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Real journeys, but it’s still virtual profit for online travel firms

Real journeys, but it’s still virtual profit for online travel firms
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First Published: Wed, Jun 06 2007. 12 19 AM IST
Updated: Wed, Jun 06 2007. 12 19 AM IST
Travel is clearly the space to be in online in India, but that by itself is no guarantee of profit. And so, even as new Indian travel portals such as Travelchacha.com and Flightraja.com (now renamed Viajustgo.com), established global ones such as Travelocity.com and Expedia.com emerge (they plan to launch their services in India by end-2007) and existing ones such as Makemytrip.com, Travelguru.com, Cleartrip.com and Yatra.com are yet to break even, at least as far as their domestic travel business is concerned.
All are betting that the use of new delivery mechanisms to make up for the low number of Internet users in the country and focusing on products such as holiday packages and hotel bookings will help them turn profitable.
Flightraja Travels Pvt Ltd, an 18-week-old company founded by Ashwini Kakkar, the vice-chairman of travel agency Mercury Travels Ltd and the former CEO of Thomas Cook (India) Ltd, is betting on mobile telephony and direct-to-home (DTH) television. “DTH can be a very lucrative way to sell travel and going forward, people will end up buying tickets and packages on TV and mobile phone in a big way,” he says.
On Tuesday, Flightraja announced that it had secured funding of $5 million (Rs20.5 crore) from the Vinod Dham-owned California-based fund, NEA IndoUS Ventures, and changed the name of its site from Flightraja.com to Viajustgo.com.
India has 170 million mobile subscribers and 110 million TV households of which around five-six million have DTH, a new delivery mechanism that facilitates some amount of interactivity, thereby lending itself for such things as selling products and services, including air tickets and holiday packages. According to PhoCusWright, a technology research firm focused on the travel business, travel portals in India did business of $800 million (of the total $15.5 billion travel market in the country) in 2006. The firm expects this to increase to $2 billion by 2008.
In 2006, India attracted 4.43 million foreign tourists; the same year, around 350-400 million domestic tourists are estimated to have travelled around the country. The year also saw the emergence of several low-cost airlines and the air passengers in the country increased from 22.788 million in 2005 to 32.172 million in 2006. On the back of an economy that grew 9.4% in 2006-07, Indians are travelling and spending more, within and outside the country.
Other challenges
It could take more than that or the use of new delivery mechanisms for online portal companies to turn profitable. For one, it could take time. Deep Kalra, the chief executive officer of Makemytrip.com Pvt. Ltd, says, “It takes around two-and-half to three years for a start-up to reach the break-even mark.” He adds his company will get there “by the end of the year.” Makemytrip.com Pvt. Ltd was one of the earliest online-travel firms in India and launched its outbound travel operations in 2000. It claims that the business broke even by 2003. The company launched its domestic operations in October 2005, and expects this to break even within the next two quarters before the year end.
The portal’s top-line or gross billing from sales was Rs550 crore for the year ended March. It expects this number to increase to Rs1,100-1,200 crore by March 2008. Its income, largely from commission from airlines and hotels, was $10 million for the year ended March. The company expects this to increase to $25 million by March 2008. On Monday, Makemytrip.com announced that it, too, would be offering customers an opportunity to book tickets and travel packages over their mobile phones.
The emergence of low-cost airlines—at last count there were four low-cost airlines and five full-service ones operating in India, up from a total of seven in 2005—has helped travel portals, but the head of one says that companies need to look beyond air tickets if they wished to break even.
Cleartrip Travel Services Pvt. launched its site in July 2006 and expects to break even in the next 12 months. According to the company, 60-70% of its revenue comes from booking (air) tickets; the rest, from selling hotel bookings and holiday packages. Cleartrip says that it is focusing on looking beyond high-volume and low-commision air tickets, at lucrative car rentals, hotel bookings, and cruise and holiday packages. “The best way to break even quickly is to focus on higher margin products such as hotels and packages. One needs to get into high-margin areas and we are beginning to make that shift now,” says Sandeep Murthy, chief executive officer of Cleartrip Travel Services Pvt. The company’s gross sales per day stand at Rs1.5 crore. By July this year, the company aims to complete 5,00,000 transactions on its Website. By March 2008, it is targeting 1.2 million transactions.
High-margin business
Most online travel portals currently make money from commissions they earn for the services they provide. On an average, commission from air tickets which account for the bulk of the business are the lowest and range from between 2% and 9%. For hotel bookings, the commission is much higher and varies between 8% and 25%, again, depending on whether the customer is travelling during the peak-season or otherwise. For holiday packages, the rate varies between 10% and 20%.
Hotels and holiday packages figure prominently in the strategy of Travelguru.com, which launched its portal in 2005. The company says that its operations would break-even in the next six-nine months and that its monthly revenue is around $10-$13 million. “We will touch the break-even mark when our revenues reach $20 million in the next six-nine months,” says Ashwin Damera, chief executive officer at Travel Guru. “Though the flights business is important, we will increase focus on the hotels and holidays business.”
Yatra Online Pvt Ltd, which launched Yatra.com in September 2006 (it does business of $10 million every month and claims it will break even by the end of this year or early next year) will also focus on hotel bookings, but in budget hotels. It has also decided to enter 20 cities other than the metros. “We plan to launch a combination of products in the hotel and package segment as well as new technologies to retain an edge in this highly competitive market,” says Dhrun Shringi, founder of Yatra.com.
Critical mass
The biggest hurdle travel companies face in breaking even is acquiring enough customers, says Amal Purandara, head India operations for Arzoo.com. The company, promoted by Sabeer Bhatia, the co-founder of Hotmail.com, launched its travel portal eight months ago. Purandara says that its emphasis right now is on “acquiring more customers” and that the firm does not “want to make money in the next two years.”
Flightraja’s Kakkar is convinced that using DTH and mobile phones is one way to acquire more customers. “The issue here is that the total number of computer owners in India is 44 million, credit card owners, 23 million and broadband users, three million. Though all these are necessary conditions for someone to book online, they do not have a mass appeal. On the other hand, mobile phone users in India are at 200 million and this is where the potential is,” he says. Kakkar claims that Flightraja is already profitable and does business of Rs1 crore a day.
With the number of travel portals poliferating, the sector could see consolidation in the next 10-12 months, says Ankur Bhatia, executive director of the Bird Group that provides software solutions to the travel industry. “This will happen after foreign players enter the lucrative Indian market,” Bhatia adds.
Executives at travel portals, however, say that it will take time for the foreign firms to establish themselves in the market. “They will have a difficult time,” says Kakkar. “The tax structure in India is complicated and they are not used to the system of issuing passports and visas in India, which is very different from the global market place,” he adds.
The noise made by travel portals, all of which advertise heavily on TV and print, is encouraging traditional travel agencies to look at their own online strategies. Kuoni Travel (India) Pvt. Ltd (sales of Rs 350 crore in 2006-07) is redoing its website. Of the firm’s business, a mere 5% comes from the Web, but this will increase, says Himmat Anand, chief operating officer for India and South Asia at Kuoni’s destination management division and co-chair of industry chamber Ficci’s tourism committee.
“The online-travel model is what is going to drive the future and our online business will increase to 15% in the next three years. Any middleman such as a travel agent or tour operator will find it difficult to survive in India in the next five-seven years,” he adds.
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First Published: Wed, Jun 06 2007. 12 19 AM IST
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