A roadmap for online travel’s long, painful path to recovery

Five months into the Covid-19 pandemic, at least one online travel company in Southeast Asia has shut down. The rest face cratering revenues and are making both ends meet by cutting costs. But since the economic fallout from this black swan event will likely be felt for some time, there are limits to this strategy.

As such, the questions have turned existential. Will online travel companies even survive this crisis?

Photo credit: 123RF

For the most part, the answer is yes, according to Aldi Hartanto, vice president of investments at MDI Ventures. He’s confident that the major online travel agencies (OTAs) – Traveloka, Tiket.com, and Trip.com Group, among others – will pull through, but he has his doubts about the prospects of smaller players.

That said, Hartanto estimates that for OTAs to stay in the game, they need to shore up a runway of 18 to 24 months. Emergency fundraising or in more dire cases, a merger with a bigger and deep-pocketed player, might be in order.

“Founders and existing shareholders will have to expect significant dilution and lower returns,” he says. Along with valuation cuts, the investment horizon will be “much longer” in order to recover growth and market perception towards the industry.

Given that a full recovery may take a year or longer, these businesses may need to rethink their model from the ground up. Whether OTAs choose to pivot, go with an investment or be acquired, it won’t be easy and the cost may be high.

The M&A or PE route

According to Hartanto, the companies with the best chances for survival have relatively straightforward traits. They have big cash balances and low debt as well as robust gross profit margins and operating cash flows. They’re also less people-centric, which means lower fixed costs and less operational exposure.

Those that fall into this category are the likes of Traveloka (close to US$1 billion in disclosed funding); Trip.com Group (US$1 billion in net profit for 2019); and Tiket.com (backed by Indonesian conglomerate Djarum). Assuming healthy internal financials, they should at least have a sizable cash balance and existing investors who can inject capital when necessary.

But there may also be instances where an investment from current backers may not be feasible. Sean O’Neill, a travel tech editor at Skift, uses Klook as an example. The Hong Kong-based travel experiences platform raised a US$225 million series D+ round led by SoftBank Vision Fund last year, but the Japanese conglomerate is still grappling with the WeWork debacle and troubles at Indian hospitality startup Oyo.

(L-R): Klook founders Bernie Xiong, Ethan Lin, and Eric Gnock Fah / Photo credit: Klook

O’Neill says that Klook can make it if it manages its cash flow well. But should it need an infusion of capital, and SoftBank or other investors can’t participate, then one avenue to consider is a merger or an outright sale.

For Klook, the likely buyers would be Trip.com Group or Alibaba, which owns travel marketplace Fliggy. SoftBank may also choose to merge Klook with one of its portfolio companies, such as GetYourGuide, a Berlin-based OTA that also markets travel experiences.

Impact on business model

A protracted recovery