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Online Travel Leaders Under Threat - An Industry Primer (CD, EXPE, PCLN, TSG, TZOO)

Aug. 25, 2005 8:41 AM ETCD-OLD, BKNG, TZOO, TSG-OLD, EXPE
David Jackson profile picture
David Jackson

Citigroup analyst Mark Mahaney initiated coverage on Expedia (ticker: EXPE) with a Hold rating. His 17-page initiation of coverage report contained a particularly useful discussion of the evolution of the online travel industry and the resulting challenges to the current leaders. Here are the "Risk Factors" from the report that discuss the industry generally:


1. Material structural challenges to online travel agencies – We see at least four negative structural developments for online travel agencies: 1) Deteriorating terms from hotel suppliers, who have sought to regain marketshare from the agencies; 2) Declining revenue per air ticket as airlines and other suppliers have sought to reduce or eliminate distribution expenses; 3) Growing market share of low cost carriers, who have had limited reliance on agencies to date; and 4) Rising online ad rates, which have impacted all ecommerce companies.

On the deteriorating terms from hotel suppliers, this has translated into lower merchant hotel raw margins for Expedia, as well as for other online travel agencies. Especially as hotel occupancy rates have gradually rebounded post 9/11, hotel suppliers have increasingly gained leverage vis a vis the agencies and have become much more selective about the terms and conditions and inventory of rooms they have been willing to distribute via the agencies. In a high profile move, InterContinental stopped distributing rooms via Expedia. There is a cyclical element at play here, and a downturn in hotel demand will likely increase the agencies’ leverage with the suppliers. In essence Expedia could be a very interesting counter-cyclical investment, and a deceleration in hotel occupancy rates may be a positive catalyst at some point in the future.

Granted, Expedia’s merchant hotel business has a much greater dependence on independent hotels (80% of its merchant business) than on major chains (20%). But there has been a clear negative structural

This article was written by

David Jackson profile picture
I'm the founder and CEO of Seeking Alpha. Before Seeking Alpha, I worked as a technology research analyst for Morgan Stanley in New York. After I left, I wrote The ETF Investing Guide (which you can find by clicking on "Author's Picks" below), and some articles about individual stocks, and then started inviting other people to contribute to the website. Seeking Alpha is now the dominant crowdsourced platform for discussion of stocks and investing, and the only place with coverage of many mid and small cap stocks. I have a B.A from Oxford University and an MSc from The London School of Economics, and am married with five children.

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