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Market Share & Profit Pools In Online Travel

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We debut our first-of-its-kind bottom-up analysis of Online Travel co’s driving $240B Lodging & $10.5B EBIT. Keys: (1) Healthier than believed OTA Lodging (+24/20% 17/18E) suggests far from ceiling; (2) Alternative now 46% of growth led by ABNB; (3) OTA EBIT lagging (+12/10% 17/18E) but more on opex than ad costs; should stabilize and improve. BKNG & GOOG = 83% of EBIT and remain best positioned.

Debuting First-Of-Its-Kind Analysis Of Companies Driving $240B Lodging, $10.5B EBIT
We are introducing our detailed, bottom-up analysis of the largest Online Travel companies (OTCs), including the Global Online Travel Agents (OTAs) BKNG, EXPE, & ABNB, the largest Asia OTAs CTRP & Meituan-Dianping, the meta-search companies TRIP & TRVG, and finally, GOOG Travel. [GOOG covered by John Blackledge.] We project in 18E the companies will drive a combined 2.3B room nights and $240B in Lodging — including 2.1B nights & $211B booked at the OTAs — and $10.5B in total EBIT, the first time the figure has been estimated.

OTA Lodging Growth Healthier Than Believed; Suggests Far From Market Share Ceiling
Investors have widely considered OTA growth disappointing since early ’17, when BKNG began slowing from +30% to +20% and EXPE failed to accelerate organic nights vs. easy comps. However, the multi-year trend has been clouded by deals, FX, murky disclosure, and Airbnb’s emergence. In our fully adjusted analysis, we found Global OTA Lodging bookings healthier than believed at +24% ex-FX to $181B in 17A, vs. +28% in 16A. While slowing in percentage terms, incremental bookings of $28B ex-FX were up vs. $26B in 16A.

  • We think this was largely missed as (1) ADR trends at Global OTAs improved, likely reflecting higher quality nights; and (2) a focus on organic nights masked an est. 250 bps pro forma bookings acceleration at EXPE when incl. Orbitz & HomeAway for all periods.
  • We est. Global OTAs have been adding 300 bps of Lodging share per year like clockwork, to 23% in 17A. (Including Asia OTAs, 400 bps & 27% share). While the OTAs may be in ‘middle innings’ of growth, the trend supports our view OTAs are far from a share ceiling.

Alternative Driving 46% Of Growth, With All Three Global OTAs Benefiting
Alternative Lodging continues to rapidly increase in the mix, up an est. 43% to $43B in 17A, or 30% of Lodging bookings at Global OTAs ($43B of $145B), and 46% of incremental growth ($13B of $28B), up from 28% in 14A, led by Airbnb. We are now defining Alternative as vacation homes, urban homes, apartment-hotels, B&Bs, and other unique places to stay, mirroring classifications recently introduced by BKNG.

  • We project Alternative to double in three years to $86B in 20E, and while competition is increasing, we see all three Global OTAs benefiting, each expanding from its relative strength: ABNB in urban homes, BKNG in multi-unit and other professionally managed properties, and EXPE’s HomeAway in North America vacation homes.
  • Alternative is more expensive operationally and will continue to pressure margins nearterm, as take rates are at or below Traditional. However, we expect automation and scale benefits over time and are bullish on take rates, given the highly fragmented market and heavier lifting, which increases the value of OTAs as aggregators and facilitators.

OTA EBIT Lagging More On Opex & Brand Than Online Ad Costs; Should Stabilize & Improve
We estimate EBIT at the Global OTAs was +12% ex-FX to $5.6B in 17A (out of $10.5B total covered in our analysis), vs. an average of +22% the previous three years, as non-ad opex accelerated, driven mostly by Alternative Lodging investments (see above) and significantly less acquisition-driven cost synergies.

  • We note that the other key ongoing EBIT pressures — (1) overall slowdown on large numbers, (2) take rates, & (3) ad costs — continued at a similar or slightly lesser pace in 17A vs. recent years, with ad costs improving into 18E on recent BKNG ROI optimizations.
  • We conservatively project EBIT +10% ex-FX to $6.5B at the Global OTAs in 18E, as nonad opex +20% (vs. +21% in 17A), overall slowdown, and BKNG TV ads more than offset performance ad leverage.
  • The companies are investing in fundamental platform improvements and brand, rather than aggressively chasing ad-driven growth, giving us more confidence in future returns.
  • As such, we expect EBIT stabilization and improvement to +12% in 19-20E on scale in non-ad costs and more normalized BKNG TV ad growth. Take rate increases in Alternative could drive upside to our estimates, though probably still a few years out.

For more information, contact your Cowen sales representative.

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