Just fifteen years ago, booking a flight and hotel was often an expensive and laborious process. Finding a good deal on a hotel meant calling several major hotel chains and asking for a rate quote over the telephone. And booking a flight likely involved calling multiple airlines to find the most direct flights, cheapest travel dates, and best fare deals. For international travel, language barriers made booking a relatively simple trip even more difficult.

Alternatively, travelers could hire a specialized travel agent to do all the legwork for them. Often travel agents could find better deals and more appropriate accommodations, but they also charged a significant commission -- as much as 1% to 5% of the cost of the trip itself. These high costs and inefficiencies were par for the course in the travel industry, where little had changed in the five decades leading up to the 1990s.

Enter the Internet. Nowadays, consumers can click on two or three web sites and find literally thousands of hotel, car rental, and flight combinations within minutes. Smaller independent hotels that were previously unknown to most consumers now get as much exposure as the big chains on a variety of travel websites. And booking commissions are normally less than $10 per trip -- a tiny fraction of the commissions that prevailed over a decade ago.

Growing Market Share
Convenient and cost-effective, it should come as little surprise that the online travel industry has been on a tear in recent years. By 2009, roughly one-third of all U.S. travel revenues will be handled via the Internet. As you can see in the chart, Internet travel will become increasingly important over the next few years.

Overseas Opportunities
But the U.S. is just the proverbial drop in the bucket. Globally, online travel sales are growing even faster.

In Europe, consumers typically have at least four weeks of vacation time annually compared to just one or two weeks for the average American; that spells multiple trips booked every year for Europeans. And online commerce and Internet penetration in Europe stills lags the U.S. It should come as no surprise then that online travel growth rates remain far higher overseas.

And then there's Asia. Fifteen years ago, few consumers in India and China could afford to travel outside their home nations. But thanks to a rising middle-class consumer, Asians are increasingly traveling both domestically and abroad. In fact, according to the China Daily newspaper, international travel has grown more than 50-fold in the past two decades.

Growth opportunities also abound in India. Up until the mid-1990s, air travel in India was dominated by state-owned airlines; ticket prices were prohibitively high. But after liberalization a decade ago, increased competition has resulted in lower fares and faster growth. As a result, air travel abroad has been growing at a nearly +50% clip in India in recent years.

Fat Profit Margins
Rapid growth in the online travel business has helped fuel impressive sales gains for a handful of online travel companies. But that's only half the story -- online travel websites are also far more profitable than traditional offline travel agency operations. The reason is simple: scalability. Specifically, when a traditional travel agency wishes to expand, it has to hire more agents. Meanwhile, expanding abroad requires setting up a local office with agents speaking the local language, and that type of expansion can get expensive.

But in the online world, once a website is designed and set up, it can handle a tremendous number of users. Growth in sales does not necessarily require commensurate growth in the labor force -- a handful of website designers and technicians can maintain the site regardless of the number of customers served. This scalability is behind the fat profit margins enjoyed by online travel firms.

Market Leaders Remain in Charge
A handful of U.S.-based online travel firms were first movers in the online travel industry. These companies not only dominate the U.S. market, but they've also leveraged their size and existing infrastructure to expand internationally. As a result, these American players also dominate many fast-growing foreign markets.

While AOL and Yahoo, among others, are now entering the online travel space, they're at a significant disadvantage. Specifically, websites like Travelocity, Expedia and Orbitz already have an established brand name and customer base in online travel -- consumers tend to be loyal to established brands both on and offline. Furthermore, existing websites have deals with literally tens of thousands of independent hotels and airlines all over the world, allowing them to offer wider selection and choice for consumers. It takes time to build up that sort of network.

In any case, investors looking for a high-growth industry need to look no further than online travel.

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