cnbcs232

Expedia, Travelocity Make the Cut


By Hal Plotkin
CNBC.com Silicon Valley Correspondent

May 25, 2001 03:30 PM

Despite earlier concerns, leading financial and industry analysts now say it is increasingly clear that online travel firms Expedia Inc. {EXPE} and Travelocity.com Inc. {TVLY} will be among the handful of Internet operations that will survive, and perhaps even thrive, after most other once-promising dot com players have been carried off the field.

“I certainly think the leading [online] agencies are going to survive,” says Heidi Kim, travel analyst at New York-based Jupiter Media Metrix, a research firm that tracks online businesses. “There’s room for both of them, but how much more room there is for other smaller players is questionable.”

Unlike most Internet firms, Expedia and Travelocity have both posted better than expected results in recent weeks. In early April, Travelocity posted its first quarterly profit, excluding one-time charges of $31 million, with earnings per share for its first quarter of fiscal 2001 coming in at 3 cents. Analysts had expected the company to post a loss of five cents a share.

Expedia matched that performance a few weeks later when the company also reported its first-ever profit, of nine cents a share for its third quarter of fiscal 2001, against analyst expectations of a five-cent loss.


Expedia 52-week stock performance

“What it means is that Travelocity and Expedia provide value to customers,” says Bailey Dalton, an analyst at C.E. Unterberg, Towbin, based in New York.

Dalton was one of the few analysts to recommend buying both stocks last year at a time when the dot com tumble had sent the online travel stocks into the tank.

Bailey says she remains upbeat about both stocks, although she’s slightly more positive on Travelocity at the moment.


Travelocity 52-week stock performance

The C.E Unterberg, Towbin analyst currently has a “buy” rating on Expedia, which implies a 15-20 percent higher 12-month price target, and a “strong buy” rating on Travelocity, which implies thirty-percent one-year upside potential, according to the stock rating guidelines used by her firm.

“It’s a small distinction between the two,” she says. “I think both stocks will be higher a year from now. A lot of people are skeptics [about dot com stocks]. But after a while, there’s going to be increased interest by shareholders in companies with a proven business model.”

There had been worries going into the most recent quarter that future profitably at the online travel firms might be threatened by a new airline-owned online travel web site called Orbitz.com, which is slated to formally commence operations in June. Some analysts have also recently noted that growing numbers of passengers are now booking online travel directly at airline web sites, rather than at online agency intermediaries. And finally, the two leading online travel stocks were also hurt earlier this year when Northwest Airlines Corp. {NWAC} announced it would stop paying commissions to online travel agencies.

Fears those issues would put downward pressure on earnings at the two leading online travel agencies, however, now appear to be receding.

“What’s really interesting is that airlines usually match each other when it comes to changing fares and commissions,” says Kim, of Jupiter MediaMetrix. “But none of them followed Northwest’s lead. So the Northwest move ended up creating a clear message that all the airlines are not ready to cut out the impact of agencies and what they sell online.”

Northwest has since backed-off on its threat somewhat and, in more recent weeks, has reached undisclosed terms with Expedia regarding a commission arrangement pertaining to the sale of its tickets online. Travelocity, meanwhile, has slapped a $10 surcharge on Northwest tickets and is reportedly still in discussions with the airline in hopes of coming to an agreement on the issue.

“Northwest did see a decline when Travelocity added the $10 surcharge,” says Dalton, of C. E. Unterberg, Towbin. “All it did was shift the market to Continental.” Dalton says she thinks common interests will lead Northwest and Travelocity to resolve the issue before long.

The bigger threat hanging over the two leading online travel firms, however, was expected to be the formal June rollout of competing travel site Orbitz.com, which is currently available online in a beta, or test, form.

Orbitz is owned by the nation’s biggest airlines — United {UAL}, Delta {DAL}, Northwest , Continental {CAL}, and American {AMR}. The company’s business plan encourages participating airlines to list the lowest fares they have available online, including at their own web sites, which could undercut the air travel prices found on the leading agency web sites.

Fears of strong competition from Orbitz, at least over the short-term, are also beginning to fade, however, now that analysts have had a chance to take an early look at the Orbitz web site, which many say is more complicated and difficult to use than competing agency web sites.

A recent request using Orbitz for flight information between San Francisco and Kauai, for example, yielded 158 different options. Similar requests made on Expedia and Travelocity yielded the same best fares and flights, but with far less confusion.

“Orbitz faces an uphill battle getting started five years after Expedia and Travelocity,” says Dalton. “They also have more hotel rooms and packaged deals available.”

What’s more, she adds, the online travel agencies have already demonstrated they can profitably diversity their offerings beyond low-margin flight ticket sales to higher-margin areas such as combination air-ground vacation deals, hotels, cruises, and rental cars.

“Travelocity is already one of the top ten [vendors] in the cruise market,” says Dalton. “They’d never make any money if all they did was sell air [tickets]. Air was the easiest thing to do first. But they are finding other ways to provide compelling value to customers.”

“Orbitz is not going to put Travelocity or Expedia out of business,” agrees Henry Harteveldt, senior analyst at Forrester Research, based in San Francisco. “Online travel is going to grow at a rate faster than travel in general. The online agencies might lose some customers to Orbitz, but they’ll never know it.”

An estimated 18.9 million households are expected to purchase travel online this year, up from 14.9 million last year, according to Forrester Research.

“Those additional four million households have not yet made a decision about where they will buy their tickets,” says Harteveldt. “There’s room in that ocean for both of them.”

Ironically, Harteveldt says Orbitz could hurt sales at the web sites of the airlines that own the service more than it dampens sales at the online agencies because of the low fares that are expected to be reserved for Orbitz users. That’s particularly important because recent data shows that more than half of online travelers are now booking air travel directly on airline web sites, rather than at online agencies.

“In some cases, Orbitz will have prices that are better than the airline’s own sites, and perhaps better customer service,” says Harteveld.

Longer-term, three to five years out, there are still some worries that as online travelers become more sophisticated even more of them will bypass the online agencies looking for better deals with the airlines themselves, or with ticket consolidators who buy distressed inventory. It’s also possible the airline sites will eventually do a better, more competitive job when it comes to offering a greater variety of package deals and other travel options.

But in the meantime, the experts say the growing flood of new customers to the online travel agency sites, coupled with the fact those sites sell digital goods which can be cost-efficiently delivered online, should keep the two leading online travel agencies – and their stocks — in the dot com sector’s ever-shrinking sweet spot for the foreseeable future.

CC BY 4.0
This work is licensed under a Creative Commons Attribution 4.0 International License.