Online Travel: Customers Are Coming, But In Search Of Deals

According to a recent study, overall travel demand is expected to fall 11% in the year. The biggest impact will likely be on corporate travel, where budgets are expected to be down 15%. While the current quarter’s trends might suggest that demand is bottoming out, there is no denying that businesses are still restricting travel.

Corporate travel, defined as travel governed under strict corporate policies, historically contributed 40% of the overall travel market. Its share is expected to fall to 35% in the year. Other business travel pertaining to smaller businesses, which contributed 12% of the overall travel market, is also expected to remain low. And as we saw in an earlier post, the videoconferencing market has grown 30% as businesses are opting for video conferencing over traveling for meetings. Gartner predicts that by 2012, video conferencing will replace 2.1 million airline seats per year, costing the travel industry $3.5 billion annually.

Even within leisure travel, consumer demand has chiefly been spurred on by companies’ offering low prices for both hotels and airlines. While travel volumes may have grown, the average revenue per customer has fallen for most travel service providers.

Priceline, (NASDAQ:PCLN) however, continued to outshine the market and revenues grew 18% to $603.7 million to beat the market’s expected revenue of $574.3 million. EPS of $2.02 also grew 30% over the year and exceeded the market’s expected $1.75.

Among key metrics, gross travel bookings grew 12.8% to $2.38 billion and global hotel bookings grew 14% despite negative foreign currency movement. On a constant currency basis, hotel bookings grew 32% over the year. Priceline also saw significant 44% growth in their worldwide hotel room night reservations during the quarter. Airline ticket sales grew 14% even in the face of fee cuts initiated by competitors. Booking.com now has a worldwide hotel count of more than 71,000 properties in over 70 countries.

Priceline’s impressive performance was bolstered by the heavy discounts offered by hotels and airlines for travel packages to summer vacation destinations. Priceline invested $150 million to offer distribution and advertising support for these efforts, which helped improve occupancy and load factors. They have become a chief destination for people hunting for a bargain and are eating into the market share of other providers. Their innovative pricing methods, such as the name-your-price promotion, continue to win them customers.

Priceline is looking to continue to invest in expanding their international hotel platform, integration initiatives and marketing to offer both consumers and suppliers the best travel value and an efficient distribution channel. They plan to grow their global footprint through the expansion of Agoda within Asia and Booking.com within Eastern Europe and North America.

The company expects their initiatives to translate to Q3 revenue growth of 19%–23% over the year to $561.6 million, with a projected EPS of $2.70 to $2.85. The market was expecting revenue growth of 9% with an EPS of $2.52.

The stock recently reached a 52-week high and is currently trading at $153.72 with a market capitalization of $6.40 billion.

Expedia (NASDAQ:EXPE) however, failed to register such impressive growth. Revenues for the quarter fell 3% over the year to $769.8 million, but managed to beat the market’s expectation of $730 million. EPS of $0.38 also exceeded the market’s expected $0.31. Net income, though, fell 57% over the year, driven by high foreign exchange losses.

Whereas Priceline registered bookings growth, Expedia’s gross bookings fell 5% over the year amid a 20% reduction in worldwide airfare revenue. Even though both revenues per room night and revenues per ticket fell sharply, by 19% and 29% respectively, Expedia was able to limit the impact of the decline due to growth in volumes. Worldwide hotel room nights grew 26% and worldwide air ticket volumes 13% over the year. Expedia eliminated consumer booking fees on air tickets earlier this year, which led to the significant fall in revenue per ticket.

Expedia is focusing on expanding hotels.com’s international services and recently partnered with eLong to launch a Mandarin-language version for Chinese travelers to provide them with access to over 100,000 of Expedia’s international hotels and over 7,000 domestic hotels in nearly 400 cities across China. Hotels.com also launched an Arabic-language site to cater to the growth in the Middle East. They partnered with MSN Japan to become Japan’s second-largest Internet portal of international hotel bookings.

Advertising and media revenue, including revenue from TripAdvisor, grew 5% for the second quarter and accounted for 10% of worldwide revenue. During the quarter, TripAdvisor was named the “Innovator of the Year” by The U.S. Travel Association. Worldwide revenue from other products and services fell 2% for the quarter.

Expedia is continuing to offer new solutions and recently launched a service to help travelers pick the best airline seats, based on user-generated reviews from real flyers. This will be the first time that user-generated airline content is available on an online travel booking site. Their recently launched “Annual Summer Sale” will give heavy discounts to customers and currently has 5,000 participating hotels worldwide, compared with 1,800 a year ago.

Their stock has been moving up and is trading at $22.62 with a market capitalization of $6.5 billion.

Orbitz (NASDAQ:OWW) also managed to beat the market’s expectations by making a surprising turnaround in the quarter to turn profitable.

Revenues, however, fell 19% to $188 million driven by the removal of air booking fees and a decline in average hotel room rates. Gross booking values for the quarter fell 12% with domestic bookings falling 9% and international bookings 27% over the year. The decline was primarily due to lower air fares and lower average hotel rates, which were partially offset by growth in the number of total transactions.

Airline revenues fell 24% over the year with a 28% reduction attributed to domestic revenues, driven by the removal of booking fees earlier this year. The company’s domestic air transactions grew 22% over the quarter.

Hotel net revenues of $47 million fell 33% over the year. Dynamic packaging revenues grew 9% over the year as consumers continued to recognize the value in booking travel products as part of a vacation package. Domestic dynamic packaging transaction grew 26% over the year.

Advertising and media revenues grew 11% to $14 million. Orbitz is looking at additional ways to monetize the traffic that their global websites attract.

As part of their search engine optimization initiative, they launched Trip.com, which is a search tool to help customers look for deals across multiple sites. They also launched a Total Price hotel search, which makes them the first and only major online travel company to show the various components of a hotel tariff during the initial search.

In continuing with the need to roll out attractive price models to consumers in order to get more traffic, they continued the “hotel fee cut” program by cutting booking fees on hotels around the world. They also completed the successful launch of their Hotel Price Assurance feature.

The stock has gained more than 100% since the most recent earnings release and is trading at $4.79 with a market capitalization of $400 million.

The present lean times are favorable for those players that can position themselves as a place for good bargains. Priceline, Orbitz’s CheapTickets.com and Expedia’s Hotwire seem to be doing so. But the fall in revenues on account of lower revenue per transaction needs to be offset by volume growth if these travel majors wish to grow. As of now, it is only Priceline that is showing any revenue growth. Their model seems to be eating into the market share of other players, its ability to adjust well to consumer demand elasticity being the primary factor.

This segment is a part in the series : Online Travel