Corporate Travel Game of Thrones
Travel is huge, but where is the corporate travel innovation?
Travel is one of those monster categories that never ceases to innovate. The global category is over $9 trillion and online travel is over $300 billion . Just when you think that there isn’t any more innovation, another new startup takes on a new twist to this mongo market. It reminds me of the patent off quote that “everything that can be invited has been invented.”
Years ago I had the good fortune to join Expedia. Actually, it was over 15 years ago and I got to see the early stages of the now prominent and established online travel market. Where size and scale win the day, we’ve seen the dominant players continue to eat up more demand and supply sources. They control their own destinies from both the core travel suppliers like air, hotel, etc. (who are always trying to disintermediate them), as well as upstarts.
One market that I helped launch from its infancy was the online corporate travel business; Expedia Corporate Travel, now known as Egencia. If you think about half the travel being business travel, one would expect to see more innovation in this space. As part of my role as an advisor and EIR at Voyager Capital, I see many travel deals but not that many business travel plays. In fact, I’m on the Board of Yapta which pivoted from a consumer-based business (focused on airline fare tracking) into a corporate travel technology play. Today, Yapta manages and monitors millions of flights in order to save corporations money on their T&E programs.
So the question is, why isn’t there more innovation in business travel? Keep reading…
Corporate travel is big, but it’s like The Game of Thrones
I say it’s like the Game of Thrones because the spend is controlled by a small number of players called Travel Management Companies (TMCs) that are constantly focused on becoming more powerful through increasing the overall bookings that they manage.
In my recent post, I talked about the corporate travel market and the lack of overall innovation. The main issue with the travel industry, and the associated opportunity, is that it’s extremely slow moving with laggard players and technology.
The traditional leisure travel business has been devastated by consumer side companies who have made easy to use, self-service tools available to anyone online. Over time, those players continued to bulk up their market share in order to get favorable back-end revenues as well as more balanced sheet leverage with the travel suppliers. M&A has been a necessity for the intermediaries like Expedia and Priceline in order for them to continue to bulk up in the market share arms race. Priceline’s market cap is ~$66B of of ~$10B in revenues and $3.7B in EBITDA. Expedia’s market cap is ~$16 of of ~$7B in revenues and $.8 in EBITDA. In the consumer space, you can gobble up consumer eyeballs through direct marketing and M&A, but the corporate travel space is much different….
The corporate travel market size is super huge. The Business Travel Association pegs it around $260B in the US (which the graphic is based on below) and its much larger worldwide. Here’s a break-down:
This image is basically right. I pulled some additional data from the business travel metrics online, but the main takeaways are:
- 2,000 companies control about 35% of the spend.
- Adding companies over 14K and Enterprise you get to about 67% of the market.
- 7M small businesses only account for $30B.
Want to see a list of some of the top corporate travel spenders? Check that out here: http://businesstravelnews.texterity.com/businesstravelnews/september_28__2015?pg=6#pg6
This number doesn’t include the lightly managed business travel; travel that’s booked outside of your official corporate travel program. You know, like seeing a rate on a consumer site and then booking it directly.
It’s simple, right? Go after the top enterprises and close them just like a consumer business. As the reader may know, corporate spend is largely managed by travel management companies (TMCs). TMCs are largely system integration companies that have a series of travel related services (agents, credit card reconciliation) combined with largely 3rd party software. T&E is typically around 1% of a companies cost and these TMCs act as an integration point for managing everything travel related for a business. More on them in another post.
The key is that the corporate traveler is largely being managed through a travel agency and is using those services to book travel. Thus, while this market is big, you as the budding entrepreneurs, need to realize that these TMCs control much of the technology and service decisions for corporations.
Corporate Travel Economics
As I mentioned in the previous section, Travel Management Companies control the majority of travel spend for business travel. In fact, the largest TMCs control ¾’s of the gross bookings market with the top six agencies (American Express, Carlson Wagonlit, Egencia, etc.)
Back in the glory days of travel, there was a lot of money to be made from both fees to consumers/companies and from back-end commissions. Back-end commissions were made up of commissions off air, hotel and car suppliers as well as GDS rebates (commission paid for using one of the reservation systems like Sabre or TravelPort).
Today, most TMCs make their money from fees. There is still some commission to be had but primarily TMCs have lost most of that revenue. Most corporations have eventually negotiated any back-end revenue to flow back to them or they pass through as savings to the corporation. In the case of Egencia/Expedia, our strategy was to use Expedia's scale in Leisure to basically have TMC-level negotiating power. That way, we could offer low transaction fees while actually making more from back-end revenue.
Another important point is that TMCs typically don’t have their own technology. At Expedia/Egencia, our strategy was to have high online adoption of our product because we didn’t rely on licensing costs for the technology. TMCs typically license software from vendors like Concur, so as bookings moved to online versus calling an agent, TMCs become more disadvantaged. Today, TMCs are still in this pickle of not being great at technology. I’ll post some more thoughts around the implication of technology and TMCs in another post.
My numbers may not be completely accurate but they are directionally correct when looking at a TMC’s per transaction economic breakdown:
|Revenue||$ 25||$40||*mainly fee revenue, small % of back-end|
These numbers are definitely not software margins. Once you load in the fixed costs of these businesses, you are looking at 10%ish profit margins. American Express leverages travel as a strategic component to their card business and will rebate corporate clients for use. Otherwise, these businesses are about huge topline in gross bookings and low profit margins.
When working with a TMC, you have to understand their strategic and economics motivations. The incentive for TMCs is to have as much ‘touch’ or human interaction with the trip/transaction as possible. The reason is that since the TMC doesn’t make much revenue on back-end fees, they want to make sure they offset these costs from agents. Technology can mitigate much of this cost and it does in the case of Egencia and Concur for online books.
TMCs like fees. In fact, they need fees from everything from waitlists, voids, exchanges, etc.
Where does corporate travel go?
It hasn’t changed that much since I had been involved with it.
Longer-term, TMCs have to think about how to become relevant as new supply sources and new technologies (like Uber, Airbnb, etc) put further pressure on TMCs as the main arbiter for corporate travel control and spend. Much to my surprise though, these changes are slow and I would have have guessed that TMCs would still have such a large hold in the market today. Steve Singh, co-founder and CEO of Concur, once told me that the biggest competitor in the business travel and expense space is change – moving from the old thinking and into a more efficient world.
From my previous post, we covered the per unit economics of TMCs. For budding entrepreneurs, you now have a good sense of how you can craft a direct or partner strategy based on the service or offering that you are building.
The elephant in the room is Concur. Concur is a friend and a potential enemy to TMCs. Their open booking strategy certainly scares the TMCs and Concur doesn’t have agents and never will. Their platform can do everything. Although, they would never have a call center or other call agent services. Who knows with travel bots thought.
Again, I haven’t seen a lot of new innovation in the space but here are some entrepreneurial ideas that might be interesting got pursue below:
- Build a better mousetrap: What’s the next booking technology, travel expense technology, etc. that you could build that would disrupt the existing players and make you a friend to the TMCs?
- Unmanaged travel: Can you build an Uber for corporate travel that mirrors the experience of having a VIP agent (maybe powered by bots)? Can it act as if you had a dedicated agent that monitored your trip and could foresee any future challenges in your journey, no agency required?
- Negotiated rates for everyone: I tried to introduce merchant rates for corporations. It’s something like 4x’s the commission of regular hotel commission. The idea longer term was to pool scale together so that even smaller companies could have access to better rates. I still think this concept could be interesting. Group buying concepts from yesterday and/or aggregation of demand for suppliers would be an incredible advantage to companies. It would be fought vehemently from suppliers. Travel managers now have tons of other lodging options outside of the big boxes like Airbnb.
- Mobile-first integration: Build a all-in-one product that focuses on customer experience but API integrated with any other travel-related API on the planet. This includes inventory outside the traditional booking experience like Uber, Airbnb, etc. Think about what did with a mobile-first, developer friendly platform – taking a different approach to a massively crowded marketplace and executing on a new market was an excellent and non-obvious play.
A big addressable market should have more innovation. Its ripe for the taking!