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The fallout from the terrorist attacks in New York and Washington keeps spreading. On the first day of equities
trading after the Sept. 11 disasters, investors dumped the stocks of online travel sites. With heavy volume on
Sept. 17, shares in sector bellwethers Expedia and Travelocity slid 38% and 45%, respectively. PriceLine, which
booked actual profits last quarter, lost 39%. Over a six-hour span, investors stripped tens of billions of dollars in
equity from the entire sector.
That's quite a change from recent months, when the online travel business was the toast of e-commerce. But in the new reality facing the sector in the wake of the World Trade Center disaster, online travel purveyors have been humbled. Now, they face a long road back as they woo shell-shocked travelers and rely on an airline industry under intense financial pressure. They also face uncertainty over the fate of e-tickets, which the U.S. government suspended on Sept. 13.
DEEP POCKETS. Then there's the new consensus among economists that the U.S. is in a full-blown recession and faces one of the worst years for corporate travel in recent memory, thanks to persistent problems in technology and manufacturing. "Online travel sites right now are running at one-third of normal volume. Some companies cannot be profitable at that level," says Legg Mason analyst Thomas Underwood.
Does that mean the sector is headed for a wave of bankruptcies? Maybe not. Most of the big travel Web sites have some key advantages that could help them weather a hostile economic outlook. According to Underwood, all the major Net players are sitting on cash hordes of $100 million or more. Most have no debt. Several have big parent companies that can outlast a long financial storm. Expedia is backed by Microsoft, and Travelocity was spawned by Sabre, the company that provides booking software to most travel agents in the U.S.
Furthermore, the industry's fundamentals remain sound. Travel sites have extremely low costs, tied mainly to operating computer networks and paying salaries for customer-service agents. "Unlike the airlines, we do not have fixed-cost assets. We remain a virtual business in that way," says Suzi LeVine, Expedia's director of product marketing. That's a far cry from maintaining a fleet of jets or rental cars.
OFFERING VALUE. These interactive sites also managed to grow smartly last year, despite a stagnant air-travel market. According to online-travel tracker PhoCusWright, the percentage of total airline passenger revenues booked online reached 10% before the terrorist attacks, well up from 2% in 1998.
This, claim analysts, proves that these sites offer value to customers. "People look at them as an efficient way to purchase travel. And they have the customer-service side that the suppliers don't have," explains Bailey Dalton, a senior analyst at C.E. Unterberg Towbin.
Still, declines in travel resulting from the terrorist attacks will surely hamper most online travel companies' performance for the foreseeable future. In an analyst note dated Sept. 17, Underwood estimated that, within 30 days, traffic and bookings would bounce back to 50% to 75% of levels prior to the terrorist attacks.
Of course, that's enough of a decline to seriously damage the long-term profitability of the travel sites, which mostly have thin margins and business plans reliant on high volumes. That could mean significant cutbacks in marketing expenses or even layoffs of customer-service agents. Travelocity has more than 1,000, many of whom have been sitting idle during the past week.
NEW LURES. Other online travel companies could be in for a rough ride for the rest of the year if flying continues to scare customers. Travelocity and Expedia have managed to diversify into more lucrative bookings of cruises, hotel rooms, and rental cars on top of their airline mainstay. Not so for CheapTickets.com or LowestFare.com, both of which rely on discount airfares.
Priceline, too, could suffer if airlines, as expected, drop prices to lure customers back. "With Priceline, it's hidden pricings, and everyone is going to look for a great deal. But if you can get an open fare for $100, you're not going to Priceline to get it for $25," says Dalton.
Perhaps the biggest question mark right now hangs over Orbitz. A Net travel venture launched by airline giants United, Northwest, Continental, American, and Delta in early June, the upstart made a splash with a massive marketing campaign that insiders say cost tens of millions.
BECOMING AN ORPHAN? Created as the carriers' vehicle for battling Expedia and Travelocity, Orbitz did make quick inroads with big gross bookings. Now, with the major airlines fearing bankruptcy and facing immense losses, Orbitz might end up as an orphan. The typical Orbitz shareholder, explains PhoCusWright CEO Philip Wolf, "couldn't care less about the original reason it was brought into being."
Surely, Orbitz isn't about to simply fold its cards and go away. And while some of the deals that occurred in the past few months might go back for renegotiation -- Barry Diller might decide he wants to pay less than $1.5 billion for his 70% stake in Expedia, for example -- no one imagines that the handful of major players will go under.
In the past, travel has rebounded quickly after crises such as the Persian Gulf War. That could be happening already. As of Sept. 17, Expedia had returned to 50% of previous booking levels. Industry sources further claim that the hijackings have actually augmented the service's standing with customers by underscoring their value. According to Expedia's LeVine, 500,000 customers visited the company's special travel-disruption services sites, designed to disseminate information and help stranded travelers complete their journeys.
The big test could come in the next few weeks as analysts get a glimpse of early bookings for the coming Thanksgiving and Christmas seasons. Should travelers decide they need to see family, it could be a nice gift for the online travel industry.
By Alex Salkever in New York Edited by Douglas Harbrecht
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