The number of U.S. travelers hitting the road - and the air and sea - is on the rise, bringing profit-making momentum to travel stocks that will continue into 2011.
While the U.S. economic recovery is slowing down, travel has picked up since 2009's fourth quarter. Consumers are facing less debt and an increase in household net worth, and those who have weathered the worst of the storm have saved enough to treat themselves to a trip.
While 2009 was the year of the "staycation," travelers in 2010 have opted for more traditional vacations. AAA projected the number of Americans traveling over this Labor Day weekend will be up 9.9% from 2009.
"While media reports on the state of the U.S. economy are mixed, many Americans are still interested in taking one more trip as the summer travel season comes to a close," said Glen MacDonell, AAA Travel Services director.
The traveling won't stop after the summer season, either. According to a TripAdvisor survey, 86% of U.S. travelers are planning fall trips, up from 73% in the fall of 2009. Almost half of the survey participants planned to spend more on travel this fall than in 2009, and 33% intended to spend over $3,000.
Part of the driving force behind the online travel boost is that hotels are offering rare deals to increase visitors, and consumers are too tempted to pass them up. Hotel "occupancy is low, and that's great for consumers," Orbitz Chief Executive Officer Barney Harford told BusinessWeek. "If you're still working and you feel reasonably good about the economic outlook, being able to get a four-star hotel for a three-star price can be attractive."
Lowering prices has done the trick and encouraged a pick-up in U.S. hotel occupancy, which rose 6.2% in the second quarter and 7% in July, according to hotel industry research firm STR Global. Hotel rates have remained low, rising only 1.3% in July, but overall hotel spending increased 5% that month.
Air travel spending also rose in July, up 12% from the year before. Airfares keep climbing as airlines continue to reduce capacity. Average domestic fares rose 4.7% in the first quarter from a year earlier.
Knowing they are going to pay more for airfare sends consumers to the Internet to search for the most affordable airline/hotel combo, increasing the need for bargain hunting to make travelers feel as though they are getting the most for their money.
"People are still looking for deals," ThinkEquity analyst Aaron Kessler told BusinessWeek. "When you're looking for deals, you're going to do more comparison shopping."
Experts project growth will continue into next year as travel demand picks up and hotel and airfare prices rise. Travel company Carlson Wagonlit Travel North America this week released its forecasted 2011 rate information, anticipating price increases in most travel industries as overall business demand improves.
CWT predicts both international economy and business classes and domestic economy airline pricing will increase 3%-5%, boosted by reduced capacity and higher demand.
Hotel rates are expected to climb 6.4% - 7.4% in the United States, with even higher rates of 12% - 12.5% in the Northeast region.
Summer Spike in Online Discount Sites
Online travel sites have enjoyed a successful summer push from consumers' comparison shopping.
"[T]here has been gradual improvement in the overall travel industry," Sandeep Aggarwal, an analyst at Caris & Co. in San Francisco, told BusinessWeek. "People are increasingly more dependent on online travel websites." Online spending on U.S. travel rose 9% year-over-year in July, building on its 8% growth in June and 7% rise in May, according to marketing research company ComScore, Inc.
Bookings at Priceline.com Inc. (Nasdaq: PCLN) in the second quarter rose 43% from a year earlier. Bookings also increased 19% at Expedia, Inc. (Nasdaq: EXPE) and 17% through Orbitz Worldwide, Inc. (NYSE: OWW).
Priceline's stock rose sharply after it reported second quarter earnings at the beginning of the month, jumping 22% in one day. It beat estimates significantly, with revenue up 27% to $767.4 million compared to expectations of $733 million. Priceline shares are up 69.6% since the end of June and are trading at their highest point since May 2000. Guidance for next quarter was optimistic at $4.78 - $4.98 earnings per share - better than analysts' estimates of $4.15.
"We believe Priceline has competitive advantages that should allow it to gain share profitably in a large, underpenetrated (ouside the U.S.), and growing space (online travel)," said GARP Research analyst George Sakellaris. "Not only is it still rapidly expanding in Europe... but it also has an option on the nascent Asian travel market (Agoda) that could become a material contributor in a few years."
Priceline has more resources than competitors to grow and develop, with a market cap of $13.5 billion compared to Orbitz's $600 million. Priceline President and Chief Executive Officer Jeffery H. Boyd noted significant growth in global hotel reservations as a main contributor to the company's 2010 success.
Smaller competitor Orbitz's second quarter earnings almost doubled analysts' estimates with profits of $9.7 million, or nine cents a share. Its revenue rose 3% and its stock is up 31% since the end of June. Expedia, the largest of the Internet travel companies, has climbed 25% since the end of June. Second quarter results showed revenue was up 8% from the same quarter of 2009.
As competition among travel sites heats up, some competitors are trying new discount-related offerings to separate from the crowd. Travelzoo Inc. (Nasdaq: TZOO) Thursday gained 5.5% after announcing the launch of "Local Deals," an alert service that notifies subscribers of entertainment and travel deals within their cities.
Travelzoo beat second quarter earnings expectations with a profit of 20 cents per share - nine cents higher than predicted - but its stock had lost about 8% since the earnings release until its spike this week.
The growing success of online travel sites led investing website Tickerspy.com last week to announce it created the Dotcom Travel Stocks Index, which includes Priceline, Expedia, Orbitz, Travelzoo Inc., Ctrip.com International, Ltd. (NASDAQ:CTRP), eLong, Inc. (NASDAQ:LONG), and MakeMyTrip Ltd. (Nasdaq: MMYT).
Strong second quarter earnings reports and MakeMyTrip's successful IPO launch pushed the index up 14.9% in the past month and it has outperformed the Standard & Poor's 500 Index by 66.6% since January 2008.
Online travel sites also are poised to benefit from Internet expansion into growth markets like Asia, Latin America and the Middle East.
"These companies have significant growth opportunities in non-U.S. regions," said Aggarwal. "These markets are just coming online."