European Online Travel Overview Eleventh Edition Written and Researched by Charuta Fadnis January 2016

REPORT

Europe’s economy continues to recover from the recession. Thanks in part to increased consumer spending, the region’s travel industry reached new heights in 2015, driven by exceptional growth in the online market. Phocuswright's European Online Travel Overview Eleventh Edition provides comprehensive analysis, sizing and forecasts for the Europe's total and online leisure and unmanaged business travel markets. The report examines key segments and channels, and also includes access to dedicated reports focusing on the following six individual European travel markets: France, Germany, Italy, Scandinavia, Spain and the U.K.

This content is published by Phocuswright Inc., a wholly owned subsidiary of Northstar Travel Media, LLC.The information 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 publications are protected by copyright. It is illegal under U.S. federal law (17USC101 et seq.) to copy, fax or electronically distribute copyrighted material beyond the parameters of the License or outside of your organization without explicit permission.

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Table of Contents

Key Findings 5 Overview 6 European Online Travel Market 8 Share and Trends by Country 16 Suppliers 20 Airlines 20 Traditional Airlines 21 LowCost Carriers 22 Hotels 23 Rail 25 Car Rental 26 Tour Operators 26 Online Travel Agencies 27 Mobile 30 Metasearch 32 Methodology 33 Links to CountrySpecific Reports 34 Endnotes 35

Figures and Charts

Fig. 1: European Gross Domestic Product Growth (%), 20092015 7 Fig. 2: European Travel Market Gross Bookings (€B), 20072017 8 Fig. 3: European Total and Online Travel Markets (€B) and Growth Rates (%), 20132017 9 Fig. 4: Online Travel Penetration by Region, 20132017 10 Fig. 5: European Travel Market, Share by Channel, 20132017 11 Fig. 6: European Online Travel Market (€B) and Growth by Channel (%), 20132017 12 Fig. 7: European Online Travel Market, OTA vs.SupplierDirect Share, 2015 & 2017] 13 Fig. 8: European Online Leisure/Unmanaged Business Travel Market, OTA and Online Direct Bookings 14 (€B) by Segment Fig. 9: European Online Direct Travel Market, Share by Segment, 2015 15 Fig. 10: European Travel Gross Bookings by Segment (€B) and Channel Share (%), 2015 16 Fig. 11: European Total and Online Travel Gross Bookings (€B) and Online Penetration (%) by Market, 17 2015 Fig. 12: Unemployment Rates (%), EU 27 Average vs. Key Markets, 20112016 18 Fig. 13: European Online vs. Total Travel Gross Bookings, Share by Market, 2015 19 Fig. 14: European Total and Online Travel Markets, Compound Annual Growth Rates (%) by Market, 20 20152017 Fig. 15: European Airline Gross Bookings (€B) by Channel and Online Penetration (%), 20132017 21 Fig. 16: European Traditional Airline Gross Bookings (€B) by Channel and Online Penetration (%), 22 20132017 Fig. 17: European LowCost Airline Gross Bookings (€B) by Channel and Online Penetration (%), 23 20132017 Fig. 18: European Hotel Gross Bookings (€B) by Channel and Online Penetration (%), 20132017 24 Fig. 19: European Rail Gross Bookings (€B) by Channel and Online Penetration (%), 20132017 25 Fig. 20: European Car Rental Gross Bookings (€B) by Channel and Online Penetration (%), 20132017 26 Fig. 21: European Tour Operator Gross Bookings (€B) by Channel and Online Penetration (%), 2013 27 2017 Fig. 22: European Online Travel Agency Gross Bookings (€B) and Growth (%), 20132017 28 Fig. 23: OTAs in Europe, Gross Bookings (€B) and Share by Region of Operations (%), 20132017 29 Fig. 24: OTAs in Europe, Gross Bookings (€B) and Share by Region of Operations and Growth (%), 30 2014 & 2015 Fig. 25: European Mobile Gross Bookings (€B) and Mobile Share of Online Gross Bookings (%), 2013 31 2017 Fig. 26: European OTA and Supplier Mobile Bookings (€B), 20132017 32

Key Findings

■ The European travel market is projected to reach €264 billion in 2015, a 5% increase over 2014. Economic growth will be slow but steady over the next two years. Aided by low inflation, falling unemployment and rising consumer confidence, travel revenue will continue to increase, reaching €282 billion by 2017. ■ More than half of all travel revenue in 2015 is generated from offline channels. As online penetration grows, offline share of revenue will drop to 48% by 2017. European travelers are embracing digital booking channels faster than any other region globally. Online revenue is projected to reach €125 billion in 2015 and will grow at a healthy 8% pace annually through 2017 to surpass €146 billion. ■ The U.K. is now Europe's largest travel market with €59 billion in gross bookings in 2015, of which €33 billion was booked online. Its high online adoption rate of nearly 57% is second only to Scandinavia's 63%. As these two markets reach saturation, Germany, Italy and Spain will become the new growth leaders in online adoption. ■ In 2015, 57% of online gross bookings are derived from supplierdirect channels; this will drop only marginally to 56% by 2017. ■ With the exception of LCCs (88% online), all other segments are highly dependent on offline or other channels, with at least 60% of their sales coming from these avenues. ■ Total airline revenue will reach nearly €113 billion in 2015 and grow to €121 billion by 2017. Online penetration is at just below 50%. In 2015, airlines' online direct revenue is expected to be €40 billion, 59% of which is generated by traditional airlines. ■ Traditional airlines continue to strengthen their online offerings and are being rewarded with a slow but steady share shift from OTAs to direct online channels. By 2017, online direct share of total traditional airline revenue will increase to 28%, and corresponding OTA share will decline to 12%. ■ Travelers booked €20 billion in LCC revenue in 2015. Growing at 8% annually, LCC revenue is forecast to reach €23 billion by 2017. EasyJet comprises a third of the market, and together with the secondlargest LCC, Ryanair, controls 52% of the market. Both of these LCCs are making calculated moves to attract business travelers by distributing inventory through the global distribution systems (GDS) and offering fare bundles that might appeal to corporates. ■ Hotel gross bookings will increase approximately 3% annually and are expected to reach €95.2 billion in 2017. Because hotels are a highly fragmented marketplace offline channels dominate distribution and generate more than 65% of revenue. Online adoption is expected to grow to 38% in the next two years and supplierdirect channels will benefit more than OTAs from this shift. ■ Hoteliers aspiring to reduce their dependency on OTAs are looking at alternatives like Instant Booking by TripAdvisor but the partnership with Booking.com could dilute its value proposition. Other alternatives include Google's Hotel Ads commission program, Trivago

Direct Connect (currently being piloted) and Accor's new distribution platform. ■ Rail remains an important part of the travel ecosystem in Europe, and is projected to rise 5% in revenue to €33 billion by end of 2015. Steady growth is expected in 2016 and 2017, with gross bookings projected to rise by more than one billion euros annually. ■ With some travelers shying away from car ownership in favor of sharing/hailing a car for short trips and renting for longer trips, the car rental industry is in for moderate growth. The market is projected to exceed €11 billion in 2015 and gain a further 23% each year before hitting €12 billion in 2017. ■ Tour operators are experiencing a small renaissance as travelers return to package holidays after a few years of shunning them. The overall tour operator market will grow to €55 billion in 2015 and €59 billion by 2017. Despite heavy investment in digital channels by large tour operators such as Thomas Cook, the sector remains stubbornly offline, and online share is fairly stagnant at a quarter of total revenue. ■ OTA gross bookings increased by 16% in 2015 to €54 billion. Revenue will continue to increase 910% annually over the next two years, reaching €64 billion in 2017. Large global OTAs have been consolidating their market power through acquisitions while local players continue to lose ground. By 2017, local OTAs will account for just 23% of gross bookings, down from 30% in 2013. ■ Priceline represents 42% of OTA gross bookings, followed by Expedia at 17% (excluding Orbitz). The rate parity ruling looms large over these global OTAs. Though, theoretically, this means that hotels can price differently across sites, the fear of being penalized in search displays means that they are unlikely to do so. ■ From €21 billion in 2015, mobile bookings are expected to increase to €35 billion by 2017 nearly a quarter of the online market. Suppliers (58%) have a slight edge over OTAs (42%) in mobile booking share, but OTAs are growing fast and will increase their share to 45% in the next two years. ■ The metasearch model is undergoing a transformation. Moving along the travel continuum, standard search and compare engines are now moving to offer booking capability. The removal of rate parity clauses may help shift some share to meta as travelers look to compare prices across suppliers and intermediaries.

Overview

Europe's economy continues its slow recovery from the recession. Unlike previous years when Germany and the U.K. were the flag bearers for growth, 2015 has seen growth spread to every country. Still, this fiscal improvement is by no means a spectacular bounce back. Annualized GDP growth in the eurozone is projected to be below 1.5% in 2015 (see Figure 1), despite the European Central Bank's quantitative easing measures. However, low energy prices have boosted consumer spending and travel has been a large beneficiary of the increased disposable income.

The European travel market continues to reach new highs with projected revenue of €264 billion in 2015, shattering the previous year's record of €251 billion (see Figure 2). This upward trajectory for travel is expected to linger, and revenue will reach €282 billion in 2017.

Figure 1

Figure 2

But this anemic recovery is facing new threats. The refugee crisis continues unabated, as hundreds of thousands fleeing the wars in the Middle East and elsewhere stream across European borders, stretching governments' resources and exacerbating tensions among European Union (EU) members. The terrorist attacks in the heart of Paris in November 2015 added fuel to the fire as questions were raised about border security and cooperation among member nations.

While travelers shrugged off the attacks in Tunisia early on in the year, going instead to similar "sun and beach" destinations like Spain, the more recent attacks in Egypt and Paris have given some tourists pause. In the immediate aftermath of the Paris attacks, tourism slumped considerably. But, travel companies remain hopeful that in the longer term, travelers will be resilient. For those who do return, safety will be top of mind.

European Online Travel Market

In 2015, the European travel market will grow a healthy 5% over the previous year to €264 billion (see Figure 3). Over the next two years, growth will moderate to an annual 3% rate and in 2017 the total travel market will be worth €282 billion. Growth in online travel continues to outpace the overall market. After a whopping 14% spurt in 2015 to €125 billion, the online travel market will grow at a healthy 8% per year through 2017 when it will reach €146 billion.

Figure 3

European travelers continue to embrace digital channels for travel booking. For the first time, Europe will surpass the U.S. and claim the top spot globally for online adoption. In 2015, 47% of travel revenue in Europe will be booked online, compared to 45% in the U.S., 31% in Asia Pacific and 23% in Latin America (see Figure 4). The gap between Europe and the rest of the world will continue to widen. In 2016, Europe is expected to reach a milestone, with half of all gross bookings made via online channels. Germany, Italy and Spain will lead the sustained increase in online adoption, as consumers in those countries avail of improved website and mobile experiences from suppliers and OTAs. By 2017, 52% of all travel revenue in Europe will be booked through online channels.

Figure 4

The rapid erosion in offline channel share, from 53% in 2015 to 48% by 2017, will benefit both OTAs and suppliers (see Figure 5). With their faster rate of growth, OTAs will comprise 23% of the total travel market in 2017, an increase of three percentage points from 2015. Supplier direct bookings will grow from 27% of the total market to 29% in the same period.

Figure 5

Supplierdirect online share varies by segment airlines are far less intermediated than hotels but this share has been under threat from the growing popularity of OTAs for some time now. In 2015, direct channel share will comprise 57% of total online travel in Europe, a drop of two percentage points from 2014 (see Figure 6).

Increasingly mindful of the threat from OTAs and acknowledging technology's power to influence consumer behavior, suppliers have been investing heavily in online functionality and user experience. This adaptation has helped them stem what, until recently, seemed to be the unstoppable rise of OTAs. The strategy to focus on online seems to be working, as OTA growth rates for the next few years are projected to slow from 16% in 2015 to 9% in 2017. By then, OTA growth will be only two percentage points more than suppliers at 7%. By 2017, OTAs will comprise 44% of the total online market in Europe, a very modest increase from 2015 (see Figure 7).

Figure 6

Figure 7

While OTAs account for the largest share of online revenue, airline direct revenue share outstrips all other product segments combined. Only a quarter of European online travel revenue comes from bookings made directly with hotel, rail, car rental or tour operator companies, compared to approximately a third from airlines (see Figure 8). In 2015, online direct revenue for the airline segment will be just over €40 billion. Traditional airlines make up the lion's share of airline direct revenue at 59% while the rest is booked on lowcost carriers (LCCs). Hotel, rail and tour operators' own websites and apps each comprise 7 8% of online travel gross bookings. The overall composition of the market is not expected to change to any great extent through 2017.

Figure 8

Together, traditional air carriers (33%) and LCCs (23%), represent more than half (56%) of all online supplierdirect gross bookings (see Figure 9). Car rental at 3% is the smallest online direct segment, with hotel, rail and tour operators each making up 1314%.

Figure 9

Though their online share of gross bookings is similar, the hotel, rail and tour operator segments each has unique characteristics that impact distribution. From the OTA dependency angle, rail companies are at one end of the spectrum, with only 5% of revenues coming from OTAs while hotels are at the other end with 25% (see Figure 10).

Competition in the rail segment is usually limited to one or two companies per country with little overlap in network. Hence, the scope for OTAs to disintermediate the channel is limited, and it would require significant investment to integrate disparate content sources. However, as consumers demand platforms with aggregated content and train companies as well as startups like Captain Train take up the challenge, OTAs are also turning their attention to this segment.

Hotels represent a highly fragmented space, replete with independent and boutique properties. Hence, the segment is heavily dependent on OTAs for efficient and extended distribution, getting a quarter of its revenue from OTAs and only 10% from brand.com sites.

On the airline front, LCCs continue to be heavily supplierdirect (83% of revenue) in their distribution. Traditional airlines' direct online channels produce twice the revenue of OTAs (26% supplierdirect to 13% OTAs). Most tour operators, a segment heavily reliant on offline and traditional travel agent channels, have thus far invested little in their online product. Consequently, only 25% of their 2015 revenue will come from online channels 18% direct and 7% through OTAs. TUI and Thomas Cook are the two prominent exceptions to this lack of online focus, each having made digital a priority, but travelers in Central Europe have been slow to adopt online booking for packaged tours.

Figure 10

Share and Trends by Country

Figure 11

The U.K. is now Europe's largest travel market with €59 billion in gross bookings in 2015, of which €33 billion was booked online (see Figure 11). Its online penetration (57%) lags only Scandinavia (63%). As both of these markets approach online saturation and online growth slows, other European countries with lower online adoption ranging from 38% in Italy to 43% in France are making strides in growing online bookings.

As economies across Europe find their footing again, unemployment rates are declining across all countries, with the exception of Norway, whose fortunes fluctuate with the energy market. Higher employment correlates to increased consumer confidence and discretionary spending. On top of low inflation, which boosts real wages, this declining joblessness will have a positive impact on travel in the coming years. In 2015, average unemployment in the EU will drop to 10.8%, and is expected to fall further to 10.2% in 2016, its lowest level in this decade and driven mostly by an economic renaissance in Spain (see Figure 12).

Figure 12

European countries' diverse cultures and economies have meant that Internet adoption rates and travel suppliers' willingness to invest in technological tools vary greatly across countries. The U.K. (57%) and Scandinavia (63%) led the way in consumer adoption of the Internet, as is evident in their higher share of the online market versus the total travel market. The U.K. represents 27% of the online travel market as compared to 22% of the total travel market, while the corresponding numbers for Scandinavia are 7% and 6%, respectively (see Figure 13). But these early adopters have now reached a point where compounded annual growth in online revenue 7% and 5% respectively from 20152017 though still faster than the total market, has slowed. In contrast, markets like Germany (41%), Spain (42%) and Italy (38%) relative laggards in the digital space will enjoy compounded annual growth ranging from 8% to 15% during this period (see Figure 14). The exception to the rule is France, which due to its unique singlesupplier dominated travel segments (e.g., Air FranceKLM), has limited growth potential.

Figure 13

Figure 14

Suppliers Airlines

Total airline revenue in 2015 will reach nearly €113 billion, up 6% over 2014 (see Figure 15). Offline and corporate channels comprise the majority of European airline revenue, 53% in 2015. Direct channels dominate the online market; the €40 billion in direct revenue represents three quarters of online gross bookings and over a third of total revenue. Expectedly, LCCs derive a significant majority of their revenue from their own websites and mobile channels but Europe's traditional airlines have also been successful in attracting travelers to their websites and apps. By 2017, airline revenue will reach €121 billion, of which €59 billion will be booked through online channels. Suppliers will continue to strengthen their position in the market and grow their share of online revenue to 78%.

Figure 15

Traditional Airlines

Gross bookings for traditional airlines are projected to reach €93 billion in 2015, only 39% of which comes from online supplierdirect (26%) and OTA (13%) channels (see Figure 16). The segment will continue to grow at a moderate pace of approximately 2.5% annually through 2017, when gross bookings will reach €98 billion with an online penetration rate of 40%.

Traditional airlines continue to beef up their online offerings, and the impact is seen in a slow but steady share shift from OTAs to direct channels. By 2017, direct share of traditional airline revenue will increase to 28% and corresponding OTA share will decline to 12%.

Facing stiff competition from LCCs on short/mediumhaul routes, and Middle Eastern carriers on longhaul routes, Europe's flag carriers have had to rethink their competitive positioning and strategy. From entering the LCC market to aggressive cost cutting and restructuring, they're pulling out all the stops to remain relevant. Despite opposition by labor groups, both Lufthansa and Air FranceKLM seem determined to carry on with their turnaround plans and emerge as leaner, more competitive and profitable carriers.

Lufthansa, in particular, stands out for its decision to add a surcharge to all bookings made via the GDS. Whether it is able to succeed where other airlines have not, time will tell. The carrier is also transitioning Germanwings to the Eurowings brand. Eurowings, meanwhile, is expanding its lowcost operations to longhaul destinations. For Air FranceKLM's Transavia, a key part of its turnaround strategy is also expanding operations. The airline aims to carry six million passengers in 2016, three times as many as in 2012.

Figure 16

LowCost Carriers

The European LCC market is flourishing. From 2014 to 2015, total revenue grew 11% to €20 billion (see Figure 17). Annual growth in this segment will continue apace at 78% per year over the next two years. Combined, easyJet (33%) and Ryanair (19%) control 52% of the market with IAG's Vueling (11%) a distant third.

Keeping a lid on costs is at the core of the LCC business model, so online direct channels will always form the centerpiece of their distribution strategy. But larger LCCs like easyJet and Ryanair are also turning their attention to the higher value corporate customer in the form of fare bundles tailored to the business traveler and, more importantly, inventory distribution through GDSs. This strategic shift toward traditional distribution has not diluted the share of revenue from direct website and mobile sales, which have been fairly steady and are expected to remain so at close to 90%.

Figure 17

Hotels

The hotel segment in Europe is projected to grow 5% in 2015 to reach €90 billion in total revenues (see Figure 18). For the first time in this decade, every country in Europe posted positive growth in room revenue. While most were in the low single digits, the U.K. followed up a 10% increase in 2014 with a nearly 17% rise in 2015. For all of Europe including, but not limited to the specific country markets covered in this report other key indicators underscore the relative health of the hotel market. Through the first nine months of 2015, average daily rates (ADR) climbed 4.7% year over year on a constant currency basis, while occupancy rose 2.8%.1

Over the next two years, hotel gross bookings will increase approximately 3% annually and are expected to reach €95.2 billion in 2017. Offline channels continue to dominate the distribution landscape, with nearly 65% of revenue generated through them.

Online penetration in the hotel market in Europe is fairly limited at just over a third (35%) in 2015. This figure is expected to grow to 38% in the next two years. Although OTA channels are more than twice the size of supplierdirect online, the latter is growing faster as both chains and independent properties take steps to gain more control over their distribution.

Figure 18

Europe's hotel market is highly fragmented. Phocuswright and h2c's Independent Lodging Market: Marketing, Distribution and Technology Strategies for NonBranded Properties found that independent properties make up 67% of room supply in Europe and 57% of room revenue. Averaging just 14 rooms, these smaller properties do not have the technology infrastructure and strategy in place to optimize channels and compete effectively with chains. European independent lodging suppliers are forecast to generate €12.8 billion in online sales in 2015, an online penetration rate of 36%. Of this, a massive 71% is generated through OTAs. Independent hoteliers aspiring to reduce their dependency on OTAs are looking at alternatives like Instant Booking by TripAdvisor. However, Booking.com's integration with TripAdvisor's Instant Booking may make it more difficult for independent hoteliers to gain leverage over the largest OTA. Other alternatives include Google's Hotel Ads Commission program and the recently launched pilot for Trivago Direct Connect.

Hotel chains are also trying to break OTAs' dominance in online distribution. AccorHotels has an interesting strategy whereby it allows independent hotels to distribute their content on its digital properties for a commission up to 14%. AccorHotels will implement some quality control criteria for properties wanting to list on its site, but hopes this OTAlike structure will draw traffic and help it scale its own digital distribution platforms.

More recently, consolidation in the hotel industry has been in the news. Recent deals like Marriott's acquisition of Starwood and AccorHotels' purchase of Fairmont, Raffles and Swissotel may help hotel chains reclaim some market power.

Nearly 40% of French, German and U.K. travelers stayed in private accommodation in 2014. The popularity of the socalled sharing economy platforms like Airbnb, HomeAway, onefinestay and Wimdu is making OTAs and hotels take note and move to counter the threat. Expedia's $3.9 billion purchase of HomeAway, Hyatt's investment in onefinestay.com and Wyndham's investment in LoveHomeSwap are just the more recent of what has been a steady flow of acquisitions and investments. Even as their standing among consumers soars, these newgen companies are facing scrutiny for unfair © 2016 Phocuswright Inc. All Rights Reserved. 24 European Online Travel Overview Eleventh Edition January 2016

competition, and city administrations across the globe are moving to regulate or, in some cases, prohibit private rentals. With the fight for legitimacy being fought at local levels, this controversy promises to be a drawnout battle.

Rail

Superior rail connectivity and improved infrastructure including highspeed networks have contributed to a projected 5% rise in rail revenue to near €33 billion in 2015 (see Figure 19). Steady growth is expected in 2016 and 2017 with gross bookings gaining 3% or close to one billion euros annually.

Online adoption of rail has been limited. Suppliers have had little incentive to improve online capabilities given that most markets operate as monopolies or duopolies. However, as travelers move to online booking, suppliers have started making investments in digital tools. Online penetration is expected to grow from 35% in 2015 to 37% in 2017.

Figure 19

Access to rail content across countries and rail operators has been a particular challenge for intermediaries. The significant investment needed to integrate with disparate operators has always made rail a low priority for OTAs, and is one reason their share of rail revenue has remained below the 5% mark. In the past few years, technology companies like SilverRail Technologies and Amadeus Total Rail have made great strides in aggregating content from multiple rail providers across Europe, and provide a platform for third parties to integrate rail content into their own frontend systems. OTAs have taken notice. Expedia recently announced a partnership with SilverRail to power its rail product as it seeks to beef up its rail offering.

Other companies are tackling this problem from a consumer perspective. Companies like Loco2 and Captaintrain.com secured funding to build on their consumerfacing sites and have been finding some traction.

Car Rental

The high cost of car ownership and new carsharing models have prompted a behavioral change among consumers. While they are likely to turn to services like Avis's Zipcar or use Uber or Lyft for intracity trips, travelers also turn to BlaBlaCar and its ilk for rides over longer distances. The multitude of available options means that many travelers are shunning car ownership, and prefer to rent a vehicle when needed for longer trips. This new attitude toward automobile ownership has provided a fillip to the mature car rental market in Europe.

The car rental market is projected to increase 5% to €11 billion in 2015 (see Figure 20). A further 23% increase will see the size of the market reach €12 billion over the two subsequent years.

Figure 20

But car rental companies are not resting easy. As carsharing portals develop and their models evolve, traditional car rental companies are focusing on ways to compete effectively. These include an increasing focus on the customer experience through improved websites, mobile booking and pickup, and allowing rentals by the hour.

In an interesting twist, Lyft will partner with Hertz and Uber with Enterprise to allow drivers who want to drive for them but lack a car to rent one at a preferential rate. While still in initial pilots in the U.S., if successful, these programs could spread to Europe as both companies look to strengthen their positions in those markets.

Tour Operators

After an abysmal three years of stagnation, tour operators experienced a recovery in 2015 and the upward trend is expected to continue over the next two years. While growth will range in the low single digits, it is a sign that European travelers still retain some affinity for packaged tours. © 2016 Phocuswright Inc. All Rights Reserved. 26 European Online Travel Overview Eleventh Edition January 2016

The tour operator market is expected to reach €55 billion in 2015 and with growth nearing 4% through 2017, gross bookings will reach €59 billion (see Figure 21). Online gross bookings represent only a quarter of total revenue and are fairly static at that level.

Figure 21

The tour operator segment is largely offline, as consumers have traditionally preferred the hightouch, inperson experience of buying a packaged holiday, especially for dynamic or custom packages. However, in some geographic regions, like the U.K. and Nordic countries, changing consumer behavior and strong online competitors (e.g., travelsupermarket.com in the U.K.) have led to a demand for better online offerings. Others like Italy and Spain retain their offline characteristics.

Recognizing the need for change, some tour operators have started to transition to online while others still prefer to maintain their old models. Companies like Thomas Cook and TUI are investing heavily in digital channels and reducing their dependence on traditional travel agents.

Consolidation is also taking place in this highly fragmented sector. Germany's REWE Group, the parent of DER Touristik, acquired Kuoni's European tour operator business in September 2015. The expanded DER Touristik will have combined revenue of €7 billion and 7.7 million customers, with operations in the tour operator and travel sales business in 14 European countries.

Online Travel Agencies

Consolidation has been the hallmark of the OTA segment in 2015. Bravofly Rumbo Group completed its acquisition of lastminute.com in March and took on its betterrecognized name. Early in the year, Expedia acquired Travelocity and followed that up with its purchase of Orbitz. In the meantime, gross bookings increased to €54 billion, a 16% increase over 2014 (see © 2016 Phocuswright Inc. All Rights Reserved. 27 European Online Travel Overview Eleventh Edition January 2016

Figure 22). Revenue will continue to increase at 910% over the next two years. In 2017, OTA revenue will reach a whopping €64 billion.

Figure 22

Local OTAs are fighting a losing battle against the immense market power enjoyed by a handful of global players. These global OTAs Priceline, Expedia, eDreams Odigeo and Orbitz/Ebookers (now acquired by Expedia) have the advantage of scale, and comprise nearly three quarters of the market in 2015, growing to 77% in 2017 (see Figure 23). Among local OTAs, there are winners and losers too. Two, in particular, On the Beach and Travel Republic, both serving the U.K. market, have grown revenue significantly over the previous year.

Figure 23

Priceline and its Booking.com brand have a commanding lead over the rest of the pack in revenue and share terms. At more than €22 billion in 2015 revenue, its 42% share is equal to the next 10 OTAs combined (see Figure 24). Expedia is a distant second with a 17% share. Even after the acquisition of Orbitz, its combined share would be about half of Priceline's share of gross bookings. Despite its size (or perhaps because of it), when measured in local currency (€), Priceline continues to grow faster than most other OTAs.

Whether this growth can be sustained in the wake of rulings across several European states striking down OTAs' contractual rate parity clauses is an open question, given the dominant market position of the larger OTAs. Germany set the ball rolling in January 2015 when HRS's contract terms were declared nonbinding, effectively returning some price and inventory control back to German hoteliers. In an effort to appease regulators, Booking.com and Expedia made some concessions to hoteliers allowing them to offer cheaper rates on other intermediaries but requiring rate parity with hotel direct rates. This option did not sit well with the authorities, and the French government and German competition authorities barred these rate parity clauses of any kind in OTA contracts. However, this ban is expected to have little effect in practice, as hotels that do not maintain price parity may be penalized in OTA search displays.

Figure 24

With an eye on the future, OTAs are also looking beyond traditional search and book. Global OTAs are investing in adjacent verticals (e.g., Priceline's acquisition of OpenTable) and technology (e.g., Priceline's acquisition of buuteeq now Bookingsuite and Expedia's recent investment in guest experience app Alice).

Aggregation and the ability to book content online has been the OTAs biggest advantage over suppliers. As an increasing proportion of travelers consider options beyond the traditional hotel when planning trips, alternative accommodations becomes an especially interesting area for OTAs. Competitors like Airbnb have made significant inroads into Europe more than 58% of its listings are in Europe and France is its biggest market. However, OTAs are not getting left behind in the race. Booking.com recently claimed to have the largest inventory of nontraditional hotel rooms, with 6.6 million bookable rooms globally, and Expedia acquired HomeAway, giving it access to a million vacation rental homes in 190 countries and putting it into direct competition with Airbnb.

Mobile

After years of hype, mobile has gone beyond the trend stage and is proving to be a sustainable channel in its own right. Consumers have moved past using mobile for inspiration and search to conducting transactions. By 2017, mobile travel revenue will reach €35 billion nearly a quarter of the total online market (see Figure 25). In most major European markets, suppliers have a slight edge over OTAs in the mobile channel, driven to some extent by the air and rail segments. In 2015, suppliers are projected to represent 58% of the mobile market (see Figure 26). But, OTAs are catching up and will increase their share by three percentage points in the next two years, from 42% to 45%. OTA mobile gross bookings will increase to €16 billion by 2017.

Figure 25

Figure 26

Large global OTAs have had more success with conversion, and mobile now accounts for 2040% of transactions for both Priceline and Expedia. This share will climb over the next several years, as continued improvements in user experience solidify mobile as a key booking channel. OTAs, especially, have invested heavily in usability over the past few years. Other factors that have contributed to mobile devices' rise include larger form factors and responsive design. Recognizing that, in a multidevice world, seamless movement between devices is important for user retention and conversion, some companies have enabled such functionality (e.g., Expedia's Scratchpad).

Metasearch

The metasearch segment is undergoing a substantial transformation in its business model. From a pure search and price comparison engine earning referral revenue to offering booking services, metasearch is evolving.

TripAdvisor showed the way with Instant Booking, and hotels were quick to sign on, hoping it would be an alternative to OTAs. However, the waters were muddied when Booking.com partnered with TripAdvisor Instant Booking. While it validates and provides traction to Instant Booking, it also calls into question the benefits that hotels will derive from the product now that they are competing with an OTA. Trivago, in its new model, is piloting a new tool called Trivago Direct Connect, which allows independent hotels to display rates from their websites on the Trivago platform, thus allowing them to undertake their own cost perclick marketing campaigns. Google, in the meantime, sunset its metasearchlike Hotel Finder program and transitioned to a commissionbased model similar to the OTAs. Skyscanner, Europe's most successful metasearch engine, has seen tremendous growth hitting revenues close to £100 million and aiming for a potential IPO in 2017. It also recently announced a partnership with British Airways that will allow it to display and sell tickets using IATA's New Distribution Capability (NDC), thus positioning itself as a distribution hub for advanced ticketing and ancillary sales.

Metasearch brands are also expected to benefit greatly from new rate parity rules that will impact OTAs. With the possibility of greater disparity in hotel prices across distribution channels, travelers are more likely to turn to metasearch sites to comparison shop.

Methodology

Phocuswright's European Online Travel Overview Eleventh Editionpresents the findings from proprietary research conducted in 2015 on the European leisure and unmanaged business travel markets. This effort was undertaken as a component of a multipart project that assesses the European travel market as a whole, and which includes indepth analyses of six individual European markets: Italy, Spain, the U.K. (including Northern Ireland), France, Germany and Scandinavia. The methodology used to conduct this research was consistent across all markets, and is detailed below.

To evaluate the markets, Phocuswright interviewed executives from over 90 Europebased airlines, hotels, tour operators, rail companies, car rental companies, online travel agencies (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., consumerfacing 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 EUbased OTAs and tour operators. Corporate online booking systems such as Sabre GetThere and Amadeus eTravel 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, thirdparty information, web traffic results, economic indicators, market trends and Phocuswright analysis. Data is actual for 20132014 and projected for 20152017. In Figures, totals may not always add to 100% due to rounding.

All currencies are in euros (€) unless otherwise indicated as in the U.K. chapter, where figures are in British pounds (£) and converted at the average rate for the period they represent. References to the "travel market" are understood to cover the total travel market, while "traditional travel agency" refers principally to 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 panEuropean 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 the U.K, for both domestic and international travel, are allocated to the U.K. 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 segment data for individual markets includes all bookings assigned to that source market. However, total travel market calculations for individual country markets as well as for the total European market include only

nonEuropean tour operator bookings (e.g., hotels in Tunisia, transfers in Egypt or trips/flights in Turkey) generated by each source market. This method avoids double counting across other segments including hotels and airlines (e.g., Air Berlin charter flights). However, as a result, it might underrepresent the tour operator segment share in the individual markets.

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 supplierdirect from intermediary bookings, consider the final merchant of sale as the booking channel. For example, metasearch engines are often nontransactional, 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.

Links to CountrySpecific Reports

This version of Phocuswright's European Online Travel Overview Eleventh Edition features access to detailed country reports on Europe's largest and most influential travel markets. Click on any of the links below for indepth, countryspecific coverage:

French Online Travel Overview Eleventh Edition

German Online Travel Overview Eleventh Edition

Italian Online Travel Overview Eleventh Edition

Scandinavian Online Travel Overview Eleventh Edition

Spanish Online Travel Overview Eleventh Edition

U.K. Online Travel Overview Eleventh Edition

Endnotes

1. Europe Market Update Q3 2015, STR Global (September 2015).