This is just one of the stories from our “I’ve Always Wondered” series, where we tackle all of your questions about the world of business, no matter how big or small. Ever wondered if recycling is worth it? Or how store brands stack up against name brands? Check out more from the series here.
Listener Melissa Hoffman in Westbrook, Maine writes:
How do sites like Expedia and Booking.com work? And are they profitable?
Expedia and Booking.com are what’s known as online travel agents, or “OTAs” for short. And conceptually, they do a lot of the same stuff that travel agents typically do: book airlines, hotels, and so on. The difference is that OTAs leverage technology to scale their offerings up.
Hotel bookings are the main way they make money. When a customer makes a booking, the OTA earns a commission.
“Usually they make something between 10% and 25%,” said Seden Doğan at the School of Hospitality and Tourism Management at the University of South Florida “It depends on the contract between the OTA and the service provider.”
In addition, OTAs also generate revenue the same way that Facebook and Google do: they run ads.
“Those are typical display ads,” said Chris Anderson, professor at the Nolan School of Hotel Administration at Cornell SC Johnson School of Business. “So [the advertisers] paid for that exposure to generate this traffic.”
Next to hotel bookings, ads are a relatively small part of their business, but one that’s on the up-and-up. When Expedia reported earnings for 2024, ad revenue was their fastest growing segment.
Going back to Melissa’s question, yes, OTAs are profitable. But there’s something else to note about this industry: it’s not as crowded as it looks.
“A consumer may not know that Hotels.com is owned by [Expedia Group], and Expedia also owns Travelocity and Orbitz,” said Lorraine Sileo, senior analyst and founder of Phocuswright Research. “Booking owns Priceline, so they're not such a variety out there as you may think.”
On top of that, OTAs aren’t the only place where you can book air and lodging online.
“They probably represent about half of the online market,” said Sileo. “The other half is people going direct to Hilton.com, Marriott.com.”
And the future could be turbulent. In their earnings call for the first quarter of this year, Expedia reported that hotel bookings had slowed, and they blamed declining consumer sentiment. Economic uncertainty could translate to a slow down in travel.
But Sileo noted that, historically, OTAs have done alright in slow travel periods.
“We thought that OTAs would be in the cellar maybe because of something like 9/11 or the whole financial crisis of 2009,” she said. “Those are actually good years for OTAs.”
She noted that OTAs often make it simple to cancel your trip, a perk when uncertainty is high. But user beware: an easy cancellation doesn’t necessarily mean a cancellation without fees.
