Mohammad Atta is a name that will live on in infamy. Atta, a 33-year-old Egyptian engineer, was the oldest in the team of suicide bombers that hijacked airliners on Sept 11, 2001. He acted as the ringleader for this unique atrocity.
The planes were used as battering rams on the World Trade Centre and the Pentagon. The attacks killed nearly 3,000 people and sparked a global war on terror.
Atta’s actions on a different day may have been forgotten. On Aug 9, 2001, he booked a first-class ticket from Portland to Boston online.
Booking airline tickets through the Internet was a novelty then. Atta made his booking on the Internet. This online travel agency has probably folded up a long time ago.
But, the 9/11 attacks turbo-charged online travel. Online travel booking was a miniscule industry in 2001. It represented less than 10% of travel capacity. Back then, most people still booked trips at physical agencies. You had to call up a travel agent and get a quote. Then, you went to the agent to physically pay and collect the ticket. In Singa-pore, some of them can still be found at People’s Park Complex.
Online booking was unreliable then. The rates quoted were sometimes at a premium to the physical agencies. About one-fifth of the sites used to break down. Unfortunately, the booking that Atta made went through smoothly.
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The 9/11 incident devastated airtravel. Over 90% of the flights in the US were grounded. In Asia, over 70% of planes were idling on the tarmac. Air travel volumes in 2002 were less than half that of 2001.
The collapse of air travel was a bonanza for online travel agents (OTAs). Airlines found that the easiest way to dispose of their unsold tickets was to sell them online. OTAs became more reliable as their technology improved.
Travellers began to trust OTAs more than physical travel agents. The fear and confusion meant that people avoided visits to the old-fashioned agents. The security compulsions also worked in favour of OTAs. By late 2002, online check-in had became prevalent. Online check-in made it easier for security to screen passengers.
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The leading OTAs today are Expedia Group and Booking Holdings. These giants have a combined market capitalisation that is higher than the four largest US airlines. The players during 9/11 have since folded up or integrated with these giants.
OTAs make money in two ways. The first way is the merchant model. OTAs collect the spread between the wholesale and the retail prices of air tickets. For example, Emirates Airlines may want to dispose of a ticket from Dubai to London at $800. The OTA buys it and sells it at $1,000. They would generate a gross profit of $200.
The second way is the agency model — a commission-based model where OTAs act as distribution partners. For example, the OTA collects a commission (of perhaps 5%) on the $1,000 ticket. The OTA is basically the storefront for the airline in this case.
The early signs of China’s reopening have been cheered by investors. The world is bracing itself for a swarm of Chinese tourists. Tech stocks have been battered in 2022. OTAs have done worse. Expedia Group is down 45%, which is 18% worse than Nasdaq’s drop. Trip.com Group is down 35%, though Booking Holdings has done better.
The rout is due to fears that inflation would curb travel spending. Also, the unevenness of the reopening rattled investors.
The OTA rout is a gilded opportunity. OTAs may be even better value than a budget trip to Bali. Expedia is on the cusp of a turnaround. According to consensus, it could generate US$11 billion ($14.9 billion) in revenue. This is more than double the 2020 levels. The market expects it to generate US$2.2 billion in ebitda. This means that Expedia is at just 5x FY23 EV/Ebitda, which is the lowest in a decade.
Giant players are not the only proxy for the travel boom. Global Digital Niaga, which operates Blibli.com, is an Indonesian e-commerce that stands to gain.
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OTAs benefited from the security requirements after 9/11. Similarly, the health constraints of the Covid era may boost its model. Passengers can produce their vaccination documentation through the OTAs. This would ease immigration.
Atta’s atrocity spawned a new industry. Over 22 years later, the online travel sector is braced for its rebirth. Investors should prepare for the ride.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column
