In 2008, Delta announced its long awaited marriage to Northwest Airlines. In doing so it started in motion a chain of events that continues to define the market for the distribution of air products.
This is not just in the US, but also across the planet. This had the effect to reduce the supply side equation by removing one of the most competitive players.
In turn it caused United Airlines and Continental to merge, thus the big players in North America went from seven to five.
So, why mention this?
The blockbuster acquisition of Kayak by Priceline is yet another moment in the realignment of the distribution system.
But there may be people inside both the Department of Transportation and the Department of Justice in the US who are going back and looking at the market and realizing that there has been a reduction in competition, with a resulting higher set of prices across the system that cannot be blamed on fuel prices alone.
Some background: the pinnacle of the conventional travel market was arguably around 1995/96 when the number of US agencies peaked at 55,000. Today there are fewer than 14,000 retail outlets (ARC figures).
The shutting off by different airlines of peripheral third party channels – e.g. Delta's cutting off AwardWallet and others, is also part of the same trend.
These factors point to real underlying shift. the market is now supply side, and no longer a demand side.
According to Airbus's global market study, the US domestic capacity has fallen every year for the past four. This reduction in capacity is continuing with the latest winter 2012 schedule. Worse still for the consumer is Southwest's decision not to add capacity, meaning there is no major disrupter on the supply willing to make the market more competitive.
The average ticket price is rising at a higher rate than the price of oil. And, indeed, when fuel is only one part of the equation and the shedding of jobs continues, you can see why some US carriers are now more profitable than they have ever been.
And now the airlines are slowly tightening the channels of distribution – the market power they have as a group has improved enormously.
So what about the consumer?
He or she can hardly tell if there is a specific channel – they just know it is complicated and get tired of looking. Please, just ask a consumer!
They doubt the results from websites because the results are seemingly all correct, but all different (so-called fare guarantees and the various caches that exist make for vastly different results at any one time).
The big issue here is that the consumer doesn't really tell the difference from Expedia or Kayak, they both do effectively the same thing as each other. ie you can complete a travel transaction. or search for a lead for one – the consumer probably doesn't care if the fulfilment is on an airline's site or that of an intermediary.
This, therefore, is a good time to jump in to the media search game for priceline. I suspect, however, the timing is driven by a number of factors.
- The apparent "win" by American Airlines over Sabre (and an earlier termination of the action involving Travelport) is a significant blow to conventional distribution.
- That the conventional ota market has seen several players decline (Orbitz and Travelocity are not as relevant as they once were).
- Expedia's stock has risen lately and it is currently trading near an all time high, which means that it could use its stock as a weapon to acquire other businesses.
- The emergence of strong local brands in travel challenges the concept of the monolithic mega brands
- The lack of opportunity for growth and the maturity of the current ota market provides little opportunity for the big four without significant expense.
- Anecdotal evidence points to a move away from CPC and a reduction in CPA values as the airlines gain more power.
Meanwhile, Priceline is already using American Airlines for direct connect and can now connect the other airlines using the Farelogix connection.
The acquisition solution also adds a foil for the airlines versus Google, all the while Kayak continues moving away from using ITA Software as the primary provider of its airfare shopping technology. The airlines have also effectively crippled Google Flight Search by not giving full access to their inventory, in particular Delta and Southwest.
The result is that the airlines are not making it easy for GFS as a product to gain a foothold in the market.
Final thoughts
While there might be a lot of high fives in Norwalk, Connecticut, the more sinister (and cynical view) has to be that the price paid here was too high (and don't expect Hipmunk will be the next one to be snapped up).
But the battleground for the OTAs and the metasearch players on a category basis appears to favour search/metasearch over OTA. The latter (OTA) is arguably more expensive without returning corresponding and significantly higher revenue numbers.
Overall, I think this is a interesting move, albeit an expensive one, for Priceline. It's a bit of a blow for Expedia, Google and the GDSs. But the real winners here, again are the airlines.
NB: Aircraft taxi image via Shutterstock.
Read more at http://www.tnooz.com/2012/11/11/news/priceline-kayak-deal-airlines-are-the-winners-again/#fkZGcUMzVRo6HuWY.99
Related posts:
- Priceline-Kayak deal: Marketing expertise and global footprint at heart of $1.8 billion takeover
- Travelport plays it straight over Priceline-American Airlines deal – for now
- American Airlines touts Kayak, Priceline as favored online travel websites
Read more at http://www.tnooz.com/2012/11/11/news/priceline-kayak-deal-airlines-are-the-winners-again/#fkZGcUMzVRo6HuWY.99
Priceline buys Kayak for $1.8 billion
Read more at http://www.tnooz.com/2012/11/08/news/priceline-buys-kayak-for-1-8-billion/#8mXE1jA82JQcvGLo.99
The deal was announced at the close of the public financial markets today in New York.
The transaction values Kayak at $1.8 billion ($1.65 billion net of cash acquired, says a statement) or $40 per share of Kayak, with Priceline paying "approximately $500 million of the consideration in cash and $1.3 billion in equity and assumed stock options".
Kayak finally managed to get its IPO off the ground in July this year, ending an 21-month wait from its original announcement in November 2010 that it wanted to go public.
The board of both companies have "unanimously approved the transaction", the statement continues, but a vote of Kayak's shareholders and regulatory approvals will take place shortly.
The deal is expected to close by late in the first quarter of 2013.
It also eclipses by some considerable distance the other major deal to take place in the past few years in travel technology – that of Google's acquisition of ITA Software in the summer of 2010 for $700 million.
Kayak's existing management team will remain in place and will run the company as an independent unit within the Priceline Group.
Priceline CEO and president Jeff Boyd says:
"Kayak has built a strong brand in online travel research and their track record of profitable growth is demonstrative of their popularity with consumers and value to advertisers,
"Kayak also has world class technology and a tradition of innovation in building great user interfaces across multiple platforms and devices."
Perhaps central to the strategy behind the deal is in the global expansion of the Kayak brand.
Priceline says it can assist Kayak "to build a global online travel brand", the one wrinkly area in an otherwise mostly successful Kayak story.
Despite growing quickly (including buying Sidestep) and then pretty much dominating the US travel search scene through the 2000s and up to its IPO this year, Kayak has not made much of a dent outside of North America.
Kayak bought European travel search brand Swoodoo in early-2010 for an undisclosed fee, but elsewhere in Europe it has struggled against the likes of Skyscanner et al.
Given Priceline's extraordinary success with acquisitions such as that of Booking.com (considered by some to be the most profitable travel deal of the 2000s), perhaps Kayak's rivals elsewhere around the world will finally consider it a significant threat.
Kayak CEO and co-founder Steve Hafner adds:
"Paul English and I started Kayak eight years ago to create the best place to plan and book travel.
"We're excited to join the world's premier online travel company. The Priceline Group's global reach and expertise will accelerate our growth and help us further develop as a company."
UPDATE:
So, if international is to become a focus, what does one of Kayak's significant competitors think about the deal?
Skyscanner CEO Gareth Williams says:
"I'm delighted to see the success of Steve Hafner and Paul English and the Kayak team. Online travel is hugely competitive and yet they have helped transform the market and create benefits for travellers and shareholders alike.
"ITA was a good acquisition for Google and I have no doubt Kayak will be a great Priceline brand. At Skyscanner we relish the ever increasing competitive challenge to be relevant, useful, fast and comprehensive to all travellers worldwide."
Read more at http://www.tnooz.com/2012/11/08/news/priceline-buys-kayak-for-1-8-billion/#8mXE1jA82JQcvGLo.99
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