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Online Travel: Priceline, Expedia, Orbitz

Posted on Monday, Nov 17th 2008

The online travel industry’s woes just don’t seem to be coming to an end, not a surprise as Japan follows the European Union and Hong Kong into an official recession. The World Travel Market’s Global Trends Report 2008 notes that global capacity for winter airline schedules is down and hotel occupancy rates continue to fall in developed economies. While most online travel stocks remain strong fundamentally, current valuations are far below the levels that some of these stocks had reached in the past couple of years.

Priceline.com’s (PCLN) stock price performance is one such disappointment. The stock had been trading at over $140 levels earlier this year but last month plunged to an 18-month low of $45.15. It has recovered since, but is still trading at only $53.80 with a market cap of $2.17 billion.

Priceline’s quarterly results still exceeded the market’s expectations. (The company has exceeded the Street’s profit views for eight straight quarters.) Revenues of $562 million grew by 35% over the year and 9% over the quarter. The Street was looking for revenues of $545 million. It shows how solid the company’s fundamentals are.

EPS for the quarter stood at $2.39, significantly higher than the market’s expectations of $2.10. EPS recorded growth of 51% over the year and 54% over the quarter.

Priceline’s international business grew by 59% over the year while the domestic business grew by 33%. International revenues were significantly affected by the devaluation of both the euro and the pound sterling in the recent quarter. Gross ADR was down 1% for domestic hotel bookings and 3.5% for international hotel bookings. Meanwhile, bookings.com continued to build inventory and clocked 57,000 hotels in 70 countries. The performance of Priceline’s Asian acquisition, Agoda, was also impressive, adding $32 million in bookings in the quarter.

The company gave an outlook of bookings growth of 7.5%-17.5% with EPS of $1.00-$1.10.

They were still wary of the recession and do not expect significant improvement in the coming quarters. However, the significant drop in the oil prices did add a bit of a cheer in time for the holidays as Priceline expects low-cost European carrier Ryan Air to see increased fare sale activity, intended to increase demand.

It will be some time before Priceline returns to the levels of its dot-com era peak, but the stock still remains one of my favorite consumer Internet stocks.

Expedia Inc (EXPE), the world’s largest online travel content company, is not faring any better in one of the toughest markets in years. Q3 revenues of $833 million beat the Street’s expectations of $826 million, and recorded 10% annual and 5% sequential growth. EPS for the quarter stood at $0.39, compared with the market’s expectations of $0.40. Earnings were flat over the year and recorded a drop of a cent over the last quarter.

Expedia’s overall gross bookings increased 7 % for the quarter, but air revenue fell 7% primarily on account of reduction in volumes. Unlike Priceline, Expedia is not hopeful of improving air revenue in the coming quarters due to capacity contractions.

In view of the “fairly challenging” environment, the company is now focusing on a five-point strategy:

First, improving marketing efficiency through harvesting their search engine optimization investments. In Europe, they will use the targeted email marketing model, which has been a success in the US, and will align their brand span with demand trends.

Second, improving conversion rates through differentiated offerings such as reducing hotel fees, eliminating change cancel penalties and promotions such as the gas card. Expedia will also continue to drive their global loyalty programs and optimize their sites to improve conversion rates. They have already seen some benefits in the conversion on hotels.com, their premium content hotel site.

Third, improving supply. They expect the previous quarter’s acquisition of hotel booking site Venere to help in improving inventory in Europe.

Fourth, increasing no-transaction revenue through improving monetization by expanding ad revenue streams on transaction sites, as well as increasing traveler adoption of high margin products such as insurance waivers and co-brand credit cards.

Finally, reducing costs. Here the focus will be on fulfillment costs, merchant fees and lower cost per transaction in call centers.

Expedia clearly has an ambitious strategy in place to handle the recession; how successful its execution will be remains to be seen.

The stock is currently trading at $7.80 with a market cap of $2.24 billion, after having recovered marginally from an all-time low of $7.07 earlier this month.

Orbitz Worldwide’s (OWW) Q3 results were in some ways more disappointing than peers’: revenues were a significant surprise to the downside and revenue growth rates were low. Revenue of $240 million represented 9% growth over the year and 4% growth over the quarter. The Street was looking for revenues of $225 million.

EPS for the quarter stood at $0.18 against the Street’s expectations of $0.14 and recorded growth of 157% growth over the quarter, a drop of 21% over the year.

International revenue grew by 15% and domestic bookings grew by 7% to $187 million.

Earlier this year, Orbtiz launched a few initiatives which seem to have borne good results in the current quarter. Their Price Assurance initiative, where if another Orbitz customer books the same itinerary for less the company refunds the higher-paying customer the difference, has helped create more effective offline advertising and driven more customers to their site.

Orbitz also won MSN’s business during the quarter and now provides travel services on MSN’s travel sites in the US and the UK. Since Orbitz’s highest revenue contribution comes from air revenue, they were focusing on increasing non-air and other net revenue. Non-air and other net revenue reached 64%, up from 61% in the previous quarter.

They also added link-based advertising in their booking passes with the goal of monetizing browsing traffic. To manage costs, Orbtiz is planning to lay off about 10% of their employees in the next six weeks.

The stock had reached an all-time low of $2.51 earlier this month and has marginally recovered to $3.00 with a market cap of $249.80 million.

I am going to take a contrarian view for a moment, before I conclude. The large scale layoffs in industries such as Finance and Technology may also give these otherwise busy professionals to travel and see the world, a fantasy that they may have nurtured. With the EURO falling against the dollar, European vacations become somewhat more affordable than they have been in the last few years. Some of the Asian currencies have also undergone similar decline, which makes places like India attractive to visit. While I don’t particularly like business travel, I am otherwise a passionate traveler, and would encourage people who have suddenly become time-rich and job-poor to take the opportunity to go see the world.

Perhaps the companies we just discussed may want to co-opt that message into their ad campaigns!

This segment is a part in the series : Online Travel

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