Online Travel: Expedia, Priceline and Orbitz

The three key online travel companies are going through a rough patch following their recent quarterly earnings reports.

Expedia Inc (EXPE), the world’s largest online travel agency, announced its Q2 earnings at the end of July. Revenues of $795 million beat the market’s expectations of $791 million. For the quarter, revenues grew 15% over the year and 16% over the quarter. EPS of $0.40 was $0.01 higher than the Street’s expectations. EPS grew a substantial 67% sequentially and 14% over the year.

Bookings increased 10% in North America and 30% in Europe. Overall, bookings rose 16% to $5.93 billion.

Earlier in the year, Expedia had said the macro environment was a “mixed bag.” During the current quarter’s results, they revised the statement to describe the environment as “fairly challenging.”

Challenges are not limited to the U.S.; the company is now experiencing softness even in Continental European markets, where until recently, it experienced excellent growth. Airlines proposed domestic capacity reduction to improve yield and mitigate losses from high fuel prices is not going to be favorable for the online travel segment.

Expedia’s diversified service offerings have helped them face market challenges. Advertising and international revenues contributed over 40% of revenues. And despite the market conditions, Expedia is going full throttle on acquisitions. During the quarter, the company acquired Venere, an Italian online travel agency. Venere works on an agency model for hotels and has relationships with about 30,000 hotels worldwide. The transaction will add over 10,000 hotels in Europe, the Middle East and Africa to Expedia’s current offering.

Expedia also seems to have done away with the thought of spinning off TripAdvisor.com. The company acquired TripAdvisor’s prime competitor VirtualTourist.com and OneTime, an online travel comparison site during the quarter. The acquisition will add to TripAdvisor’s user base. Expedia is continuing with a strategy of market expansion with entry into Japan and China and improvements to their user interface and search engine optimization. This week the company also announced a partnership with the Dubai-based Jumeirah Group to market the group’s global luxury hotel chain through Expedia.com and Hotel.com.

After the results announcement, the stock rose $0.03 to $19.06. It is currently trading at $18.61 after recovering from the 52-week low of $16.85 it fell to earlier last month based on speculations about macro issues.

Priceline.com (PCLN) continued to beat the market’s expectations on revenues and earnings.

With quarterly revenues of $514 million, the company exceeded the Street’s outlook of $495 million and recorded sequential growth of 28% and annual growth of 44%. Its international business recorded 80% growth in gross bookings, primarily due to the addition of markets through Agoda and the favorable exchange rate.

The company's domestic market grew 59% annually compared to 51% in Q1. Priceline’s Bookings.com continued to grow and had more than 52,000 hotels listed in over 65 countries.

EPS of $1.55 was substantially higher than the market’s expectations of $1.40 and it recorded impressive sequential growth of over 103% and annual growth of 40%.

Priceline.com gave Q3 revenue outlook of 30%-35% growth with EPS of $2.00-$2.15. For the year, the company is estimating gross bookings of $7.55-$7.9 billion with EPS of $5.50-$5.85.

Being aware of and challenged by the market’s weakness, the company is investing in new distribution channels and expanding the geographic reach of Booking.com. The site has a good market presence in Southern Europe and Italy, a region Expedia is targeting with the acquisition of Venere.

Priceline did express concern about the reduction of domestic airline capacity and its impact on the car rental business. As capacities decrease, Priceline expects car rental agencies to reduce their fleets of cars as well.

The stock had been trading well above the $104 levels, which it had reached at the peak of the dot-com era. In May of this year, it recorded a new high of $144.34. After the announcement of the results, the stock fell 19% to $95 before rising to $117.20. Currently, it is trading at $97.17. I stand by my view – Priceline is strong fundamentally.

Orbitz Worldwide (OWW) announced its Q2 results on Wednesday. With revenues of $231 million, it recorded a 5% sequential and annual increase. Revenues were substantially lower than analysts’ expectations of $267 million.

During the quarter, the company reported a loss of $0.06 per share compared with analysts’ expectations of $0.03.

Bookings grew 4% to $3 billion. International operations grew 41% and contributed $476 million to bookings revenue. Domestic bookings, however, were down 1% to $2.6 billion. The domestic market conditions had an impact on their air business as well: revenue was down 13% to $90 million. The Non-Air segment reported a 12% increase over the year to $141 million.

The domestic air business contributed 21% of overall revenue. Orbitz's management understands the need to diversify out of this business given the troubled economic conditions in the U.S. Furthermore, the Non-Air business is also better for its margins.

Like its competitors Expedia and Priceline, Orbitz is targeting new markets:

• The company has teamed up with Microsoft (MSFT) as the online travel provider for MSN.com’s travel portals in the United States, and the U.K.
• The company is expanding into Russia through the Russian-language web site for HotelClub.com.
• The company has also partnered with the Indian hotel group the Taj Hotel Resorts and Palaces for its 80 luxury hotels worldwide.

Orbitz is on track with its migration to a new global platform and continued to come up with innovative pricing techniques for last-minute hotel deals through RatesToGo.com, and Price Assurance. Price Assurance is a functionality that assures customers that.

if the price drops for a plane ticket booked on Orbitz.com and another customer subsequently books the same airline ticket on Orbitz.com for less, Orbitz will automatically send travelers a cash refund for the difference.

Despite these measures, the stock fell 2.6 percent to $5.60 during Wednesday's afternoon trading session. It had reached a new 52-week low of $4.14 in July.

Disclosure: None

Comments

[jay fredric...:]

Nice to see that these companies are holding up fairly well in this slow economic period. As the economy gets tougher, the online search and booking model appears to be reaching into higher demo areas than in the past. The few local travel agencies in most markets are getting hammered by these big online sites. Economies of scale really at work here.

Jay

i-5south.com

2008 Aug 08 09:47 AM

[russelltehri:]

International online travel agencies are definitely experiencing a hard time now to cope up high fuel prices and the entrance of suppliers to the net.

As a domestic online agency, I've also experienced this first hand.

2008 Aug 09 09:47 AM