Why Does Anyone Use Webjet?
Why Does Anyone Use Webjet?
I like Australia’s listed internet businesses. Jobs (Seek), car sales (carsales.com), property (REA Group) and hotels (Wotif) are all markets that demonstrate extremely powerful network effects. The more people that visit the sites looking for jobs, cars, properties or hotels, the more sellers want to use the sites to sell jobs, cars, properties or hotels. The more sellers, the more use it is to the customers and hence more traffic. On and on we go until your website is worth more than a $1bn.
The economics of these businesses are mouth-watering. Minimal capital requirements; which means all the profits can be paid out as dividends. But high barriers to entry thanks to the network effects outlined above. What’s more, in many cases (jobs being a notable exception), the progression from offline purchasing to online purchasing is far from complete.
The problem is that these attributes are plainly obvious to everyone and the shares come with an appropriate price tag. The big four are all sporting price to earnings multiples of 30 or more.
There is, however, one exception. Back in November and December I spent a few days working on Webjet, a listed online travel agent. I’ve followed the business for a number of years and it displays all the economics of its listed online counterparts: prodigious cashflow; minimal capital requirements and rapid growth.
But Webjet wasn’t trading on thirty-something times earnings. The asking price was 16 times and the company had already announced that turnover in October was up 50% on the prior year. It wasn’t too difficult to look 12 months down the track and see a rapidly growing business that you’d bought for 11 or 12 times 2010 earnings.
But I didn’t buy the stock. And it wasn’t because of stock exchange announcements headed ‘Webjet growth rockets!’ (no, the exclamation mark isn’t mine). It’s because I don’t understand why anyone uses the website.
Webjet is an aggregator of flights. You can go to the site, search for a flight from Brisbane to Melbourne next week, for example, and Webjet will show you all the fares from Australia’s four domestic airlines. Then you can choose which flights you want and book them through Webjet for a $30 fee (including the $10 ‘price guarantee’ fee). Or, you can choose your flights and book them through the airlines’ own sites for free.
It takes me less than a minute to search for the same fare I’ve found on Webjet on an airline site, so an economically rational person would need to value their time at $1,800 per hour to justify the convenience of booking through Webjet (if your time is worth that much, you should be paying someone to book your flights). Or perhaps people don’t realise they are being charged the extra $30. The fees aren't immediately obvious, I must admit, but when I select two $100 flights and get charged $230, I’m soon asking questions.
I was that exasperated about my lack of understanding that I rang Webjet and asked them directly about the customer proposition. ‘People use us’, they told me, ‘because we offer a valuable service’. Really? They pay you $30 out of the goodness of their hearts? ‘Oh’, he went on, ‘and we offer a 24/7 help desk’.
Can someone please put me out of my misery? The stock price is up 30% since I was looking at it but you only need two more years of growth like this for it to still be exceptionally cheap. Please, please, please, why do people use Webjet?
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Steve
I recently booked an overseas trip for 3 people and was hit with a $49.90 processing fee out of a total charge of $6,544.36. Paid for with credit card for travel in Jul 2010.Like the insurance companies they have the use of my money for 6 months? I found the site very useful after learning one or two tricks like changing the intenary slighty or even the dates. It gave multiple flight options for the dates chosen.Took me longer than a minute though. You probably need to be computer literate to get the best from the site but then most of the younger generation are. Yes I could have gone online direct to the airline and booked but in this instance two different airlines were involved.By the time the first booking was finalised the second airline option might not have been available and I would have screwed up the whole booking process by being an el cheapo for $30. I was able to try all sorts of itenary options much more than I would have with a travel agent.Maybe it's Flight Centre for those price concious and don't want the hassle or responsibility of booking online.Webjet is not good value for cheap internal flight when the fees become a larger percentage of the booking cost.
Eddie
I'm also looking forward to hearing from Webjet customers. I've never used it myself. I have used aggregators before for international flights (e.g. Opodo, Orbitz, Kayak), but I always check the website of the airline to see if it is cheaper to book direct. I only book through these websites when the price is the same or when they have itineraries with multiple carriers from different alliances.
I agree 100%. I use Webjet then book direct with the airline. I have no idea except that I think people must get caught out by the fee. Im sure if you interviewed 100 people who used the site they would tell you they think they are getting the same price as booking direct with the airline. It just shows you how you can still make money like this these days. Alot of people cant be bothered shopping around. I think foreign exchange conversion at airports, train stations etc is another interesting one. People think if they see a sign NO commission no fee they are getting a great deal. If only someone told them the amount they are paying due to the poor conversion rate.
I think Webjet has an excellent site and I use it regularly. However, I'm yet to book a flight through them. If I'm travelling domestic I always go directly to the airlines website. For international travel I always use Flight Centre.
I don't think they hang onto the money like Flight Centre does - Webjet simply takes their fee and passes the cash on.
Interesting though. It makes a lot more sense to pay a $30 fee on a $3,000 transaction than it does a $300 one. It also makes a lot more sense to use Webjet for international - when there are 30 airlines involved instead of four, you start getting some network effects. My understanding was that it wasn't particularly useful for international fares but perhaps that's just an impression I formed two years ago that needs to be changed. My notes say 60% of the transactions are domestic but that was from a while ago and I'm not sure where I got it from.
Another interesting point they made to me is that people tend to book their flights first, then worry about car hire and accomodation. As the first point of contact, they believe they're well placed to grab a portion of the other transactions as well. They're doing well on car hire but struggling on accomodation. Merger or JV with Wotif perhaps? Would give Wotif the international exposure they are looking for and Webjet the accomodation functionality they need.
This is just weird. I saw an add in the paper for Webjet the other day and thought ot myself "are these guys still around, who uses them".
The only answer I can come up with Steve is more of a reflection on society; the same people that watch A Current Affair for soap sud tests are the same people that Webjet make the most of their money on. I'm confronted on a weekly basis by people that choose a glitzy marketing campaign over their own research. Credit cards, health insurance (don't get me started in iSelect), home loans, groceries, etc.
The questions is, does banking on long term laziness and lack of research of the general public make a long term business model?
Like some of the other respondents, I use Webjet for research and then book via the airline site. I have occasionally found that there is a small discrepancy between prices on international flights. I don't like paying the credit card surcharge so usually pay by direct debit.
The credit card surcharge of 2% is a ripoff. I am sure that the airlines have been able to negotiate much better rates than 2%. I would think that it would be something less than 1%. The difference is profit.
Behaviour psychology tells us that the answer is yes. It can underpin a long-term business model, because of the consistency principle or what I call "branding". Webject's value offering is to become this one-stop online booking shop for people to self-organise trips that may involve multiple airlines/hiring companies. In a sense, it's the network effect Steve refers to. My main concern about it are the low barriers to business entry - simply google "online air travel booking".
I view the success of the above 4 websites (e.g. Seek) as being a consequence of effective advertising and insightful management, so rather than looking at the website model per se, I suggest studying the operators themselves - are they simply sitting content or do they innovating and planning their next move years ahead?
I daresay better evidence can be found by interviewing management in all 5 companies and identifying similar strengths, than by second-guessing the evolution of the online business model. To me, the second is like anticipating how the masses will behave and we all know how "well" that works in investing.
I believe Webjet's $30 fee is fixed regardless of the number of passengers. In contrast, the credit card surcharge that airlines levy depends on the number of passengers and sector type (eg. domestic, overseas). So it's conceivable that Webjet is more economic for a large party wishing to travel overseas. Other than that explanation, possibly users don't realise they are being charged a fee (more likely for a high priced fare)? Separately, I heard that Expedia and Zuju have discontinued booking fees. Also, Qantas and Virgin are now offering an alternative to credit card payments (B-pay and a link to online banking), depending on the proximity to departure date. These two developments could pressure Webjet.
I found WebJet not so good when it comes to finding best international fares to Europe. Their search engine will often only list the most obvious airlines (Qantas, KLM or British Airways) while ignoring the more cheaper options like Korean Air or Swiss Air. For this reasons if you use it to find a cheaper fare you will usually miss the best deals! And then you get charged for the priviledge of booking a more expensive fare.
I use wotif and carsales regularly. For domestic travel I just browse each carriers website & for international I use flight centre. I consider myself fairly savvy with internet things and find no use for it in Australia (it does not value add much at all, especially for $30).
I use Webjet as a reference, but book directly with the airline. In addition Webjet does not offer flights from all airlines that are available to the desired destination. For international flights I bypass Australian travel companies and use reliable US or UK travel aggregator websites. The UK and USA have larger populations so there is generally more competition amongst airlines resulting in lower prices. Then, at times, there is the benefit of the high AUD. I booked 3 flights to the US last year using the website Kayak and the total saving was over $2000 AUD vs the lowest priced vendor from Australia. Australia is an island, but the market place is global. For a nearly generic service like economy air travel, I don't think Webjet have a sustainable competative advantage when you can "import" a cheaper airfare. The other "Big Four" are all primarily offering services/products based in Australia with few or no international competitors.
I've travelled lots recently and for muti-leg trips it was easier either to ask a travel agent to do it or book directly with the airlines. The online agencies can't provide full international, e.g. vietnam to cambodia or as I recall UK to Australia return. That's really frustrating when I want to buy a fare for a relative to Australia.
I confess to being a fan of flight centre as an investor, consumer and respect for their growth culture butI think it's fair to say FLT is miles ahead. I almost get the impression that FLT are biding their time focussing on the main game, ready to pounce and compete with Webjet when if they have to.
I'm presently in the process of reading the book "Nudge" by Sunstein and Thaler (as an aside I don't recommend the book at all, It's one of the least useful books I've read in recent times), and they make an interesting distinction between "econs" (i.e., homo economicus) who they liken to Spock and "humans" who they liken to Homer Simpson.
One of the paradoxes of being a good investor is that we are naturally more likely to have "econ" characteristics and so find "human" dysfunctions difficult to fathom, however, most businesses have "humans" dominating their customer base.
Understanding "human" thinking is one of the biggest boons that an "econ" fund manager can have.
As an example, I have a very good friend, Adam, who works as a tree surgeon. He is very well paid (around $90kpa), but makes less than I do and has to work much much much harder to boot. However, when it comes to money, it is interesting that if I drop a 5c piece, I will stop to pick it up, whereas Adam once couldn't be bothered to even attempt to run after a $50 note that flew out of his hand on a windy day, as he had recently been paid and so thought of himself as having "plenty of money" at the time.
Such behaviour has no explanation in economic theory and yet it is extremely commonplace amoungst the post baby-boom generations of affluent countries.
In this context, I would say that the biggest threat to Webjet's "$30 for a disproportionately small time benefit" business model would be a shift in the prevailing zeitgeist in the aforementioned generations.
What could trigger such a shift? An evaporation in the cosy illusion of wealth that people have embedded in their real-estate "investments" ("speculations?") is one of the most obvious triggers; it is impossible to say what could cause it though. However, what is certain is that providers of obviously high-cost, low benefit goods & services like Webjet will be the first to see their revenues collapse if/when such a zeitgeist shift occurs.
Webjet does raise issues about rationality. But so does the claim that "it makes a lot more sense to pay a $30 fee on a $3,000 transaction than pay $30 on a $300 transaction." $30=$30!
Occasionally Webjet shows available seats on flights that are not available on the airline website. I don't know why--does it bulk buy seats?
But you're right. Webjet is a strange phenomenon.
It cleary has a few things going for it.
Even if you don't book over the site it seems many of you have used it to view available flights. Therefore it should be attractive to advertisers and hence generate advertising revenue.
As already said above, many people are too lazy and just want the job done so don't care about a booking fee.
Another thing going for them is everyone seems to know the name so the brand awareness is there.
Great insight Shum, that distinction between 'econs' and 'humans' seems a very useful way to think. Thanks for the post.
Interesting stuff Shum. In my observation, gen Y's seem to take great pride in buying things on-line, even if the savings are only marginal, and the convenience is dubious. They seem to take a dim view of 'dinosaurs' that purchase things the old fashionwed way - because we aren't getting the optimum price.
Typical purchases here are travel and electronic gadgets. Infact, as an owner of FLT and HVN stock, this is something that has, at times, caused me some concern. A 'switched on gen Y' seems to think that if you can't get it on-line, then perhaps you might look at JB - but shock horror should you look at HVN (but I digress).
What I find ineteresting is that this phenomeneom seems to be contrary to the spendthrift nature (that you quite rightly point out) of post baby boom generations.
An alternative view is that it is the era of the specialist - airlines could opt out of taking direct bookings - outsourcing - possibly the expertize of the specialist will diminish the activity of the generalist travel agent.
I work for a small company of about 30 employees nationally. We all travel domestically a lot. The flights are booked in house "to save money" but there is no effective oversight or strategy for travel management. The person booking the flights told me "she just loves Webjet 'cause it’s easy and all there". She is not accountable for the $30 fee and has no idea or care that it is being charged (I will now remedy this and have her use Webjet for research only and book direct). It seems that Webjet have convinced the user that they can show all options and the $30 fee is hidden well. I have never personally looked at Webjet nor did I know about the $30 fee but now I do. They have just lost our companies domestic flight bookings which would be about 3 - 5 per week.
As a previous comment mentioned $30=$30 but often travel management in many organization has no policy or strategic focus because we are focused on selling widgets. Travel management is a chore and a pain so tends to get overlooked. Banks are another rip off as is insurance along with office stationary supplies, add them all up and one could go broke without noticing.
I think it's simply that the fee is a bit "buried" (i.e. not overt) and that customers are either not aware or don't particularly care (e.g. Peter's receptionist example, above).
Like everyone else on this blog (it seems), I use their site for research and then book direct. Perhaps it's simply that not all people are financially-savvy and switched on to saving money wherever possible. Perhaps they see the TV ads (or was it radio?) and that's enough to lure them in?
Why does anyone buy from Webjet? Why does anyone buy grocery items from 7/11? Foot traffic – it is a numbers game. Webjet appears the internet equivalent of a really well located bricks and mortar business like a 7/11 in a prime location.
People who need items 7/11 sell walk past every day but occasionally a small percentage go in and buy i.e. you get caught out needing the item, parking, only need one item can’t be bothered with a supermarket etc so you pay over the odds. So a very small percentage of people who look at Webjet’s site end up buying from Webjet e.g. price guarantee and the other price goes off making the $30 fee cheap, some are lazy (Peter's comment?), some don't know better, some are in a hurry or maybe they are from overseas and don't know the airlines. What do they need 1 in a 1000 people who visit to buy, less even? Either way if you create enough foot traffic, which Webjet clearly do (because it is free), you will pick up enough customers for which price isn’t the issue. The obvious difference with Webjet and someone like 7/11 is you don't have to pay the premium rent to get that foot traffic so more can be spent on advertising.
Now this all works until a better free offering is created and everyone finds out about it, and assuming it isn’t Webjet this time (because the skill sets to do this type of web design, I.T etc are forever becoming increasing available) all the traffic leaves. So this is Webjet’s serious problem...some one will provide a better free service at some stage and they will lose their location. I guess it is the downside to free distribution. When comparing Webjet to Kayak (and it is a second derivative aggravator) for example Webjet is already behind in capability and cost to the customer, so the threat is already out there. No wonder Flight Centre think their model is different and don’t chase this space.
As for the comments about the other sites i.e. Seek etc and the network effect I would be cautious. First if a person wasn't a buyer about this time last year then they will never be a buyer...10X depressed earnings for Seek? But more importantly I am not convinced any premium price is justified simply because of a possible network effect – this is far from fully proven in this country and it could be a myth here. The effects of near costless distribution have not been around long enough to be tested.
Seek for example is continuing to take market share from print at great rates because the economics are so bleeding obviously superior and there is still plenty of market share to be had. But Seek looks good because the print alternative looks so bad i.e. offering benefits and price.
But it is not enough that the internet will end up with the greatest majority of classified advertising because the economics or print publications will become irrelevant at some stage. Iternet companies will go head to head and it will be a race to the bottom in margins. It is likely the economics of the online classified market i.e. profit margins, will resemble the cost of operations at some stage in the future with print no longer there as the main competitor providing excess revenue for Seek. The online industry will have more volumes but at lower prices and higher costs and Seek won't be hiding behind big margins. If anything these are the glory periods of online classified margins…,add Classifieds to the Auto and Airline industry. I don’t want the risk of holding fools gold.
Always enjoy your thoughts Justin, and agree with 'foot traffick' comments.
Don't you think that the same dynamics that result in a 'winner takes all' outcome in printed media will also play out in on-line classifieds? Ie, if you're looking to advertise why bother going anywhere but Seek, given that that's where all prospective applicants are looking? Although, I do see higher risk in the on-line medium than in the printed medium. After all, it's much easier to peruse multiple websites than to buy many newspapers. Hence, the internet alternative probably results in business (even for the few winners) with relatively flimsy moats.
Thanks Mars.
Yea I do believe it is most likely that the same dynamics will play out with online as it has print but that doesn't mean it will to be hugely profitable for the ultimate winner as it has in the past.
The historical reasons for the high classified rates i.e. decades of newspaper consolidation (or natural selection) coupled with genuine cost barriers to entry don't and won't exist with online. But at the moment online still benefits from the comparison. As you mentioned the moat for online is low but worse its low nature will attract potential competitors time after time. I mean why is there always someone so keen to be the 3rd airline in Australia, don’t they follow history.
With print out of the way there will always be a potential competitor who will see the profits and make a play because the cost won't be prohibitive to break in - especially as it would be setting a newspaper. And good sites go viral. This is the key.
The new player will offer Seek's paying customers massive incentives and that will in turn put pressure on Seek as the balance of power will shift more towards the customer then it is now. Will the new player lose money - probably. At the moment Seek gets away with it because there is an advantage in being the head of the pack vs. print. Seeks currently looks a relatively cheap offering compared to print but with print gone Seek will look relatively expensive to a new low cost offering one day...ultimately no one will make much money as this will cap prices and keep continued pressure on the industry. Once print is finished off the online industry will restricted to compete on price mainly (becasue of the threat) while print competed on differentiation.
Sure the biggest player will win most market share and be the winner who takes all but the constant threat of competition will keep profits modest. I think that will be a global player who just rolls out their platform here and gets the benefits of global scale.
Even if I am wrong ultimately I don’t like the odds today.
The key to online classifieds in inventory. Buyers follow inventory; sellers follow buyers to who they supply inventory and then Steve says "On and on we go until your website is worth more than a $1bn."
But this only works well while you're number one, which is why we see the two and three players carrying only a fraction of the inventory. If number one acquires 100 sellers, 20 might also list with number two, and 5 with number three and value for both buyers and sellers tails of very quickly. In general, there aren't too many sellers who bypass number one, and those that do might just be listing with number one anyway per the carsales.com strategy of holding 1 & 2 (or 3 or 4) in each vertical).
There are many, many new players entering each market each year, each offering all sorts of incentives. However the best incentive is a result, and unlike the underlying technology, these can't be manufactured by some kid in a garage.
For commercial sellers, where up to 90% of leads are generated by the number one player, not listing just isn't an option. In effect, the incumbents are your viral hit. The logistics of shifting sufficient inventory to create another are simply breath taking - the time to do this was 10 years ago.
The next wave will have to be just as disruptive as the incumbents were 10-13 years ago, and this will surely be predicated by the emergence of the next disruptive platform. Until then I'll happily remain on the gravy train.
Webjet,I have just booked with them once more, you pay $35# if you book one seat or 20 seats value for money
across airlines is clearer
Harvey Norman shops are pretty boring, whereas JB's are not. Young people flock to JB because they generally are cheaper and have a less stuffy atmosphere.
Perhaps, but if it were that obvious, why would HVN management not be taking action? Can anyone seriously contemplate Gerry Harvey sitting on his hands while HVN's competetive advantage evaporates?
Steve
This may help as a point for further investigation. I like you have used webjet to get a price on domestic airfares then go to the airline to make the booking. However my wife is off to Switzerland later this year and she had a quote from Flight centre of $2,600 return. I thought this seemed expensive, went to webjet and got a price of $2,022 for a flight with Singapore Airlines which was only 3 hours longer and with two stops instead of one. So I then went to Singapore Airlines with all the flight numbers, times and dates and the cost was to be about $2,650 (can't recall exact price). I tried again, same price, I went back to webjet, still $2,022. I immediately thought maybe taxes were not included with webjet but they were, that was a complete price. So maybe and I don't know, there is discounted fares offered to them. I don't know why the airlines would do this though, but this is clearly some pricing difference going on. By the way even if the prices were the same I could not have got the made the booking with Singapore Airlines' website with any ease like I could have with Webjet and maybe people go through them for that reason.
The booking fee is not the issue. The average person does not hunt around and analyse various offers to save a few bucks.
I just read that despite Zuji and Expedia removing their booking fees recently, Webjet continues to gain market share.
This is put down to brand strength and shrewd marketing.
I would've thought I'd be the last person to forfeit the $10, but I almost did three weeks ago. Why?
Because I had to book fares for both myself and son using different airlines for each leg of the journey to get the cheapest flights. It took 15-20 mins. to book the flights, and my time was probably more valuable spent doing other things.
webjet... searched the flight my brother is on to see how much it was... philippines on air nuigini... the same date, time everything... my brother went direct to air nuigini travel agency and it cost him $1,040 return... but webjet says it costs $2,050 return... feel sorry for the guys that paid the $2,050
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