Though Priceline (NASDAQ:PCLN) is one of the few names people think for online travel services along with competitors Expedia (NASDAQ;EXPE), Travelocity, and Orbitz (NASDAQ:OWW), air travel bookings make up less than 2% of our $479 Trefis price estimate of Priceline’s stock. The real gem here is hotel bookings which constitutes a dominant 91% of its value.
Priceline is the second largest online travel agency in the world after Expedia in terms of booking volumes. Through its online travel portals such as Priceline.com, booking.com, agoda.com, rentalcars.com, breezenet.com and lowestfares.com, Priceline provides consumers with travel services that include bookings for hotel stays, airline tickets, vacation packages, car rentals and cruises.
Priceline makes money by charging a percentage of the dollar value for bookings. Hence, the factors that drive this division are average airfares (value of bookings), Priceline’s commission (%) on air ticket bookings and the expected future air ticket bookings. Overall air booking activity and Priceline’s market share of air ticket bookings determine how much Priceline earns from this segment.
In addition, air tickets bookings’ low contribution to Priceline’s stock is predominantly due to the fact that commissions are declining for bookings in an increasingly competitive market place that dims the prospects for this business.
Some factors contributing to this decline are:
◦ Increasing competition from low cost air carriers as well as other online travel agencies is taking market share.
◦ Competitive pricing is lowering commissions and fees charged for online bookings, and Priceline earns a fixed percentage of airfares.
◦ Airfares on average have declined leading to lower earned margins on air travel bookings, though this has turned around some recently.
Nevertheless air tickets bookings draw traffic and account for over two-thirds of online bookings overall, which necessitates their presence at any online travel agency especially for those that offer packaged deals or discounts for group travel.
See our detailed analysis behind the $479 price estimate for Priceline’s stock.
Disclosure: No positions