Global Travel Titan

Aug 2, 2024 7 min read

Florian

“Travel is the only thing you buy that makes you richer”

– Anonymous

arvy’s teaser: Booking Holdings dominates the online travel industry with its comprehensive and capital-light business model. Despite fierce competition, its unmatched user base and strategic prowess keep it at the top.

Summer vacation.

And the greatest pleasure was in the anticipation!

So, since work comes before pleasure, we first must choose a destination, book flights and hotels, maybe look for a rental car and, of course, choose great places for dinner. After all, we must send our friends and family some appealing pictures of our great vacation with delicious food and the ride in a convertible. Right?

Although you book your trips through many different websites or providers, it all boils down to a few big players in this industry.

This is where the world’s leading provider of online travel and related services comes in.

Booking Holdings.

Chart 1: Booking owns and operates several travel fare aggregators and metasearch engines

Source: Booking Holdings

One-Stop Shop

Booking has only been called Booking since 2018 because its eponymous website booking.com is so successful. Before that, it was the Priceline Group.

Other well-known travel websites they own are Kayak, Swoodoo, Agoda, OpenTable or rentalcars.com (chart 1).

Whether you want to book a flight, a hotel, a rental car or a table in a restaurant, Booking Holdings is your one-stop shop. The company offers a fully connected travel offering.

Booking established its dominance with the acquisition of booking.com in 2005. For travelers, booking.com was attractive because they could pay after a hotel visit and did not have to pay in advance. This helped to increase visitor traffic (demand side), which in turn increased hotel inventory on the website (supply side). This created a virtuous cycle at a time when no other competitor, especially in Europe, had started to do so.

Another advantage of Booking is its very strong European presence. Since 2 out of 3 hotels are boutique hotels and not chains like Marriott or Hilton, it is very difficult, costly and time consuming to build such a network for other or new competitors.

The result?

Booking is by far the largest online travel company, followed by Airbnb, the Singaporean Trip.com (Skycanner), Expedia (e.g. Hotels.com, Ebookers, CarRentals, Trivago), the Indian MakeMyTrip or Tripadvisor (chart 2). GetYourGuide is still privately owned.

With so many vacation travel providers, I start dreaming about my next bookings.

But how does an online travel agency make money?

Chart 2: Largest Online Travel Companies, Market Cap in $ bn

Source: arvy

Commission-based Model

Booking.com works on a commission-based model, which means that you, e.g. as a hotel owner, pay a certain percentage for every paid reservation you receive through their platform.

The commission percentage, which ranges from 10% to 25%, depends on various factors such as location, peak season, number of rooms and length of stay. Hotels can also opt for the commission-free model, where they pay a fixed fee per booking.

That is it.

Compared to other online travel agencies such as Expedia and Airbnb, Booking’s commission rates are relatively high. Expedia charges between 10% and 15%, while Airbnb charges between 3% and 5% (plus a 5% to 15% transaction fee for guests).

Why can Booking charge more?

These high commission rates are offset by the largest user base and extensive marketing efforts that hotels can use to reach a wider audience. Marketing efforts include social media, targeted advertising, promotions and deals or preferred partner programs.

Consequently, travel platforms are a double-edged sword that arguably have more advantages than disadvantages. With that said, for you as a customer, if you always want to stay at the same hotel or support a business, then go directly through what you want to book, especially boutique hotels.

Little travel buddy tip from me: now that you know the commissions and accommodation rates, check directly with the hotel for possible discounts, upgrades and so on when you compare the online agency’s website with that of the hotel itself.

From time to time, you will get a good deal, whether you pay less money or get more value for your stay, while the hotels net more.

A win-win situation for both parties.

Chart 3: Capital light businesses have outperformed those that employ heavy capital

Source: Goldman Sachs

Capital Light

An attractive characteristic of online travel agencies, as the word “online” suggests, is that it is a low-capital business model, meaning we only need software and no heavy machinery, factories or anything that can spoil.

This is one attribute we love about a “Good Story” and history has shown that they usually outperform capital intensive ones (chart 3).

Why?

Their maintenance costs for the business are very low, essentially a website and some accounting and booking software behind it. This is also reflected in their gross margin of 99% (compared to ≈30% for an average business). Out of CHF 100, CHF 99 goes directly into the business, as they only have “cheap” software and do not have to buy any equipment or raw materials first. Further down the income statement, the net profit margin is 22% (compared to ≈10% in an average business). This means that of the CHF 99 deducted from salaries, high marketing costs and other operating costs, a net CHF 22 remains in the pocket.

This enormous profitability leads to flexibility when it comes to navigating stormy seas. This was evident when Covid hit the travel industry hard.

The company recovered like a tennis ball (chart 4).

Fast and powerful.

Chart 4: Booking Holdings over ten years