and 2016 2013 2016

OTA 46% 48% 52% Supplier- 54% Direct

At nearly A12 billion in supplier bookings in 2013, Spain’s hotel segment is larger than all other travel supplier categories combined. This difference explains why – despite the fact that only 8% of the segment’s gross bookings come through online direct channels – hotels still account for the largest percentage of the total online direct market in Spain. Hotel transactions represent nearly 30% of online bookings that are made directly with a supplier (see Figure 6.3).

Still, Spain’s fragmented hotel segment favors intermediaries. And since smaller chains and intermediaries often lack the marketing and resources to effectively promote direct channels, they will continue to turn to OTAs as a cost-effective alternative in the years to come. At the other end of the spectrum is the LCC segment, which is considerably smaller than the traditional airline segment, but leverages the online direct channel better than any other segment (65% of supplier bookings are online direct). As a result, LCCs capture 27% of all online direct bookings in the Span- ish market, slightly outpacing traditional airlines, which account for 25%.

Rail, another relatively small segment, size-wise, captures 15% of all online direct bookings in the country. Spanish consumers tend Figure 6.3: Spanish Supplier-Direct to gravitate to specialists Online Market, 2013 online, and the state- 4% controlled Renfe has used its position as a 15% 25% Traditional Airline monopoly to funnel LCC 40% of its gross bookings Hotel to its online direct Rail channels. Car rental, the 29% Car Rental smallest of Spain’s travel 27% segments, accounts for just 4% of the country’s online Note: Totals may not add to 100% due to rounding. direct gross bookings. Source: Spanish Online Travel Overview Tenth Edition With the exception of ©2013 Phocuswright Inc. All Rights Reserved. tour operators, car rental has the lowest online penetration rate of any travel segment, and offline channels remain hugely important. Since they are not permitted to sell directly to consumers, tour operators do not contribute to online direct bookings and instead distribute through online and traditional travel agencies.

Mobile Due to a number of factors, Spanish travelers use mobile devices most frequent ly during the inspiration and shopping phases. While bookings are gaining some traction, a significant share of Spanish consumers remain uncomfortable using tablets or smartphones for what they view as expensive, relatively complex transactions. In addition, there is a fair amount of cross-channel travel planning, in which mobile may be used in the research stages, but the bookings occur mainly via the desktop, or perhaps on the phone or even through an offline agency. This hybrid approach to travel planning makes it challenging for suppliers to assess the extent to which mobile is driving bookings. Still, mobile bookings for OTAs and most supplier segments are growing rapidly. In 2013, mobile – including both smartphones and tablets – accounted for 8%

of all online bookings. By 2016, however, this percentage will more than double to 17%. Among suppliers, LCCs had the highest share (12%) of mobile bookings relative to their total online direct bookings (see Figure 6.4). Their simple, low-cost product works well with mobile, which makes the LCC segment ripe for future mobile growth. Similarly, OTAs are making a strong showing in mobile. OTAs that specialize in accommodations and last-minute bookings are attracting a significant share of travelers drawn to the simplicity and convenience of their mobile apps; mobile will account for one in five OTA bookings by 2016.

Figure 6.4: Spanish Mobile Share of Online Supplier-Direct and OTA Bookings by Segment, 2013 vs. 2016

2013 2016 20% 17% 15% 14% 12% 13% 10% 8% 6% 6% 4% 4% 0% 0% Traditional LCC Hotel Rail Car Rental Tour OTA Airline Operator

As in other markets, smartphones are quickly becoming the dominant type of mobile phone. In 2013, 48% of mobile phone owners in Spain used a smartphone; by 2016, this percentage will skyrocket to 70%.6 One of the key drivers for smartphone adoption is the availability of a number of text messaging and social media apps (including both WhatsApp and Twitter) which have become extraordinarily popular in the Spanish market. This popularity is especially true of younger consumers, who often prefer to connect through free Wi-Fi networks rather than paying for data access. However, since younger users typically lack the spending power and/or the credit cards necessary to drive m-commerce, transactions tend to trail adoption. Tablets, on the other hand, are generally regarded as more similar to the PC, since consumers tend not to carry them throughout the day. Due to their larger screen size, conversion rates for tablets are considerably higher than for smartphones, although the advent of large-screen smartphones (i.e., “phablets”) may help close this gap. Most Spanish travelers tend to stick to mobile websites, unless a particular travel app offers a unique value proposition. The popular travel apps in the Spanish market include Blink (or other last-minute accommodation apps) and specialized segment leaders such as Booking.com or Renfe’s rail app. For the

6) Share of mobile phone users that use a smartphone in Spain from 2010 to 2017, Statista (2014)..

most part, however, travelers rely on the mobile web without downloading many travel apps, in part because of the limited storage capacity of many smartphones. Mobile websites are useful for acquiring customers; apps help retain them for future bookings. Beyond the low-hanging fruit of air and rail tickets and hotel bookings, the cross- and up-sell opportunities for mobile have also begun to attract the attention of suppliers and OTAs. In the case of airlines, carriers now sell premium seat selection, extra luggage allowance and on-board Wi-Fi via mobile. Hotels can deliver well-timed offers to guests’ smartphones, such as for on-site parking, in addition to offering a range of in-property specials and promotions. In most cases, this ancillary revenue comes at relatively little additional cost and goes directly to the company’s bottom line. This result is one reason why airlines such as Iberia are paying such close attention to their mobile check-in; it can be used as a “foot in the door” to offering add- ons later in the trip. Tour operators are also looking to leverage the mobile opportunity, particularly since many of them have aggregated in-destination content such as tickets, excursions, activities, restaurants and more. One notable barrier to these types of mobile transactions is the high roaming costs that still exist within most European countries and which deter many travelers from accessing 3G or 4G networks while traveling. While EU law makers agreed in April 2014 to abolish roaming fees by December 2015, they have not yet agreed on a detailed plan on how to accomplish this.7

Suppliers Airlines Spain’s improving economic outlook is lifting airlines’ gross bookings. In 2013, gross bookings (for traditional airlines and LCCs combined) fell slightly, driven mainly by significant losses by Iberia, the national carrier and largest airline in the country. However, projections for 2014 are brighter; both online supplier- direct bookings and those made through other channels will rise, with total gross bookings exceeding A6.2 billion (see Figure 6.5). Online direct bookings, in particular, will notch double-digit gains, as carriers take advantage of improving market conditions to advance their direct offerings, including both web and mobile. By 2016, total gross bookings for the segment are expected to climb to A7.8 billion, up 36% from 2013. Traditional airlines currently repre sent roughly three fourths of all gross bookings, while Spanish LCCs (excluding foreign LCCs that operate in the country) account for the remaining one fourth. Among traditional airlines, Iberia is mounting a notable recovery as it reinstates key routes it had abandoned earlier, while implementing cost-cutting measures and an ambitious restructuring plan. Meanwhile, the Spanish LCCs continue to gain market share and post strong gains, especially in the online direct channel.

7) Julia Fioretti and Francesco Guarascio, “EU divided over how to end mobile roaming charges,” Reuters (Sept. 26, 2014).

Figure 6.5: Spanish Airline Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 1.6 4.3 28% 5.9

2013 1.7 4.1 29% 5.7

2014 1.9 4.3 31% 6.2

2015 2.3 4.6 33% 6.9

2016 2.8 5.0 36% 7.8 Online Direct Penetration Supplier-Direct Online Other Channels Note: 2014-2016 projected. Source: Spanish Online Travel Overview Tenth Edition ©2014 Phocuswright Inc. All Rights Reserved.

Vueling has grabbed significant market share from Ryanair, and Iberia Express has successfully taken over numerous European routes that were abandoned earlier by its parent company. Another important development in Spain’s airline sector is the government’s plan to privatize Aena Aeropuertos, the state-owned airport operator. The world’s largest airport operator in terms of passenger numbers, Aena manages 46 airports and two heliports in Spain and also has a stake in numerous Latin American airports. According to the country’s development ministry, the government intends to privatize 49% of the company – 21% in a sale to institutional investors and 28% in an IPO slated to occur before the end of 2014. Efforts to privatize the sector began in 2011, but these plans were scuttled due to the country’s faltering economy. Some analysts have pegged Aena’s total value at A16 billion, including debt of about A12 billion.

Traditional Airlines Iberia Spain’s flag carrier is part of the International Airlines Group (IAG), the holding company formed by the merger of Iberia and British Airways in 2011 (the group also includes Vueling, the leading Spanish LCC). Following consecutive losses in 2012 and 2013, Iberia’s gross bookings are poised to climb approximately 5% annually over the next several years, as market conditions improve and several recent moves the company has made begin to bear fruit. In 2014, Iberia’s gross bookings will top A3.1 billion (up 5% year over year) and are expected to climb to A3.5 billion by 2016. In 2011, Iberia suspended some of its key European and Latin American routes, citing high costs and lack of demand. However, in response to improving demand beginning in 2013, the carrier has reinstated some of these routes and added others. In addition, in July 2014, Iberia sold its 7.5% stake in Amadeus

to Nomura International for A578 million.8 The cash infusion will strengthen the carrier’s liquidity and enable it to implement its aggressive transformation plan, which includes a return to profitability and a range of new commercial initiatives. Despite these positive developments, the airline has suffered greatly during the downturn. In 2013, Iberia announced it would eliminate more than 3,000 jobs, including pilots, ground crew and other personnel. Since then, however, the company implemented a new restructuring plan, which includes a deal on pilots’ salaries and a provision to link future pay increases to the carrier’s productivity. Given Iberia’s focus on long-haul routes, average ticket prices are relatively high. This factor contributes to some Spanish travelers’ reluctance to purchase through online direct channels and their tendency to gravitate to other channels, including offline. In 2013, just one in five bookings came through Iberia’s online direct channels, including mobile. Still, Iberia’s online bookings continue to climb, and by 2016 four in 10 bookings will be made online (including through OTAs). This pales in comparison to the online share for the leading Spanish LCCs, each of which boast an online penetration rate of more than 80% – more than double that of the flag carrier. As part of efforts to strengthen its customer relationships, improve customer experience and gain traction online, Iberia has established a robust social media presence. In addition to boasting more than 1.72 million followers of its various Facebook and Twitter pages, the airline is also active on YouTube, Instagram, Google+, Pinterest and others. In a bid to offer greater flexibility to its customers, Iberia has partnered with Samsung to offer wearable boarding passes. Passengers equipped with a Samsung Gear smartwatch and Iberia’s compatible app can install their boarding passes directly onto their watches.9

Air Europa When Spanair exited Spain’s traditional air market in early 2012, Air Europa was a key beneficiary. While Iberia’s bookings fell in both 2012 and 2013, Air Europa advanced 4% and 18%, respectively. In addition, Air Europa was able to gain market share when Iberia temporarily abandoned some of its Latin American and European routes, and, as a result, the airline generated a record A66 million in profits in 2013.10 Gross bookings are expected to climb 10% in 2014, after which more moderate gains of 5% are likely through 2016. Still, Air Europa runs a distant second to the national carrier and attracts only half the gross bookings of Iberia, its only direct competitor in the traditional air segment. Much of Air Europa’s strength is derived from its position as the airline component within Globalia, one of Spain’s leading travel and tourism groups. Air Europa is the preferred carrier for several important Spanish travel agencies and tour operators that are also part of the group, including Travelplan, Halcón

8) Linda Fox, “Exit Iberia as Amadeus reports growth across distribution and IT,” Tnooz (Aug. 1, 2014). 9) Iberia press release (April 22, 2014). 10) “Air Europa ganó unos históricos 66 millones en su último ejercicio,” Preferente.com (April 3, 2014).

Viajes and others. According to Globalia chairman Juan José Hidalgo, the group is considering an IPO for Air Europa but wants to ensure that market conditions are right to reward long-standing investors before going public with the carrier.11

Low-Cost Carriers Vueling Spain’s largest homegrown LCC by far, Vueling is part of IAG, which in 2013 acquired an additional stake in the airline, bringing its total shareholding to more than 90%. The carrier operates out of Barcelona’s El Prat Airport and currently serves more than 100 destinations throughout Spain, Europe and North Africa. Since its acquisition, Vueling has been one of the key sources of growth for its parent company, which also owns Iberia and British Airways. In the first half of 2014, Vueling surpassed 9 million passengers, a 28% increase year over year.12 In terms of passenger numbers, Vueling carries more passengers in Spain than any other carrier with the exception of Ryanair, and the gap between the two is narrowing. In 2014, Vueling’s gross bookings will total roughly A1.2 billion, a 10% increase over the previous year, according to Phocuswright projections. More than half (56%) of all bookings will come through the carrier’s own website, with an additional 9% coming through mobile. In total, online channels will account for more than eight in 10 bookings for Vueling in 2014.

Iberia Express Established in 2011 as a low-cost subsidiary of Iberia, Iberia Express is the primary regional and domestic feeder airline for Iberia’s Latin American routes. The LCC has taken over numerous short-haul routes that its parent company was unable to operate efficiently, and in 2014 gross bookings growth of 50% will to some extent compensate for Iberia’s relative weakness. Growth is expected to level off somewhat to 30% in 2015 and 2016, when gross bookings will exceed A480 million (still less than one fourth that of Vueling). Operating largely out of Madrid, the carrier’s routes do not compete heavily with Vueling, which is centered in Barcelona. In fact, the main competitor for Iberia Express, domestically, is the country’s high-speed rail service, particularly to and from Madrid. As such, Iberia Express has been quite aggressive in its pricing in order to compete on these routes. The LCC offers short- and medium-haul service in Spain and Europe, covering 20 destinations (11 in Spain, nine elsewhere in Europe). Like Vueling, more than 80% of Iberia Express bookings are online, with nearly two thirds coming through direct web or mobile channels.

11) Ismael García Villarejo, “Air Europa to redo IPO to reward small investors,” 02B (March 31, 2014). 12) “IAG eleva un 21,8% sus pasajeros hasta junio gracias a Vueling,” Hosteltur (July 3, 2014).

Others Ryanair continues to transport more passengers in Spain than any other airline, though its dominance in the LCC segment is weakening as the home-grown carriers gain ground. In the first half of 2014, Ryanair carried just under 12 million passengers, a 4% drop from a year earlier. Similarly, Air Berlin carried 5% fewer passengers in Spain in the same period, compared to 2013.13 In both cases, Vueling and Iberia Express have retaken some market share from the non-Spanish carriers. On the other hand, Norwegian Air Shuttle, the third-largest LCC in Europe, established a new base in Madrid in June 2014. The LCC now operates six bases in Spain, with connecting flights to major cities throughout Europe. The number of passengers carried by Norwegian Air Shuttle in Spain grew more than 50% in the past year, to more than 2 million passengers.14 Mobile air bookings have begun to gain traction in Spain, though the trend is more pronounced among LCCs than traditional carriers. Since LCCs gener ally offer lower fares than traditional carriers, the perceived risk associated with purchasing via mobile device is not as great. In 2014, mobile bookings will represent about 14% of LCC carriers’ direct online bookings, compared to 11% for traditional airlines.

Hotels Unlike the country’s air market, Spain’s hotel segment is less dependent on domestic demand, which can be good or bad depending on the global economic climate. Compared to other travel categories, therefore, the market has exhibited greater resilience during difficult times. In 2012, when much of Europe was mired in a significant economic downturn, the Spanish hotel segment suffered considerably. However, improving conditions elsewhere in Europe buoyed international demand, and the hotel market grew slightly in 2013.The recovery continues in 2014, although it is decidedly uneven; resort areas in the Balearic Islands and coastal regions (which cater to inbound tourists) maintain healthy growth, while urban destinations that are more reliant on domestic and business travelers struggle. Barcelona – which attracts an abundance of international visitors – is a notable exception. Spain’s hotel bookings grew 3% in 2013, and additional growth of 4% in 2014 will bring total supplier gross bookings to A12.2 billion (see Figure 6.6). Similar growth is projected for the next several years, and gross bookings are expected to total A13.2 billion by 2016. As the market slowly expands, online direct book ings are growing as well. However, hotels face a significant challenge from large OTAs such as Booking.com, which continue to take advantage of high market fragmentation to capture an ever larger share of the market. In 2014, online

13) Yovanna Blanco, “Iberia vuelve a crecer en España impulsada por su filial Express,” Expansión.com (July 26, 2014). 14) Ibid.

Figure 6.6: Spanish Hotel Gross Bookings (FB) and Online Direct Penetration, 2012-2016 Total 2012 0.8 10.6 7% 11.4

2013 0.9 10.8 8% 11.7

2014 1.0 11.2 9% 12.2

2015 1.2 11.5 9% 12.7

2016 1.3 11.9 10% 13.2 Online Direct Penetration Supplier-Direct Online Other Channels

direct bookings will account for only 9% of total bookings, the lowest online direct penetration rate of any travel segment. Despite some reluctance among Spanish consumers to use their mobile devices to purchase travel, mobile has begun to capture a share of online hotel bookings, particularly for last-minute, on-the-go travelers. Among suppliers, mobile will account for only about 1% of total bookings, and 12% of all supplier- direct online bookings in 2014. On the other hand, mobile bookings are much stronger for OTAs, which have more resources to develop the responsive websites and robust apps needed to win over Spanish travelers. Following several years of consolidation, Spain’s accommodations market has grown increasingly fragmented, partly as a result of challenging market condi tions. Several large hotel chains – seeing a mature market with limited demand and declining average daily rates (ADRs) – have chosen not to renew some of their property management contracts. As a result, property owners have been forced to take over the management of their hotels independently, which has spawned smaller chains with fewer hotels. Larger chains, meanwhile, have turned their attention elsewhere, in particular to less mature markets with greater growth potential, such as Latin America and Asia Pacific. Increasingly, the large Spanish hotel groups have fewer properties in Spain, leaving individual property owners to figure out how to maintain growth in the challenging domestic landscape. Peer-to-peer and other alternative lodging services have begun to take a bite out of Spain’s accommodations marketplace. Companies such as Airbnb, HouseTrip, 9flats and others are attracting wider attention in Spain, particularly among younger, independent travelers. As in other countries, established companies, along with local and national authorities, are wrestling with how to ensure that these alternative services can be made to abide by the same regulations as traditional accommodations providers. Barcelona is one of Airbnb’s top destinations, and under pressure from the city’s powerful hotel lobby, local authorities there recently fined the company for

failing to list its rentals with the local Catalan tourism board.15 In August 2014, Barcelona residents held a public protest, urging local authorities to crack down on private apartment owners who frequently rent out their units to unruly international tourists. Locals claim that widespread apartment and home rentals have disrupted otherwise quiet residential neighborhoods, with reports of noise, public drunkenness and littering.16 Following several years of poor results, most large hotel chains are in recovery mode. Both Meliá Hotels International and NH Hotels Group – the largest and most international hotel companies based in Spain – have increased their revenues. This gain will enable expansion plans, mainly outside the country. Meliá now obtains just 15% of its revenues from Spain, while 59% comes from the Americas and 26% from elsewhere in Europe, the Middle East and Africa. NH Hotels, which operates nearly 400 hotels in Europe, Africa and Latin Amer- ica, signed a memorandum of understanding (MOU) in September 2014 with China’s HNA Group to create a hotel management partnership backed by an initial US$20 million investment. The joint venture would enable NH to gain a foothold in some of the world’s fastest-growing hotel markets, including main- land China, Hong Kong, Taiwan and Macau. Some hotel chains in the Spanish market are leveraging technology to drive bookings as well as improve customer service and hotel operations. For example, Iberostar Hotels & Resorts now offers an online, web check-in service for all its properties in Europe. Customers are able to take virtual tours of rooms, common areas and facilities, in addition to selecting a room and checking in up to five days prior to arrival. This type of value-added initiative represents an important up-selling and cross-selling opportunity, and approximately 20% of customers reportedly use this service.17

Rail Operating under the auspices of Spain’s Ministry of Public Works and Transport, Renfe is currently the country’s sole rail operator, although recent restructuring has paved the way for privatization in the segment. After suffering a significant drop in 2012, rail bookings bounced back 2% in 2013, to A1.15 billion (see Figure 6.7). Due in large part to the popularity of AVE, Renfe’s high-speed rail service, bookings are expected to climb an additional 4% in 2014. By 2016, gross bookings for Renfe are projected to total A1.24 billion. High-speed service now accounts for more than 70% of gross bookings for mid- and long- distance operations.

15) Lauren Frayer, “Uber, Airbnb Under Attack In Spain As Old And New Economies Clash,” NPR.org (July 29, 2014). 16) Ashifa Kassam, “Naked Italians spark protests against antics of drunken tourists in Barcelona,” The Guardian (Aug. 21, 2014). 17) Vivi Hinojosa, “Iberostar Web Check-in está disponible en todos sus hoteles en Europa,” Hosteltur (July 31, 2014).

Figure 6.7: Spanish Rail Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 0.29 0.83 26% 1.12

2013 0.45 0.69 40% 1.15

2014 0.54 0.66 45% 1.19

2015 0.61 0.61 50% 1.22

2016 0.74 0.50 60% 1.24 Online Direct Penetration Supplier-Direct Online Other Channels Note: 2014-2016 projected. Source: Spanish Online Travel Overview Tenth Edition ©2014 Phocuswright Inc. All Rights Reserved.

Along with impressive advances in its high-speed operations, Renfe has seen strong growth in its online direct bookings. In 2013, online direct bookings – including those made through mobile devices – represented nearly four in 10 bookings for the operator, up from 26% a year earlier. This is expected to jump to 45% in 2014, and by 2016, six in 10 Renfe bookings – including regional, long- haul and high-speed rail – will come through online direct channels. Mobile bookings are expected to skyrocket 71% in 2014, albeit from a smaller base. Renfe’s dedicated mobile app enables on-the-go bookings and helps drive loyalty among frequent travelers. Due in large part to the AVE service, Renfe is now transporting more passengers than ever, and revenue continues to climb. In the first half of 2014, revenue grew 5%. However, escalating costs have cut into any potential profit for the operator; losses totaled A127 million in the first six months of the year.18 In total, Renfe is saddled with an estimated US$5 billion in debt, which is one of the key reasons the government has embarked on a privatization plan for the rail segment.19 In 2013, Renfe restructured its operations by splitting the company into four separate divisions to handle passenger transport, cargo operations, manufac turing and maintenance, and equipment rental. In addition to facilitating liberalization of the segment, the restructuring is creating more transparency with respect to Renfe’s management, with the intent of driving greater cost- efficiency in its operations. The liberalization of the country’s railway segment began in mid-2014, when the government announced it would invite one private operator to compete with the AVE service in the Levante corridor, including routes from Madrid to the eastern coastal cities of Valencia and Alicante.20 While no decision has been made yet regarding which operator will enter the market, it could happen as

18) Phil Murray, “Fast Train Success Not Enough to Prevent Escalating Renfe Losses,” On the Pulse (Aug. 20, 2014). 19) “Spain set to start privatizing train routes,” The Local (May 16, 2014). 20) Ibid.

early as 2015. The liberalization plan calls for a single operator to compete with Renfe for the first seven years, after which the market will be opened up to additional competitors. While modest by some accounts, the plan is notable in that concrete action has finally been put in motion, given that it has been discussed for many years with little or no activity taking place. Given the lack of any current competition from other rail operators, Renfe’s chief competitors are the LCCs that serve the same city pairs as the popular high- speed routes. In the first six months of 2014, more than six in 10 passengers traveling between Madrid and Barcelona did so by rail, while airlines captured a minority of these travelers.21 In the interest of gaining share on its high-speed routes, Renfe has introduced some innovative services to differentiate its product from airline competitors. For example, in July 2014 the operator launched its AVE Silencio (“Silence”) service on key routes. The service bars passengers under the age of 14 and prohibits cell phone conversations. In addition, carriages feature low-level lighting and limited announcements, enabling passengers to rest and/or work in a quiet environment. Tickets for these “quiet cars” are available for the same price as traditional tickets. Renfe intends to roll out additional value-added services such as onboard Wi-Fi and door-to-door luggage transport. As with some of Spain’s large hotel chains, Renfe is looking abroad for potential growth. Renfe leads a consortium of 12 companies (including Adif, the Spanish rail infrastructure operator) to manage and operate high-speed service in Saudi Arabia between the holy cities of Mecca and Medina.22 When completed, the 450-kilometer Haramain High Speed Railway project will transport up to 11 million travelers annually. The route is now scheduled to launch sometime in 2016.

Car Rental The smallest of the country’s travel segments, Spain’s car rental market is benefiting from a resurgence of inbound tourism now that the economic malaise that gripped much of Europe has abated. Following a slight dip in 2012, gross bookings rose 3% in 2013. Similar growth in 2014 will push the segment past the A1 billion mark for the first time (see Figure 6.8). With growth projections in the 2-3% range for the next several years, car rental companies are beefing up their fleets in anticipation of higher demand. According to the local car rental industry association Federación Nacional Empresarial de Alquiler de Vehículos (FENEVAL), suppliers purchased more than 125,000 new vehicles in the first half of 2014, a 16% year-over-year increase.23 With the exception of the tour operator segment, car rental has the lowest online penetration of any travel category in Spain. The online supplier-direct channel accounts for 14% of all bookings, and in total, approximately one third

21) “El AVE sigue ganando terreno al avión en la ruta Madrid-Barcelona,” Hosteltur (July 21, 2014). 22) “A Spanish consortium wins the high speed tender in Saudi Arabia,” Spanish Railway News (Nov. 15, 2011). 23) “Las empresas de alquiler alquiler adquieren un 16% más de coches en 2014,” El Mundo (July 28, 2014).

of car rentals are booked online. Offline bookings – via traditional travel agencies and walk-ins – remain an important channel for the segment.

Figure 6.8: Spanish Car Rental Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 0.11 0.86 11% 0.97

2013 0.13 0.87 13% 1.00

2014 0.14 0.88 14% 1.02

2015 0.16 0.89 15% 1.05

2016 0.17 0.91 16% 1.07 Online Direct Penetration Supplier-Direct Online Other Channels Note: 2014-2016 projected. Source: Spanish Online Travel Overview Tenth Edition ©2014 Phocuswright Inc. All Rights Reserved.

Among indirect online channels, airline websites that offer bundled and/or add-on car rental options are becoming increasingly important. In addition, a number of intermediaries that focus exclusively on car rental are attracting a significant share of bookings in Spain. Most notably, the Priceline Group’s dedicated Carrentals.com division is an effort to duplicate the success achieved by its Booking.com unit in the accommodations category. Given that international visitors are the key driver of Spain’s car rental segment, the country’s top vacation destinations – the Balearic and Canary Islands, Andalusia and Valencia – are the most critical markets. Barcelona is one of the few major cities with significant demand for leisure car rental; parking is difficult in Spain’s major metros, and in Madrid many central streets are entirely closed to car traffic. Most of the major international players are active in Spain’s car rental segment. Together, Avis, Europcar, Hertz and Sixt represent 55% of all bookings, with no single company attracting more than 18% of the market. The segment is un- dergoing some consolidation; the top 10 car rental companies now command three fourths of the market.24 However, Spain remains a vibrant marketplace for car rental companies, with an abundance of specialized and local operators competing for market share. Ancillaries represent an important revenue opportunity for car rental companies in Spain, with GPS and Wi-Fi services leading the way. In 2013, through a partnership with ConnectedtoGo, Europcar launched its “WiFi Everywhere” service at major Spanish airports, providing travelers with portable, high-speed Internet access for A6 per day. Other ancillaries – including fuel prepayment and optional insurance coverage – are creating some uncertainty and frustration among customers. Since some of these options are available only at the car rental location (and not online at the time of booking), some customers have

24) DBK Sector Study – Rent a Car, DBK Informa (May 2014).

complained about being misled and have expressed dissatisfaction with the overall booking experience, which could impact loyalty and repeat business. In addition to focusing on ancillaries, the major car companies are pursuing alliances with other transportation and lodging providers to develop additional booking streams. For instance, Avis has established cross-selling agreements with both Renfe and Meliá Hotels International, while Hertz has partnered with Air Berlin. In August 2014, the European Commission ordered Avis, Hertz and several other car rental companies that operate in Spain to discontinue allegedly discriminatory online rental practices. The commission found that consumers in certain country markets have been prevented from getting the best prices when using car rental websites, depending on the country in which they reside (as detected via the computer’s IP address). 25 Meanwhile, the Comisión Nacional de la Competencia (CNC), Spain’s competition authority, fined 17 car rental firms more thanA 35 million in 2013 for operating an illegal cartel. The fine was the result of a lengthy investigation, which found that between 2005 and 2011, the companies had unlawfully fixed prices, established common policies regarding seasonal pricing, and agreed on charges for extras such as child seats and additional drivers. Avis and a number of other major players were included in the crackdown. As in the hotel segment, alternate services have begun to make an impact on Spain’s car rental market. Disruptive services such as Uber and peer-to-peer startups like BlaBlaCar have gained some momentum, to the dismay of local governments and taxi drivers. In June 2014, the Catalan government announced its intention to fine private drivers who use the Uber app and threatened to impound their vehicles. Catalonia's Territory and Sustainability Department has characterized Uber as an illegal taxi service. 26 Still, the impact of these alternative services on the traditional car rental market in Spain is minimal (as opposed to the taxi industry), since these arrangements typically include a driver, whereas car rental is more strictly defined as a vehicle-only transaction.

Tour Operators Buffeted by a combination of factors that make it difficult to compete with other segments, the Spanish tour operator market continues to struggle greatly. The country’s still-shaky economic picture is suppressing Spaniards’ demand for packaged tours, which is critical in a segment that is so heavily reliant on outbound travel. In addition, competition has intensified from OTAs, which increasingly leverage their own in-house tour operators and offer travelers flexible online packaging capabilities. Tour operators also face significant challenges bringing their content to market; by law they cannot sell directly to consumers

25) Linda Chiem, “EU Orders Avis, Hertz To Stop Bias In Online Bookings,” Law 360 (Aug. 11, 2014). 26) George Mills, “Catalonia to fine drivers using Uber taxi app,” The Local (June 11, 2014).

Figure 6.9: Spanish Tour Operator Gross Bookings (FB) and Online Direct Penetration (%), 2012-2016 Total 2012 0% 3.30

2013 0% 2.94

2014 0% 2.61

2015 0% 2.67

and must instead distribute through traditional travel agencies, which themselves are losing market share. After dropping nearly 11% in 2013, tour operator gross bookings are heading for another year of double-digit losses in 2014. The steep decline in bookings is in part due to the bankruptcy of Orizonia, one of Spain’s largest travel groups, which ceased operations in 2013. In 2014, total gross bookings for the tour operator segment will decline 11% to A2.6 billion (see Figure 6.9). The market will creep back slowly for the next several years, with growth in the 2-3% range in both 2015 and 2016. Since tour operators are prohibited from selling directly to travelers, many of them are integrated into larger vertical groups which include their own retail travel agency arms. Travelplan – one of Spain’s largest tour operators – is part of the Globalia group, while Grupo Barceló also includes a number of tour operators in its stable, along with its retail agencies and hotel operations. While a few companies control a relatively large portion of the tour operator market, fragmentation has increased, particularly as a variety of smaller operators have gained market share in the aftermath of the Orizonia bankruptcy. Travelplan has been the most notable beneficiary of Orizonia’s exit from the market; its bookings climbed 5% in 2013, and 7% growth in 2014 will propel bookings to the A800 million mark. Travelplan will continue to perform better than the broader market for the next several years, due in part to its position within the Globalia group. In addition to having a powerful retail agency arm through which Travelplan can distribute its products, Globalia also includes Welcomebeds, a bed bank and inbound travel division that Travelplan can leverage in its tour offerings. Smaller tour operators that have also benefited from the void left by Orizonia include Soltour, Julià Tours and Special Tours. While some of these smaller packagers put up strong numbers in 2013 – and will do so in 2014 as well – the boost is likely to be temporary. Once the Orizonia market share is taken up by other operators, fundamental market challenges will significantly restrict longer- term growth for most players.

Along with Travelplan, Tourmundial is one of the leaders in Spain’s tour operator marketplace. In 2014, the two packagers together control about two thirds of the market. Unlike Travelplan packages, which can be sold through any retail agency, Tourmundial is sold exclusively through its own retail channel – Viajes el Corte Inglés (ECI). While ECI gives Tourmundial a powerful distribution arm, it is also restrictive in that Tourmundial cannot make use of other retail channels to sell its tours, and all packages must be sold through an ECI travel agent. Mundosenior is another important packager in the Spanish tour operator market. A joint venture between Halcón Viajes (part of Globalia) and Barceló Viajes, Mundosenior is dedicated to senior travel, a key segment for tour operators. Historically, Mundosenior has been dependent on government subsidies. In the past several years, however, the Spanish government has reduced subsidies for senior travel as part of its broader cost-cutting efforts. As a result, Mundosenior bookings have fallen significantly, with additional losses expected in 2014. While the segment continues to depend largely on outbound travel, the inbound side of the business has performed comparatively well, and is increasingly influential. A number of operators – including Julià Tours – now focus more on providing incoming services, excursion and activities to international visitors. On the whole, tour operators in the Spanish market have been late in adopting technology. This lag is especially the case with respect to enabling connectivity with both online and offline retailers, through which they must distribute their products. With tour operators slow to enter the online space, OTAs were driven to build out their own packaging capabilities, which have gained traction with consumers. Travelers are now able to create their own dynamic packages on OTA sites, many of which have retained dedicated in-house tour operators to handle fulfillment and customer service. As a result, many traditional tour operators are struggling to stay in the game, and some are likely to close up shop.

Online Travel Agencies Tough economic times favor OTAs over suppliers as travel consumers shop around for deals, and this trend has certainly been the case in Spain for the past several years. Keeping a careful eye on their discretionary spending, price- sensitive Spanish travelers have been more inclined to use OTAs than supplier websites to identify the best deals. In addition, challenging market conditions have helped position OTAs to negotiate more favorable terms with travel suppliers. As a result, OTA bookings in Spain have climbed while some supplier- direct bookings have dropped or remained relatively flat. In 2013, gross bookings for OTAs operating in the Spanish market climbed 14%, to A3.4 billion (see Figure 6.10). This represents 52% all online bookings, compared to 48% for the supplier direct channel. Additional growth of 9% will bring total OTA bookings to A3.8 billion in 2014. However, over the next several years – with the Spanish economy projected to rebound – growth in OTA bookings will slow. By 2016, supplier-direct bookings will outpace OTA bookings in Spain’s online travel market (see Figure 6.2).

Figure 6.10: Spanish Online Travel Agency Gross Bookings (FB), 2012-2016

4.2 3.8 4.0 3.4 3.0

2012 2013 2014 2015 2016

While the Spanish OTA market will enjoy solid growth overall in the next few years, advances will be uneven, both in terms of the specific agencies and the segments they serve. With airlines eliminating service fees for both offline agents and OTAs alike, margins on air ticketing have declined dramatically. Some travelers prefer to shop and compare prices on OTAs, but purchase via their preferred supplier site to avoid paying transaction fees. In addition, companies operating in the metasearch space such as Kayak and Google routinely bypass OTAs entirely and refer travelers directly to airline websites. The scenario has created significant challenges for air-only or air-centric OTAs, including eDreams (and Rumbo, to a lesser extent), which are under some pressure to restructure their offerings. As a result, air-driven OTAs will grow at a much slower pace than those focused on hotels or packages, and some OTAs are actively shifting their attention to these relatively strong segments. High fragmentation in the tours and accommodations segments gives OTAs more bargaining power and bigger margins. Even some metasearch companies (including Kayak) – which began primarily as airfare comparison tools – are now more focused on the hotel category. Among other segments, rail and car rental will continue to be marginal for traditional OTAs. However, Priceline’s Rentalcars.com is making inroads in that category in an effort to duplicate the success its Booking.com unit has had in accommodations. Mobile has made quick advances in the Spanish market, although most consumers still prefer to book via desktop or offline channels, even if they have researched their trips via a mobile device. In 2013, mobile accounted for 8% of all OTA bookings, but this proportion is expected to climb to 20% by 2016, as consumers grow more comfortable transacting via mobile (especially for shorter, relatively inexpensive trips). Most of the major OTAs have developed responsive websites, and a smaller number have dedicated mobile apps. Blink – which specializes in last-minute hotels and was acquired by Groupon in September 2013 – is among the most popular mobile offerings in the Spanish market. How- ever, these and other OTAs’ efforts tend to include a relatively small number of hotels, and mobile’s net impact on overall bookings is still muted.

Travelers who plan their trips online frequently have difficulty distinguishing OTAs from metasearch companies from search engines, and these lines continue to blur. Google has entered the travel metasearch space, and OTAs are acquiring or partnering with metasearch players (Expedia and Trivago, eDreams Odigeo and Liligo). Meanwhile, user-generated content sites such as TripAdvi- sor now act as metasearch companies by connecting review-reading travelers directly to hotel booking engines. To the extent that travelers cannot discern (or do not care about) the differences between the types of sites they use to make their bookings, these intermediaries all compete with one another. In terms of traditional OTAs, however, the Spanish landscape is dominated by the hotel-only Booking.com. In 2013, the Priceline company commanded just over half of all OTA bookings in Spain (see Figure 6.11). Together, Booking.com and the other international or pan-European brands represent 62% of the market. A variety of Spanish OTAs – from niche operators to a number of relatively large, influential players – account for the balance of bookings.

Priceline/Booking.com Booking.com is the undisputed leader in Spain’s OTA arena, capturing 51% of all OTA bookings in the country. The figure is even more impressive in light of the fact that it focuses entirely on accommodations. The company’s gross bookings in Spain grew 20% in 2013 and are projected to climb an additional 11% in 2014, to just under A2 billion. While growth is expected to taper off somewhat in the next several years, Booking.com will continue to advance quicker than all other OTAs in the market; by 2016, it will control 53% of Spain’s OTA market. The ascendance of Booking.com in Spain and elsewhere owes much to the OTA’s strong, sales-driven website and its commitment to providing a top- notch customer service experience. However, its strong position has also drawn criticism from some hotels, which complain that Booking.com wields too much

Figure 6.11: Online Travel Agencies in the Spanish Market, Estimated Market Share, 2013 1% 2% 2% 8% Expedia 5% Priceline/Booking eDreams Odigeo 7% Bravofly Rumbo Group Logitravel 8% Atrapalo 51% Viajes ECI 8% Destinia Barceloviajes 8% Others

power by charging unusually high commissions and exacting unfair penalties if not given preferential treatment. Since 2013, Booking.com has powered hotel bookings for eDreams, an important competitor in Spain. In addition, in May 2014, the Priceline Group acquired Hotel Ninjas, a Spain-based hotel management system. The acquisition is expected to complement Booking.com’s B2C booking platform by providing a range of tools and services to hotels.27

eDreams A division of the pan-European OTA eDreams Odigeo, eDreams is the second- largest OTA operating in Spain, with bookings of A292 million in 2013. To a large extent, its model has been focused on air bookings, which is an impediment to growth given the declining margins for OTAs in that segment. In addition, since eDreams’ hotel offerings are currently powered by Booking.com (i.e., it does not control its own hotel content), it will be challenging for eDreams to shift its focus to the higher-margin hotel segment. Still, the company has strong brand recognition in Spain and is expected to remain a key player in the Spanish OTA market in the years to come. In April 2014, eDreams Odigeo raised A376 million in an initial public offering. However, shares of the company tumbled shortly after the IPO, when management reported a significant loss of profit, causing investor confidence to waver. According to the OTA, a change in Google’s algorithm impacted its positioning in search results, hurting referrals and driving up the cost of customer acquisition.28 More difficulties followed in October 2014, when British Airways and Iberia withdrew their fares from Odigeo’s websites in Spain and France, claiming a lack of transparency in how the OTA displays its fares. Shares fell nearly 60% following the carriers’ withdrawals before a temporary agreement was reached and the listings were partially reinstated.29

Rumbo Rumbo is part of the Bravofly Rumbo Group, another pan-European group with a strong presence throughout the continent. Along with Italy, Spain is one of the group’s most important markets. With bookings of A284 million in 2013, Rumbo runs a close third to eDreams in Spain. Like eDreams, Rumbo has been largely focused on air. However, the company has developed its own in-house packages, which yield higher margins and greater control over pricing. As a result, Rumbo is expected to surpass eDreams, with 30% growth projected, to become Spain’s second-largest OTA in 2014. Similar to eDreams Odigeo, Bravofly Rumbo made its trading30 debut in April 2014. While the stock's price declined sharply in the first six months

27) Kevin May, “Priceline Group buys Hotel Ninjas, adding more services to its new hotel tech jigsaw,” Tnooz (June 16, 2014). 28) Sean O’Neill, “Down 60%, eDreams Odigeo shares try to escape post-IPO nightmare,” Tnooz (Aug. 29, 2014). 29) “British Airways and Iberia reach partial agreement with eDreams over fares,” Travolution (Oct. 29, 2014). 30) Jan-Henrik Förster, “Bravofly Falls as Travel Website Price Competition Increases,” Bloom- berg Businessweek (July 1, 2014).

of trading, investors rallied somewhat after the group announced plans to acquire Lastminute.com in December of 2014 from Sabre Corporation.

Logitravel Logitravel is another influential OTA in the Spanish market, and in 2013 its bookings nearly matched those of eDreams and Bravofly Rumbo. In addition to offering consumers a range of choices in hotels, tours and cruises, Logitravel has a dedicated travel agent intranet that serves more than 1,100 traditional agencies in Spain and Portugal. The company maintains operations in Spain, Portugal, Italy, Germany, France, Brazil and the U.K. About a third of its business comes from overseas markets, while two thirds is from Spain.31

Atrápalo Occupying a somewhat unique position among Spanish OTAs, Atrápalo offers local entertainment, activities and excursions, in addition to more traditional travel products such as flights, hotels and more. The OTA leverages its local activities offering to drive traffic to the higher margin travel segments. Atrápalo recently expanded its operations to focus on some key Latin American markets, and in 2014, overseas operations are expected to generate 30-40% of its revenues.32

Others While it is quite strong in other markets, Expedia is not a major player in Spain’s OTA space. The OTA has very few domestic offerings and has largely ceded the market to Booking.com, its chief rival elsewhere. Meanwhile, Lastminute. com has lost much of its luster in recent years, and its parent company Sabre is reportedly seeking potential buyers. Most traditional travel agencies in Spain continue to shy away from the online space. The most notable exceptions to this are Viajes El Corte Inglés and the Globalia Group, which operate Halcón Viajes and TuBillete.com, respectively. To some extent, traditional agencies in Spain have benefited from bankruptcies among their peers, but overall the offline market is contracting, and the number of retail outlets continues to shrink.

Conclusion Signs of recovery in the Spanish economy are evident, if not definitive. Despite a significant drop in the country’s unemployment rate, the jobless percentage remains considerably higher than in other European nations. Consumer confidence has begun to return, though domestic spending on travel is still quite cautious and varies greatly between socio-economic segments. For travel providers, continued economic improvement is critical, especially true for the air, rail and tour operator segments which depend heavily on domestic

31) José Manuel de la Rosa, “Logitravel crece un 42% captando cuota de las agencies presenciales,” Hosteltur (Feb. 13, 2014). 32) Gabriel Trindade, “Atrápalo wraps up Italy operation, sets sights on South America,” 02B (March 17, 2014).

market demand. Conversely, the hotel segment, which depends much more on inbound visitors, is already on more solid ground. Spanish resorts have largely taken on a “business as usual” feel, while properties in many urban destinations are still lagging. The long-awaited liberalization of the rail segment has begun, albeit slowly. Renfe’s restructuring and the entry of new players will open up new distribution channels, and air and rail will soon share space on OTA screens. As a result, multi-modal travel will gain traction, especially if/when more rail providers enter the market. On the other hand, OTAs that focus on distributing a single product – and providing a front-end experience tailored to that product – will be the most successful. The most likely segments for this approach are fragmented markets such as packages, car rental, activities and lodging (though Booking.com has already captured the hotel opportunity, to a large extent). Meanwhile, lower margins are forcing air-focused OTAs to re-examine their strategies; some will shift their emphasis to higher-margin, in-house vacation packages. Mobile has begun to carve out a place of importance in Spain’s travel distribution landscape and will capture a significant share of online bookings going forward. Smartphones, tablets and PCs – not to mention still-influential offline channels – each have their time and place in the travel planning process. The key challenge for travel companies is to capture a broad set of information about how their customers access their content across devices and channels in order to leverage the opportunities and improve their offerings. Undoubtedly, mobile devices represent an increasingly important component, though they may not typically be used for the final purchase. m

The U.K. Online Travel Overview

Lead Analyst: Luke Bujarski Contributors: Lorraine Sileo, Colie Hoffman

Overview Improvements in the U.K. economy in the second half of 2013 helped drive the British travel market. Moving into 2014, more favorable exchange rates between the pound and the euro also helped boost demand for outbound international travel. This healthy growth environment stirred heavy competition between suppliers and intermediaries – particularly online, where mobile strategies remained front and center. For U.K.-based online travel agencies (OTAs), 2013 was a bright year: Travel demand picked up and hotel performance improved over 2012. On the flip side, tour operators began shutting their doors to OTAs in efforts to cut costs and showcase themselves as the U.K.’s favored travel brands and intermediary channels. In all segments, suppliers and intermediaries are experimenting with ways to capture customers’ attention without sacrificing core value propositions.

Online Distribution Dashboard

Figure D.1: U.K. Share of Gross Bookings by Channel, 2013 vs. 2016 Traditional Airline 29% 16% 55% 2013 30% 14% 56% 2016 LCC 91% 5% 4% 2013 91% 3%6% 2016 Hotel 15% 21% 64% 2013 16% 26% 59% 2016 Rail 21% 10% 69% 2013 23% 13% 65% 2016 Car Rental 22% 16% 62% 2013 26% 16% 58% 2016 Tour Operator 37% 6% 56% 2013 39% 6% 55% 2016

Supplier-Direct Online OTAOther Channels Note: 2016 projected. Totals may not add to 100% due to rounding. Source: U.K. Online Travel Overview Tenth Edition ©2014 Phocuswright Inc. All Rights Reserved.

Figure D.2: U.K. Share of European Total and Online Travel Market, 2013 U.K. 27% 26.9 U.K. 20% 48.1

Rest of Europe 74.4 Rest of Europe 194.8 Online Travel Market Total Travel Market 101.4 242.9

Source: U.K. Online Travel Overview Tenth Edition ©2014 Phocuswright Inc. All Rights Reserved. Key Findings 0 The U.K. travel market will grow between 4% and 6% in 2014, picking up pace from the previous year.1 The British pound gained strength against the euro yet again in 2014, driving outbound demand. Improvement in the U.K.’s economy drove demand for both inbound and outbound business travel.

Figure D.3: Total Online Penetration 2012-2016: U.K. and European Travel Markets

60%

55% 58% 56% 56% 57% 54% 50%

45% 47% 44% 45% 40% 42% 39% 35%

30% 2012 2013 2014 2015 2016 U.K. Europe

1) Phocuswright methodology uses a variable exchange rate to forecast market growth. At fixed exchange rates, the U.K. market is projected to grow faster in 2014 than it did in 2013.

0 Online penetration will inch up by one percentage point in 2014 to 56%, resulting in total online bookings of £24.1 billion. Because of the U.K.’s maturity as an online travel market, growth will slow to an average compounded rate of 8% annually between 2013 and 2016. In 2016, online bookings will reach £27.5 billion.

0 OTAs will gain 4% in gross bookings in 2014. In 2015, gross bookings will increase 8% as a result of better economic conditions and favorable supplier relationships.

0 Airlines remain the largest component of the U.K. travel market at £21.3 billion in gross bookings in 2013. Growth for the year was led by the strong performance of low-cost carriers (LCCs). EasyJet’s incorporation into the GDSs showed positive results by 3Q14, suggesting that the powerhouse carrier will continue to pose a threat to the dominance of British Airways.

0 U.K. hotels saw strong growth in 2013. Total gross bookings jumped 5% to £10.3 billion as average daily rates (ADR) and occupancy jumped to five- year highs. By 2016, hotel gross bookings will reach £11.7 billion.

0 U.K. rail franchises are increasingly leveraging OTAs for distribution, especially Thetrainline.com, which processed around 10% of total U.K. bookings.2 The rail-focused OTA’s growth has captured the interest of investors, and the company is slated for an initial public offering (IPO) in 2016.

0 In the car rental segment, leisure demand will benefit from decreasing car ownership in the next several years. At the same time, corporate demand is likely to take a hit from the growing popularity of car-sharing programs.

0 Both Thomas Cook and TUI Travel made bold moves to revamp their online strategies in 2013. Both are positioning themselves as unique, full- service, high-tech travel providers. Overall, 44% of bookings for the U.K. tour operator segment came from online channels in 2013. Total bookings for tour operators will grow another 4% in 2014, reaching £11.1 billion.

Macro Landscape

The British economy showed signs of recovery at the beginning of 2013, when growth resumed after a lengthy economic cool-down. Transport, hotels and restaurants together comprise 18% of the U.K.’s GDP, and much of the economic rebound is a result of domestic consumption rather than export- related activities. GDP jumped nearly 2% in 2013, its strongest growth since 2007. This consumer-driven rebound will have positive impacts on the U.K. travel sector through 2014. In addition, the number of unemployed workers fell to 1.97 million between June and August – the lowest since late 2008, when Britain was in the early stages of recession. Business traveler revenue remains critical to the U.K. travel market (in

2) Note: Thetrainline.com sells commuter and non-commuter rail tickets. When sizing the rail market, Phocuswright excludes commuter passenger revenue.

comparison to more leisure-driven European destinations such as Spain or Italy, where its relative importance is lower). The economic rebound, both globally and domestically, has been welcome news for airlines and hotels, but it may be short-lived – signs of another economic cool-down loom, both in Europe and globally. Much of the bearishness regarding global economic growth in the second half of 2014 stemmed from the disappointing growth in emerging markets, particularly China. Continued slow progress could have an indirect negative impact on the British economy and travel market as growth in U.K. (and European) exports to China slow. While the British economy is likely to slow moderately through 2016, prospects for growth thereafter remain largely optimistic.

Size of the Market Total travel bookings for the U.K. reached £41.2 billion in 2013 (see Figure 7.1), approximately 20% of the European market3 and 27% of the online market. Strong economic performance relative to the rest of Europe accelerated demand in 2013 and 2014 as unemployment rates declined and as the British pound gained value against the euro. By 2016, total gross bookings will reach £47 billion.

Figure 7.1: U.K. Travel Market (£B) and Online Growth Rates (%), 2012-2016 Total 2012 15.0 6.1 17.8 £38.8

2013 16.2 6.7 18.3 9% £41.2

2014 17.2 6.9 18.6 6% £42.8

2015 18.3 7.5 19.1 7% £44.9

2016 19.5 8.0 19.5 Online Growth 6% £47.0

Supplier-Direct Online OTA Other Channels

Online bookings captured an increased share of the market in 2013, and will grow at an average compounded rate of 8% between 2013 and 2016. The U.K. is one of Europe’s most mature markets: Online penetration climbed to 56% in 2013, surpassing the European average by 14%. Supplier-direct online channels represented 71% of online bookings in 2013, due largely to the formidable LCC market, particularly strong website sales at easyJet (see

3) Phocuswright market sizing for Europe includes the original EU15 plus Norway and Switzerland.

Figure 7.2: U.K. Online Travel Market, OTA vs. Supplier- Direct Share, 2013 and 2016

2013 2016

29% 29% OTA Supplier- 71% Direct 71%

Figure 7.2). While major disparities exist between hotel types in terms of the OTA share of sales, on average, U.K. hoteliers garnered 21% percent of room revenue through OTAs in 2013. Tour operators pushed online strategies aggressively in 2013 in order to shore up direct bookings and respond to industry pressure to revamp their business models. Despite substantial overall revenue (£10.3 billion), only 15% of hotel bookings in 2013 were online direct. Of all segments, LCCs were by far the most dependent on online channels. Ninety-six percent of LCC bookings in 2013 came from supplier websites, mobile channels or OTAs, but this online dominance will likely change as LCCs integrate with GDSs in efforts to diversify their distribution. In contrast, traditional airlines leveraged travel management companies and traditional travel agencies more often: 55% of 2013 revenue for traditional airlines was processed through offline channels. When accounting for U.K. online supplier-direct bookings, LCCs captured the largest share in 2013, followed closely by tradi- Figure 7.3: U.K. Supplier-Direct tional airlines (see Figure Online Market, 2013 7.3). Hotels, on the other hand, captured a small share relative to their con- 25% 28% Traditional Airline tribution to the total travel LCC market. Hotel bookings Hotel 2% accounted for more than Rail 20% of total gross book- 6% Car Rental 10% Tour Operator ings, while hotel-branded 30% web platforms represented just 10% of all online supplier-direct bookings in Note: Totals may not add up to 100% due to rounding. Source: U.K. Online Travel Overview Tenth Edition the U.K. ©2014 Phocuswright Inc. All Rights Reserved.

Mobile In Europe, the U.K. has the highest share of total web traffic from smartphones and tablets. Mobile-first strategies are a priority among U.K. suppliers and intermediaries, and in 2013, mobile captured 12% of the total online travel market. By 2016, that figure will jump to 25%. British Airways’ diverse mix of global leisure and business travelers makes mobile a critical booking channel for the airline. Mobile also serves as an important loyalty builder and in-travel toolset for customers. On average, the U.K’s traditional airlines captured about 15% of their online direct bookings through mobile (see Figure 7.4). EasyJet’s entire distribution strategy depends on direct online bookings, which compounds the importance of having an effective mobile app with user-friendly booking functionality. Robust and mobile-optimized websites have become increasingly important for the hotel industry, as more traffic moves through these platforms. Apps remain less of a priority among independent brands, but they are still critical for big hotel brands with strong customer loyalty programs.

Figure 7.4: U.K. Mobile Share of Online Supplier-Direct and OTA Bookings by Segment, 2013 vs. 2016

2013 2016 31% 30% 30% 28% 23% 18% 18% 15% 15% 16% 12% 14% 5% 7%

Traditional LCC Hotel Rail Car Rental Tour OTA Airline Operator

By 2016, up to 30% of the U.K. rail system’s online direct bookings will be mobile. National Rail Enquiries, the U.K.’s official train timetable, now offers mobile metasearch that links users to the appropriate rail franchise for booking. Tour operators, including TUI Travel, are also making inroads with mobile, particularly for in-destination services. Global OTAs in the U.K. all have robust mobile apps that address the needs of a highly penetrated mobile market, where tech-savvy consumers have grown accustomed to shopping on well-designed mobile platforms.

Suppliers Airlines U.K. airlines recorded £21.3 billion in 2013 passenger revenue, a 7% increase over 2012 (see Figure 7.5). Airline websites accounted for over 44% of revenue.

Figure 7.5: U.K. Total Airline Gross Bookings (£B) and Online Direct Penetration (%), 2012-2016 Total 2012 8.6 11.3 43% £19.9

2013 9.4 11.9 44% £21.3

2014 10.1 12.2 45% £22.3

2015 10.8 12.7 46% £23.5

2016 11.4 13.4 46% £24.8 Online Direct Penetration Supplier-Direct Online Other Channels

EasyJet continued to steadily steal share from British Airways, as the LCC increasingly targets business and leisure travelers via third parties. The two airlines - BA and easyJet - totaled £14.4 billion in passenger revenue, or about 68% of all U.K. airline revenues. Overall, about 16% of traditional airline revenue in the U.K. was processed through OTAs in 2013, compared to just 5% of LCC revenue. This share will likely grow as GDS connections push more LCC flights through OTAs and travel management companies. Airport capacity remains a contentious issue in the U.K. – London’s two main airports, Heathrow and Gatwick, are currently at their operational limits. Flights at Heathrow (the world’s third busiest airport) are capped at 480,000 per year, and local planning bodies have stalwartly rejected moves to increase the cap. Both hubs are overdue for expansion and must compete for government approval and funding to add runways and extend existing ones. Stansted, on the other hand, has spare runway capacity and considerable room to grow. In late 2014, Heathrow reported that 30 different airlines had pending applications to start new routes or to increase the frequency of existing services. Stansted will likely have record growth in passenger volume in 2014 as more airlines expand routes and ground transportation authorities work to improve connectivity with central London.

Traditional Airlines The U.K.’s traditional airlines grossed £15.9 billion in 2013 (see Figure 7.6). British Airways accounted for 64% of this total, while Virgin Atlantic, tour operator airlines Thomson and TUI Travel, and other carriers comprised the remaining share. The segment will grow 4-5% annually through 2016. Traditional airline gross bookings through supplier websites and mobile apps totaled £4.6 billion in 2013, or 29% of passenger revenue. Other channels – including OTAs, traditional travel agencies and travel management companies – captured the majority of bookings, and this pattern will continue through 2016. Mobile will

Figure 7.6: U.K. Traditional Airline Gross Bookings (£B) and Online Direct Penetration (%), 2012-2016 Total 2012 4.2 10.9 28% £15.1

2013 4.6 11.4 29% £15.9

2014 4.9 11.7 29% £16.6

2015 5.2 12.2 30% £17.4

2016 5.4 12.8 30% £18.2 Online Direct Penetration Supplier-Direct Online Other Channels

increase its share of online direct bookings, but overall, traditional airlines will maintain a diverse distribution mix (with the exception of tour operator airlines, which sell largely through proprietary channels).

British Airways Passenger revenue for British Airways jumped nearly 7% in 2013 to £10.1 billion. In the first half of 2014, the airline’s total revenue climbed an additional 4% over the same period last year. The International Airlines Group, a holding company formed through the merger of British Airways and Iberia (Spain’s flag carrier), reported a 30% increase in 3Q14 profits, which it achieved through cost-cutting measures at Iberia, strong growth at IAG-owned LCC Vueling, and strong growth at British Airways. Better connectivity with digital sales channels, ancillary products and stronger codeshare agreements in various markets including Asia and Latin America were identified as driving growth in 2013. Avios, IAG’s loyalty program targeting business travelers in small-to-medium enterprises, had a strong year in 2013. In addition, improvements to the IAG websites on both the back and front ends helped push ancillary sales. In 2014, BA completely overhauled its iOS mobile app, which enables travelers to purchase ancillary upgrades (e.g., seat options) and take advantage of fare deals. Overall, British Airways’ positive performance has put pressure on other legacy airline groups, including Lufthansa and Air France.

Virgin Atlantic Privately held Virgin Atlantic had estimated passenger revenue of £2.6 billion in 2013, a year-over-year increase of 5%. Lower fuel costs, a joint venture with minority stakeholder Delta, and the strength of the British economy are poised to push Virgin into profitability in 2014 after losses of £51 million in 2013 and £102 million in 2012.4 Although the October 2014 crash of Virgin Galactic’s test shuttle may have negatively impacted the brand, the introduction of Virgin’s first Boeing Dreamliner in the same month helped repair the airline’s reputation. The

4) Kari Lundgren, “Virgin Atlantic Focuses on U.S., Trims Asia in Delta Deal,” Bloomberg News (Sept. 5, 2014).

majority of Virgin’s operations originate from Heathrow, and congestion at the airport has limited the carrier’s ability to expand its affordable flights to the U.S. Other European LCCs and their growing appetite for transatlantic routes could pose stiff competition for Virgin in the longer term.

Low-Cost Carriers EasyJet is the U.K.’s dominant LCC. The airline plans to diversify its distribution mix as it expands to attract additional customer segments, including business travelers. Smaller players such as Jet2 and Flybe have unique value propositions serving chartered flights and regional airports, and have managed to steadily grow their route networks. In total, LCC gross bookings reached £5.3 billion in 2013 (see Figure 7.7). Most of this revenue was captured through direct online channels.

Figure 7.7: U.K. LCC Gross Bookings (£B) and Online Direct Penetration (%), 2012-2016 Total 2012 4.4 0.5 90% £4.8

2013 4.9 0.5 91% £5.3

2014 5.2 0.5 91% £5.7

2015 5.6 0.6 91% £6.2

2016 6.0 0.6 91% £6.6 Online Direct Penetration Supplier-Direct Online Other Channels

easyJet EasyJet’s 2013 passenger revenue jumped 10% in 2013 to reach £4.3 billion. Approximately 56% of revenue was originated in British pounds, with the remainder in euros.5 2013 was a big year for easyJet, which overhauled its direct-only distribution strategy. In April 2013, the company signed an agreement with Travelport to make inventory available through third parties – the first time in 10 years that easyJet has worked with a GDS provider. With this new approach, easyJet aims to boost corporate sales through improved connectivity with travel management companies. In addition, OTAs such as On the Beach will begin selling easyJet flights in early 2015. The easyJet website, which receives over 1 million visitors daily, will remain a major sales channel.6 In 2013, the airline began experimenting with iBeacon technology at select airports in efforts to interact with clients in a new way. EasyJet will continue its expansion throughout Europe, potentially offering transatlantic

5) EasyJet Half Yearly Report. 6) EasyJet Investor Relations.

flights in direct competition with Norwegian Air (the first European LCC to offer low-cost flights to the U.S.).

Jet2 The majority of flights on Jet2 were sold as part of a bundled vacation package booked through Jet2holidays, but seat-only flights are growing. The airline occupies a unique niche, flying out of regional, under-serviced airports in northern England. Jet2 flew to 51 destinations in 19 different countries and operated a total of 173 different routes in 2013. Registering £463 million in 2013 gross revenue – a 19% jump over 2012 – the airline now has 50 planes and offers flights throughout Europe. Parent company Dart Group has so far been satisfied with the airline’s (and tour operator’s) performance in 2014; though Jet2 suffered from a lag in demand during the summer months, winter bookings have been satisfactory. The brand launched its mobile app in March 2013, which received over 80,000 downloads in the first year. And Jet2holidays launched a fully transactional mobile app for its packaged holiday business, a move that helped the airline secure a larger year-over-year share of direct digital bookings.7

Flybe Flybe primarily serves regional airports throughout northern England, operating from seven U.K. bases while flying to 64 airports across the United Kingdom and Europe. 2012/2013 passenger numbers increased by nearly 7% as reported in the company’s 2014 annual report, while revenues rose slightly to £620 million, up from £614 million. In mid-2013, the airline brought in new CEO Saad Hammad to lead the company out of financial trouble. By the end of 2014, Flybe returned to profitability, but ran into a cloud of negative publicity after divesting from its Flybe Finland operations, selling the line to Finnair for €1. This decision was part of the carrier’s strategy to concentrate on its core U.K. business. In late 2014, Flybe announced the launch of services to and from London City Airport to six routes in the U.K. and Ireland. In efforts to improve its e-commerce business, Flybe introduced PayPal as a payment option on its website. The move is intended to attract customers paying in foreign currencies as well as those who don’t have credit cards or prefer not to use them online.

Hotels The U.K. hotel industry continues to outperform the rest of Europe, and ADR and occupancy rates, both currently on the rise, are expected to continue climbing through 2015. In 2013, hotel gross bookings (room revenue only) reached £10.3 billion (see Figure 7.8). Hotel-branded web channels will capture approximately 15% while OTAs and other channels – including walk-ins and phone bookings – will account for the rest.

7) “Jet2holidays Unveils Fully Transactional Mobile App,” Travolution (Feb. 7, 2014).

Figure 7.8: U.K. Hotel Gross Bookings (£B) and Online Direct Penetration (%), 2012-2016

Total 2012 1.4 8.4 14% £9.8

2013 1.5 8.7 15% £10.3

2014 1.6 9.1 15% £10.7

2015 1.7 9.6 15% £11.2

2016 1.8 9.9 16% £11.7 Online Direct Penetration Supplier-Direct Online Other Channels

ADR in London for 2013, at £136.6, was 2.3 times higher on average than those in the provinces.8 In the U.K. as a whole, ADR is expected to climb 8% from 2013 to 2015, when it will reach £86.5.9 Overall occupancy averaged 75% in 2013; London’s rate was 82%.10 A slowdown in both the European and global economies could indirectly reduce hotel demand in the U.K. in the coming years, but the segment is expected to grow 4% annually, at least through 2016. Increasing cost-consciousness among travelers, the edge of the British pound over other currencies, and pressure from new supply sources – including peer- to-peer accommodation rentals (through Airbnb and other sites) – have all contributed to a growing demand for budget hotels in the U.K., particularly in London. By the second half of 2013, the U.K. had approximately 23,000 rooms in its development pipeline, and budget properties comprised a significant portion of these. Of these, four- and five-star hotels will contribute 4,000 rooms to the hotel landscape, while budget hotels will account for the remaining share. Much of the demand for budget rooms will be met by branded chains. Premier Inn, the U.K.’s largest budget hotel brand, expects that this hotel type will comprise 28% of all U.K. rooms by 2018, up from just 21% in 2012. Mean- while, independent brands have been losing share: In 2007, they accounted for 63% of rooms in the U.K. By 2018, this share could drop to 46%.10

InterContinental Hotels Group (IHG) The U.K. is a key profit center and one of 10 priority markets for IHG, the world’s largest hotel group.11 Other priority markets include the U.S., the Middle East, Germany, Canada, Greater China, India, Russia and the Common- wealth of Independent States, Mexico and Indonesia. In 2013, the company acquired 18 new U.K. hotels and RevPAR for the U.K. market increased 3%,

8) STR Global (July 2014). 9) PwC, Growth Beds In: UK Hotels Forecast 2015 (September 2014). 10) Whitbread PLC, Annual report and accounts 2012/13. 11) Based on number of beds.

with particularly strong performance (a 7% increase) in the final quarter. IHG has a stronger mobile strategy than many other hotel chains, and by late 2014, its app had over 850,000 downloads globally. Mobile bookings delivered $611 million in revenue in 2013 – double the previous year’s sales.12 The company reported that 30% of the group’s website visits come from mobile.13 Group wide, web-based bookings accounted for over $3.5 billion in room revenues. In Europe, the majority of mobile bookings are for stays within 24 hours.

Premier Inn The U.K.’s largest hotel chain, which controls 7% of inventory,14 added 4,242 new beds to its network in 2013, bringing the total to nearly 53,000. This increase is in line with similar growth in 2012, when the chain increased its inventory by 10%. Total revenue in 2013 grew 10% over 2012 to nearly £1.4 billion. The brand, owned by Whitbread, has a committed pipeline of 10,000 additional beds through 2018, when it expects inventory to reach 75,000. Eighty-three percent of Premier’s bookings were made through digital channels in 2013, up from 76% the previous year. The company’s heavy investment in its online platforms resulted in 61 million visitors to the Premier Inn website in 2013, 36% of whom visited via mobile device.15 Mobile bookings accounted for 29% of the chain’s transactions in 2013, twice its share in 2012. The company launched its first mobile app in 2011 and released an updated version in 2012, which has so far received 2 million downloads. Premier’s loyalty program is also successful: 26% of all revenue comes through the chain’s Business Account Card program, which has 22,000 active accounts.

Travelodge UK Travelodge UK (not associated with the Wyndham Group) is a private company operating around 500 hotels, mostly throughout the U.K. and a handful in Spain. Located in and around major city centers and popular holiday destinations, the brand has capitalized on increased demand for budget accommodations, particularly in the wake of the financial crisis as consumer appetites have generally shifted toward more economical options. The chain has 59 hotels (7,633 rooms) across London and is popular among business travelers. The company employs more than 6,000 people across its operations in the U.K., Ireland and Spain. In 2013, Travelodge opened 14 additional hotels investing over £140 million in new inventory. Travelodge asserts that 90% of its reservations come through Travelodge.co.uk – also claiming that it’s the U.K.’s most visited hotel website. While much of the site’s traffic comes from direct search, the company receives about 19% of its desktop traffic from referral sites. Interestingly, job search aggregation engine indeed.co.uk is among its most popular referral sites.

12) Pamela Whitby, “Test and see: how mobile at a global hotel powerhouse is boosting the bottom line,” Tnooz (Sept. 18, 2014). 13) IHG 2013 Annual Report. 14) Annual company report, 2012/2013. 15) Whitbread PLC Annual report and accounts 2013/14.

Rail U.K. rail gross bookings (long-distance, regional, and Eurorail lines) grew 6% in 2013, reaching £4.5 billion.16 Rail travel has had a prosperous decade in the U.K. – steady growth in passenger kilometers traveled has coincided with hikes in ticket fares. From 2004 to 2014, passenger kilometers jumped 47%, and fare prices increased between 14% and 22% (depending on rail franchise). Eurostar reported a strong 2013, with passenger revenue up 5% to £857 million (at constant exchange rates) amid a rebound in corporate travel and an influx of leisure bookings. This success is likely due, at least in part, to the company’s increase in marketing spend and the expansion of its rail network to new destinations. The carrier’s 2013 trial of direct service from Paris to Lyon proved successful; starting in December Eurorail will offer a permanent and direct route from London to Provence, with stops at Lyon, Avigon and Marseille. Similarly, Eurostar announced its intention to open a new direct line from the U.K. to Amsterdam, expected to begin operations in 2016. Total rail gross bookings reached £4.5 billion in 2013 (see Figure 7.9).17 Similar increases in passenger revenue (4-5% annually) are expected through 2016. Online direct channels captured over 21% of total bookings in 2013, while 10% of U.K. rail bookings were processed through OTAs. This share is expected to grow steadily through 2016 as full-service OTAs look to leverage rail to boost hotel bookings. By 2016, total bookings for the segment will reach £5.1 billion. The structure of the U.K. rail market is unique in Europe. Service is heavily fragmented; 16 different franchises currently operate under individual terms and conditions agreed upon with the U.K. Department for Transport. Capital improvements to infrastructure are subsidized and imposed by the government – a dynamic that has helped increase ridership – but this model deters self-initiated investments, since franchise ownership contracts are set

Figure 7.9: U.K. Rail Gross Bookings (£B) and Online Direct Penetration (%), 2012-2016 Total 2012 0.87 3.35 21% £4.2

2013 0.96 3.51 21% £4.5

2014 1.04 3.62 22% £4.7

2015 1.11 3.77 23% £4.9

2016 1.16 3.95 23% £5.1 Online Direct Penetration Supplier-Direct Online Other Channels

16) Office of Rail Regulation. 17) Note: Half of Eurostar bookings are allotted to the French market.

for finite time intervals and thus change hands regularly. In the absence of competition between franchises, technological advancements such as mobile ticketing have lagged markets like Italy, where competition between two carriers running on the same track has prompted innovations. Most online search and transactional activity related to U.K. rail is under the control of two entities: National Rail Enquiries and Thetrainline.com. National Rail Enquiries is the official timetable for the entire rail system and is run by the Association of Train Operating Companies (ATOC), a coalition of rail companies that coordinates operations and passenger services among member operators. (ATOC also acts as the voice of the British rail industry to U.K. and European regulatory bodies.) NRE is essentially a metasearch technology that aggregates schedules and guides customers to individual rail operators for booking. Thetrainline.com was established in 1999 as a technological spin-off from ATOC, which was working to digitize U.K. rail. The company has steadily increased its bandwidth and now reportedly handles around 10% of all U.K. rail sales. Thetrainline.com gained more than 2 million customers in 2013, and has received more than 6 million app downloads since the app’s launch in 2010. The company has started discussions with banks about an initial public offering (IPO) that could value it at more than £400 million.18 Cur- rently, the company does not have operations beyond the U.K. Other OTAs, including Loco2 – a rail-focused OTA that launched in 2012 – and Orbitz brand Ebookers, have recently entered the rail market. Boston-based technology provider SilverRail Technologies, the GDS of rail services, provides the search functionality across these brands. Established OTA management has expressed interest in rail data and integration into their product mixes, mostly as a complement to existing OTA services and as an opportunity to capture hotel bookings that might be bundled into rail travel. U.K. and European rail bookings will continue to migrate online as more and more European travelers turn to multimodal search sites to plan trips. Rail in Europe is gaining momentum as a cheap and convenient alternative to flying. While many multimodal sites, including GoEuro, Wanderio and Rome2rio, have yet to make a significant impact on travel search, investors see potential in these brands. Planeandtrain.com, the latest European multimodal startup, focuses on the Continent. Multimodal sites will likely have less presence in the U.K., as the majority of inbound travelers simply fly into London.

Car Rental The U.K. car rental market is consolidated among five players, two of which control nearly half of all gross bookings. In 2013, Enterprise Rent-A-Car and Europcar together held on to 49% of the segment, which has grown steadily at 2-3% annually after taking a dive of 10% in 2009 (in the wake of the economic crisis). In 2013, total car rental gross bookings reached £1.4 billion; supplier

18) “Rail booking site Trainline tipped for flotation,” Travolution (June 23, 2014).

websites and apps accounted for 22% of that total (see Figure 7.10). Car rental companies are leaning more and more on OTAs, which represented 16% of bookings in 2013. Rentals booked via OTA are often marketed and sold as a complement to dynamic packages for inbound visitors and travelers taking a weekend holiday. Airline websites also drive traffic to car rental websites, and most airlines – including LCCs – offer car rental search. Reserving rentals over the counter at airports is likely to remain the most popular booking mode, especially for leisure travelers. Business travelers and repeat customers, however, often take advantage of mobile booking apps. Because the U.K. market is mature, barriers to entry are high for new players. Car ownership in the U.K. has declined as public transportation, car sharing, bike sharing, and other forms of transportation have become more prevalent. This trend should increase opportunities for the leisure segment as domestic travelers grow accustomed to renting rather than owning. Car-sharing programs are taking off in London: Zipcar is launching an aggressive campaign to expand its footprint in the nation’s capital. The company has proactively pushed Transport for London and the Greater London Authority to provide more support for car sharing. By 2020, the number of members in car-sharing clubs is expected to increase to 264,000, up from 140,000 in 2014 – a compound growth rate of 11%.19 Three popular car-sharing models currently exist in the U.K.: round-trip, fixed one-way, and floating one-way, which allows users to begin and end anywhere within a defined operating area.

Figure 7.10: U.K. Car Rental Gross Bookings (£B) and Online Direct Penetration (%), 2012-2016

Total 2012 0.30 1.08 22% £1.38

2013 0.31 1.12 22% £1.44

2014 0.34 1.11 23% £1.45

2015 0.37 1.13 25% £1.50

2016 0.40 1.15 26% £1.55 Online Direct Penetration Supplier-Direct Online Other Channels

Tour Operators British tour operators stepped up their online efforts in 2013 with the goal of competing directly with OTAs and suppliers. The market’s big brands, TUI and Thomas Cook, have distanced themselves from OTAs, and are instead

19) “Car-Sharing in London – Vision 2020,” Frost & Sullivan white paper commissioned by Zipcar (Oct. 21, 2014).

focused on strengthening their online relationships with customers directly. Though both companies have strong brand recognition in the U.K., growth has slowed relative to OTAs. In response, both TUI Travel and Thomas Cook have centered their strategies on profitability and productivity to appease shareholders and convince them of the operators’ long-term growth. On- line distribution is one way that both operators are attempting to curb costs and align themselves with consumer preferences. Still, tour operators value high-street brick-and-mortar agencies as part of a multichannel approach to marketing and brand-building. TUI Travel has also diversified beyond its core packaged travel businesses, adding B2B wholesale hotel content and giving greater attention and resources to its acquired OTA brands. These brands include LateRooms, AsiaRooms, and MalaPronta. In 2013, total tour operator gross bookings reached £10.6 billion, up 3% from 2012 (see Figure 7.11). The jump in total travel gross bookings in the first half of 2014 reflected a steady recovery in leisure travel demand, which helped secure revenue for the big two operators and for growing boutique players such as Jet2holidays. Online direct bookings made up 37% of total tour operator gross bookings in 2013; this share will increase significantly for the mainstream brands and steadily for small-to-medium operators. Access to inventory and robust online platforms have traditionally been a major obstacle for niche operators, but providers of technology and white-label solutions, including Expe- dia Affiliate Network and Amadeus, are poised to help level the playing field. Innovation in the segment will likely come from one of the big tour operators, as they have bigger budgets for experimenting with best-fit online platforms for packaged travel search.

Thomas Cook The U.K. represented 32% of Thomas Cook Group’s (TCG) total revenue in 2013, which totaled £3 billion, a 4% decline from the previous year. 2013 was a year of restructuring and investment for the company, which likely detracted from sales and marketing activities. However, revenue for transactions in the U.K. and Ireland for the first half of 2014 declined almost 12% compared to the

Figure 7.11: U.K. Tour Operator Gross Bookings (£B) and Online Direct Penetration (%), 2012-2016 Total 2012 3.82 6.45 37% £10.3

2013 3.97 6.64 37% £10.6

2014 4.18 6.89 38% £11.1

2015 4.39 7.15 38% £11.5

2016 4.68 7.37 39% £12.0 Online Direct Penetration Supplier-Direct Online Other Channels

same time period last year. All of TCG’s business segments declined during this period with the exception of Airlines Germany, which increased marginally by 0.4%.20 TCG’s overall message to investors remains focused on profitability and reassurance that the company’s long-term strategy will result in growth and modernization of its business model. The group is continuing to strengthen its vertically oriented structure of exclusive hotel brands that cater to three broad categories of leisure travelers: adults, families, and budget travelers. In addition, the company’s airline consolidation program was well underway in 2013. The project aims to integrate management and IT systems and to create other synergies across TCG’s fleet of European airlines. Profitability remains front and center for the company’s airline business, which expects a profit of £110 million in 2015. In late 2013, TCG implemented the third phase of the transformation initiative it began in 2011. This phase centers specifically on channels and digitization. Web penetration (based on departed passengers) for the group reached 37% in 3Q14, in line with TCG’s ambitious objective of reaching 50% by the end of 2015. The group launched a new U.K. website in May of 2014 with positive results. After the launch, the company reported that 1,000 new customers per week were signing up for the site’s My Account feature. Globally, Thomas Cook reported £3 billion in annual online revenue with £0.5 billion (17%) originating from smartphones and tablets.21 By 3Q14, mobile conversion doubled and desktop/tablet conversion increased 10%.

TUI Travel Revenue for TUI Travel, which largely operates under the Thomson brand in the U.K., jumped 4% in 2013 to £3.8 billion. The company saw growth in underlying operating profit in its two biggest source markets – 27% in the U.K. and 30% in Germany – bringing the total to £251 million. An imminent merger between U.K.-listed TUI Travel PLC and Germany-listed TUI AG will impact the group’s global operations and brand positioning. Ultimately, TUI’s key objective is to strengthen its ecosystem with exclusive hotels, cruise ships, and a fleet of planes dedicated to TUI passengers. Currently, 90% of hotels booked via the company’s “mainstream sector” were Thomson-exclusive hotels, which bodes well for profitability. The company has also increased the share of packages sold through its mainstream sector; in 2013, 69% of holidays were prepackaged, compared to 62% in 2011. TUI also increased its total and online direct distribution mix as a portion of its mainstream holiday business. In 2013, two thirds of transactions were direct, and 35% of all transactions were online (both direct and indirect). At the core of TUI’s online strategy is development of a robust series of mobile- optimized websites and apps that connect with customers at every part of the travel cycle. A central selling point in the company’s campaigns is the notion that travel planning and shopping has become too cluttered, confusing and

20) Thomas Cook Investor Relations. 21) “1H 2014 results announcement and strategy update,” Thomas Cook Group (May 15, 2014).

stressful given the myriad booking and search options available online. In July 2013, the company launched its TUI Digital Assistant in the U.K. as the MyThomson mobile app; in November it launched the German version (Meine TUI). In October 2013, TUI opened its flagship concept store in the Bluewater shopping center east of London. The store showcases user-generated content, digital billboards and interactive features.

Travelsupermarket: Metasearch in Packaged Holidays Travelsupermarket, a division of U.K.-based Moneysupermarket, is one of the few metasearch brands that centers on packaged travel. The company launched in 2004 and its website receives over 55 million visitors annually. It partners with more than 34 travel intermediaries, more than 650 low-cost and chartered airlines, and more than 200,000 individual hotels throughout the world. Revenue reached £17.7 million in 2013, up 35% from the previous year. In comparison, Kayak’s 2013 revenue was £236 million.22 Currently, Travelsuper- market focuses exclusively on points of sale in the U.K., but this practice could change as metasearch sites gain more popularity locally. Aside from packaged travel, the company offers search capability for flights, hotels and car rentals.

Online Travel Agencies The U.K. remains a lucrative opportunity for OTAs, from both from a point- of-sale and a B2B perspective. Overall, favorable economic trends stirred travel demand in 2013 and 2014. Outbound international travel from the U.K. (measured by number of visits abroad) increased 3.4% in 2013; in the first six months of 2014 outbound travel jumped 6.5% compared to the same period in 2013.23 During this time, the pound gained strength against other European currencies, making it cheaper for U.K. nationals to travel abroad; its value rose more than 10% in relation to the euro between July 2013 and July 2014. Likewise, Britain’s status as an international destination for both leisure and business travel boosted OTA commissions from hotel bookings as ADRs rose 5% in 2013. Total inbound visits to the U.K. increased by 6% in 2013 while overall spend jumped 13%. The number of inbound visitors traveling to the U.K. specifically for business jumped 7% in 2013, while spend increased by 11%.24 In this context, OTA gross bookings totaled £6.7 billion in 2013, up 10% from 2012 (see Figure 7.12). Priceline brand Booking.com captured a third of the market when comparing total value of travel sold, while Expedia.co.uk remained the U.K.’s leading full-service OTA (see Figure 7.13). Appreciation of the British pound relative to the euro will curb the U.K. OTA bookings growth rate in 2014 to roughly 4%, before climbing again in 2015 as exchange rates level off. By 2016, OTA gross bookings will reach nearly £8 billion.

22) Note: Originally stated in U.S. dollars totaling $292 million. 23) Office of National Statistics. 24) Visit Britain.

Figure 7.12: U.K. Online Travel Agency Gross Bookings (£B), 2012-2016

8.0 7.5 6.7 6.9 6.1

Figure 7.13: Online Travel Agencies in the U.K. Market, Estimated Market Share, 2013 6% 2% 6% 16% Expedia/ Hotels.com Priceline/Booking 11% Odigeo Travelocity/Lastminute Orbitz/Ebookers Travel Republic 11% 33% On the Beach Youtravel 10% Others 4%

The OTA market in the U.K. is the most mature in Europe, so its growth is relatively slow and online penetration is high. Overall, growth rates in percentage terms will likely peak in 2015 as the market matures. Next-generation travel shopping brands, including metasearch sites, have created an even more competitive marketplace, particularly with regard to search traffic. While metasearch sites like TripAdvisor, Trivago and Skyscanner feed referrals to OTAs, they simultaneously compete for web exposure and, increasingly, bookings. As global OTAs including Booking.com mature, they are diversifying their business models, moving beyond plain search-and-book service offerings to consumers. The purchase of OpenTable by Priceline is a prime example. An increasing focus is also being put on B2B services, including white-label content and technology, inventory management, digital marketing solutions, along with other technologies. Strong growth with business groups such as the Expedia Affiliate Network, and Priceline’s purchase of hotel digital marketing company Buuteeq highlight this trend.

Booking.com (Priceline) Almost 7% of Booking.com global desktop traffic originated from the U.K.25 By the fourth quarter of 2014, Booking.com had over 27,000 U.K. properties listed on its site, including traditional hotels in addition to villas, B&Bs, hostels and other accommodation sites. Gross bookings (point-of-sale) totaled approximately £2.2 billion in 2013, or about 33% of the total U.K. OTA market. Through 2012, the company’s U.K. sales notched annual gains upwards of 30%. However, growth will likely slow through 2016 as Booking. com matures as a distribution partner for U.K. hotels, and as competition on the consumer side intensifies. The company now has a long list of competitors vying for bookings, but also for web referrals from metasearch engines and other affiliate sites. As a result, the parent company Priceline will likely explore new avenues of growth either via acquisition or development of new products and services. The 2014 acquisitions of restaurant booking website OpenTable and hotel digital marketing firm Buuteeq, along with investments in the Chinese OTA Ctrip, are examples of this move toward diversify.

Expedia/Hotels.com Expedia Inc. currently maintains two OTA brands and one metasearch brand in the U.K. Expedia.co.uk receives roughly 5 million monthly desktop visitors, and an additional 1 million originating from either smartphones or tablets. Sister brand Hotels.com (uk.hotels.com) receives roughly half the number of visitors, but traffic sources differ considerably between the two brands. In the three months leading up to January 7th 2015, direct visits to uk.hotels.com generated over 41% of its traffic while general search generated about 18% of traffic. Expedia.co.uk direct visits accounted for over 24% of traffic to expedia.co.uk with search generating just over 35% of traffic.26 A higher share of direct visits suggests that uk.hotels.com has stronger brand recognition relative to expedia.co.uk when it comes to hotel search only. Phocuswright estimates that the total value of transactions across the two brands reached approximately £1 billion in 2013, an increase of 9% over 2012. The pound’s favorable exchange rate in the second half of 2013 and into 2014 also benefited business by spurring (more lucrative) outbound bookings. Top referral sites for both brands included Tripadvisor.co.uk, Trivago.co.uk (owned by Expedia) and Kayak.co.uk (owned by Priceline). Expedia’s acquisition of metasearch brand Trivago in March 2013 has also helped the company generate cost-per-click revenue in the U.K. market, as well as referrals to the expedia.co.uk website. Trivago is widely used across Europe by both leisure and business travelers bound for the U.K. The U.K. is Expedia’s largest single European market. The Expedia.co.uk brand has a strong position as the dominant full-service OTA and, while lacking a direct, full-service competitor, the OTA jostles for client loyalty against various types of digital entities including supplier websites, tour

25) Similarweb.com. 26) Similarweb.com.

operators, and hotel-centric OTAs such as Booking.com. For do-it-yourself leisure travelers, the company will increasingly compete with onthebeach. co.uk, a U.K. focused OTA specializing in beach getaways. Lastminute.com also has strong brand presence in the market and, with the prospect of renewed investments from Bravofly Rumbo Group, the OTA could regain some momentum in 2015.

Lastminute/Travelocity Lastminute.com received about 43% of its desktop web traffic from the U.K. in the fourth quarter of 2014. The company has strong brand recognition with U.K. travelers, but lagging investments have impacted sales, particularly as parent company Sabre Corporation has focused away from its OTA businesses. Sabre essentially sold its U.S. brand Travelocity to Expedia, which also deflected investments and focus away from Lastminute.com. In December 2014, Sabre received a bid from Bravofly Rumbo Group to acquire the ailing brand. If the deal is finalized, Lastminute.com could improve results in 2015, as Bravofly invests marketing dollars to strengthen the brand.

Orbitz/Ebookers Best estimates put Ebookers.com U.K. gross bookings at over £700 million in 2013. The company launched its Bonus + Rewards program in September 2014 and a new mobile app for Android in early 2014 amid exponential growth in mobile bookings. Its mobile hotel bookings exceeded 50% of online bookings during certain times of the year. Rail bookings for the U.K. are the latest addition to Ebookers’ portfolio, but the company has encountered some hurdles in synchronizing its data with rail schedules. In theory, however, focusing on rail could give Ebookers an effective inroad to increasing hotel bookings.

On the Beach U.K.-based On the Beach is a source of hope for midsize OTAs across Europe. The brand’s gross bookings – estimated at £400 million in 2013 – have grown tremendously since the company opened in 2004. The OTA is owned privately by Inflexion Private Equity, but it may be bound for an IPO as it grows interna- tionally. On the Beach will likely see rapid expansion through 2016. It launched a Swedish website (eBeach) in 2014 and plans to create German and Dutch sites. It will also expand its long-haul vacation offerings – first adding Dubai as a destination, with later plans to add locations in the Far East and the Caribbean.27 In each of the past three years, the company’s profits have grown by 50%.28

Travel Republic Travel Republic, which focuses primarily on the U.K. holiday market, grossed approximately £600 million in turnover in 2013 and serves more than 2 million customers a year. The company opened in 2003. In December 2011, it was acquired by Dnata, a subsidiary of The Emirates Group. Although Travel

27) Ashley Armstrong, “Inflexion looks for strong return from On The Beach IPO,” The Telegraph (June 21, 2014). 28) “On the Beach’s Simon Cooper: ‘We Have the Platform to Get Personal’,” Travolution (May 9, 2014). 29) Similarweb.com.

Republic currently operates websites for the British, Austrian, Irish, Italian, Spanish and German markets, more than 90% of its desktop web traffic originated in the U.K. Top referring websites for the OTA in November 2014 include Trivago.co.uk, Tripadvisor.co.uk and Travelsupermarket.com.29 Travel Republic enables holiday searches but does not sell, organize or ar- range packaged travel. At the time of publication, the brand did not have an app for either iOS or Android operating systems. Two chief executives left the company in 2014 – CEO Paul Furner and chief commercial officer Chris Roche. In late 2014, Mr. Roche announced intentions to launch his own travel brand, Travel.co.uk, which will have backing from Simon Powell (founder of Comtec) and entrepreneur Humphrey Sheil (who most recently co-founded Eysys) and – like Travel Republic – will focus on the U.K. holiday search market.

Others Turnover for Lastminute.com’s U.K. business has declined steadily since 2011. Its parent company, GDS Sabre, announced interest in selling the brand in August 2014. The strategic agreement between Sabre and Expedia regarding the outsourcing of Travelocity’s back-end technology and content effectively turned both Travelocity and Lastminute.com into marketing brands. Neverthe- less, Lastminute.com has a diverse market footprint across Europe, operating in most of the region’s key markets. Many of the various other small to medium OTA brands operating in the U.K. are subsidiaries of larger holding companies and traditional travel agencies. Brands like Directline Holidays by Broadway Travel Service Limited, members- only site Secret Deals by Conde Nast Traveller, adventure travel site Explore (Explore.co.uk), Best At Travel and others all serve the U.K. market and get the majority of their web traffic from general travel search. Many of these brands are quasi-OTAs that lack online booking functionality; instead, they rely on call centers.

Conclusion Because the U.K. is a mature market with high online penetration, competition between supplier and intermediary brands is intense and revolves around customer loyalty and market share shift between the major players. OTAs in general will expand at about 6-8% annually, but growth will vary across brands. Mobile and metasearch platforms, along with big marketing budgets, will propel the publicly traded brands in terms of overall web presence. Airlines will jockey for position at London’s busy airports, particularly as the emerging transatlantic low-cost flight market heats up. Traditional travel agencies will focus on strengthening brand loyalty, while LCCs will look to new distribution channels as they spread their wings to include more business travelers. Holiday search, for both metasearch engines and tour operators, will become more relevant as search technology evolves and the love affair between U.K. travelers and packaged travel gets a second wind. Look for innovations from the big

29) Similarweb.com.

tour operator brands. Budget hotels will also thrive as the U.K. economy and cost-conscious business travelers gain momentum. Previously considered a cheaper alternative to traditional hotels, private rentals (e.g., via Airbnb) will continue to gain popularity, pushing this accommodations category into a higher cost tier, particularly for centrally located flats in London. Private rentals will mostly impact the higher-end luxury and boutique brands that differentiate themselves to leisure travelers by offering a unique local experience. As private accommodation grows, hoteliers will focus on content and direct distribution – not only to reduce costs, but also to engage customers at every stage of the trip process. m

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