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November 19, 2006

Online travel portals: Can we hear the crash already?

Anurag Gupta has analyzed the economics of the online travel services sector and the results are not very encouraging for the half-a-dozen VC-backed startups in this space. This will remain so even if there is a strong growth in the overall market size in the years since that is likely to be negated by the entry of travel agencies (like Thomas Cook) and foreign online brands (like Expedia).
I estimate that close to 1,00,000 Air tickets are being sold every day in India. Out of this nearly 20,000 are being sold online. Online tickets are sold by Online Travel Portals / Agents & Directly by the Airlines Websites. Out of this 20,000 I believe that Online Travel portals are selling around 4-5000 tickets per day.

At an average ticket value of Rs. 3,000 the total revenue (Gross revenue) earned by Online Travel Portals from sale of Airline Tickets would be in the range of Rs 430-540 Crores. The portals would be getting a net commission ranging from 0.5% to 7.5% from various Airlines. At an average commission rate of 3-4%, the net revenue would be between Rs. 13-22 crores.

The Air Tickets business would be forming almost 90% of the total revenues of the online travel portals. 10% revenues would be coming from Hotel bookings, Taxi rentals Packages etc. The margins on these products would be much higher going up to almost 20%. This would give them another Rs 10 crore in net revenues. This makes the total business size around 25-30 crores in net revenues.

Looks like we will see early sellouts of some of the VC-backed start-ups to overseas entrants.

Update: Obviously, VCs can't hear any signs of a crash. Battery Ventures has joined Sequoia in investing a $15 million second round into Travelguru.

Mark Sherman, general partner at Battery Ventures, has a formula worked out based on the value of ticketing ($30 billion annually, growing 10 percent year on year), how much of it will go online in a couple of years (20 to 30 percent), industry size in 10 years ($50 billion), and how much booking will be done online ($12.5 billion).

Arun Natarajan is the Founder of Venture Intelligence, which tracks private equity and venture capital in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.