What if web giants merged?

WEBJET and Wotif have revolutionised the way Australians organise their travel arrangements.

John Guscic

WEBJET and Wotif have revolutionised the way Australians organise their travel arrangements. Webjet is the leading aggregator of flight information while Wotif is the go-to site for booking accommodation.

The strength of their networks has created high barriers to entry. In turn, these barriers afforded Webjet and Wotif the opportunity to grow at attractive rates while increasing market share. For many years the companies were content to play in their own backyards and leave each other to their own devices.

But the growth in their core divisions has reached maturity, and the companies need to find a way to satisfy shareholders' insatiable demands for earnings growth. The natural path for each to take with their existing infrastructure is to increase their range of booking services. By providing solutions for every segment of the travel market, the companies can provide packaged deals, which not only increases the transactional value per existing customer, but also entices new customers to visit their respective sites.

Both companies are intent on becoming the leading travel websites in the region. Webjet describes itself as "Australia and New Zealand's largest online travel agency" while Wotif describes itself as "Australasia's leading travel website".

But there can only be one leader, and in order to become that leader the two companies must steal market share from the other - and this is easier said than done. You see, even though each company has built a large customer base, it seems that users are unwilling to switch. In the consumers' eyes, Webjet is for flights while Wotif is for hotels, and both are struggling to shake this perception.

Webjet management has been frustrated by the lack of impact their hotel division has had on Wotif's domestic market share while Wotif is booking only 18 per cent of the airfares that Webjet does. The network effect has allowed Wotif and Webjet to grow into the companies they are today, but it is also proving to be a worthy barrier against each other's advances.

We believe one will ultimately emerge victorious, however, it will take time for a foothold to be gained.

While the stalemate continues, the companies are attempting expansions into Asia to offset their mature domestic earnings profiles. And this is where their strategies diverge.

Earlier this year, Webjet acquired Zuji, a complete online travel agency in Singapore and Hong Kong. The acquisition sidesteps the branding issue that Webjet is experiencing domestically. Zuji is perceived as a one-stop site to organise all travel arrangements rather than a singular booking service. Wotif, on the other hand, has expanded in accordance with its core competency, choosing to acquire accommodation sites rather than online travel agencies.

Webjet's strategy appears to be more successful, with Zuji expected to contribute to earnings next year. Conversely, Wotif has considerably underperformed overseas, with travel bookings into Asia declining in each of the past four years.

But while Webjet appears to have its nose ahead of Wotif at this stage, neither company reported meaningful earnings from packaged deals in their recent full-year results.

The natural outcome with any network economy is that one winner will eventually emerge. A positive feedback loop is created when users are attracted to a site, which in turn attracts other users, until the site becomes the preferred choice in the marketplace. Both Webjet and Wotif know the exponential benefits that arise from this phenomenon, and they will be conscious of each other's position in the race to become the region's leading travel website.

With such complementary services and a shared long-term vision, you would think the companies could merge rather than compete for market share, but it seems that both are intent on a long, drawn-out battle.