Both players have substantial market share, and the combined entity is expected to command about 20 per cent market share. They will also have one of the highest inventories of branded and unbranded hotels. The future of OTA (online travel agents) market is hotels. According to Internet and Mobile Association of India (IAMAI), the online hotel market is pegged at around Rs 5,200 crore.
Even though the air ticket market is the biggest contributor to the industry's revenues - 39 per cent - the margins are extremely low. The hotels segment, on the other hand, is a relatively high-margin business, especially the unbranded category, because the budget hotel operators are ready to share a decent part of their profits in return for higher occupancies coming through OTAs.
While the deal looks rosy, there are various downsides that take its sheen off. First, the travel market has reached a point where market shares rise and ebb on the basis of discounting. The trend was started by latecomer ibibo Group in order to garner market share. The others followed suit. The discounting doesn't guarantee customer loyalty. The combined entity will have to continue with discounting to keep the market share intact. Otherwise, it risks losing market share to other big players such as Expedia, Yatra, OYO Rooms, Booking.com and Cleartrip.
Flushed with funds, the combined entity still has some leeway to burn cash before starting to worry about what next. MakeMyTrip, for instance, raised $180 million from a Chinese firm early this year whereas ibibo Group raised another round of $250 million from its primary investor Naspers in February this year.
However, the current level of discounting is unsustainable. For instance, a deluxe room cost in New Delhi's Hotel Hari Piorko varies widely. On goibibo and MakeMyTrip, the most aggressive players in terms of pricing, the cost is Rs 1,500. Yatra is selling the same deluxe room for Rs 3,832. The difference in tariffs is likely to come down unless the combined entity gets more funding. As such MakeMyTrip is a loss-making company. In fiscal year 2016, the company reported losses of $88.5 million on revenue of $336 million.
The lower penetration is another area that the OTAs are trying to crack. According to some estimates, just 16 per cent of hotel rooms are booked online in comparison to 70 per cent in Europe and 35-50 per cent in the US. To grow penetration, the OTAs have to reach out to smaller towns and cities. But the inability of hotel operators to maintain standards poses a big challenge.
The online travel segment accounts for 61 per cent of the Indian e-commerce market, as per an IAMAI-IMRB study. Much like e-tailers, online travel companies are struggling to run a profitable business. The consolidation ensures higher market share, but at the end of the day, the investors are looking for returns - either through dividends or exit. With stakes getting high and already-weak business models, the possibility of decent returns seems like a distant dream.