As summer began, the online travel business was facing some serious turbulence. Frugal U.S. consumers were grounded by rising airfares. A Greek debt crisis and a plunging euro threatened to limit travel in Europe, a major growth market for online travel. Further complicating worldwide travel was political unrest in Thailand, a popular destination, and volcanic ash that shut down European air travel.
In the last two months, however, the outlook has brightened considerably, as demonstrated by the performance of major Web travel stocks. Shares of Priceline.com (PCLN) are up 69.6 percent since the end of June and now trade at their highest point since May 2000.Orbitz Worldwide (OWW) shares have rebounded 31 percent and Expedia (EXPE) shares have jumped 25 percent since the end of June.
Great deals are driving consumers to continue booking flights and hotel rooms, Orbitz President and Chief Executive Barney Harford told Businessweek.com in an interview.
At hotels, "occupancy is low, and that's great for consumers," Harford says. "If you're still working and you feel reasonably good about the economic outlook, being able to get a four-star hotel for a three-star price can be attractive."
In the quarter ended June 30, Orbitz's bookings rose 17 percent from a year earlier, while net revenue rose 3 percent. Expedia's bookings rose 19 percent last quarter, and revenue jumped 8 percent.
The most impressive results came from Priceline, where gross bookings rose 43.3 percent from a year earlier and revenues climbed 27 percent. That despite the fact that a high proportion of Priceline's business comes from Europe, where its Booking.com site is popular.
"The widespread concern that a sovereign debt crisis in the euro zone would lead to falloff in travel demand has not yet materialized, and business results to-date are encouraging," Priceline Chief Executive Jeffery Boyd told analysts on Aug. 3.
In June, Priceline was named the top stock in the Bloomberg Businessweek 50, a list of the companies in the Standard & Poor's 500-stock index with the best shareholder returns of the past five years.
The effects of the Greek debt crisis, volcanic ash, and Thai unrest have been less than feared, says Sandeep Aggarwal, an analyst at Caris & Co. in San Francisco. The "macroeconomic concern is still there," Aggarwal says, but "there has been a gradual improvement in the overall travel industry."
U.S. consumers are still "restrained," ThinkEquity analyst Aaron Kessler says, but that can be good for online travel sites that allow consumers to compare various travel offerings. "People are still looking for deals," Kessler says. "When you're looking for deals, you're going to do more comparison shopping."
According to Internet marketing research company ComScore (SCOR), online spending on travel in the U.S. was up 9 percent year-over-year in July, a slight improvement on the 8 percent growth in June and 7 percent in May. Air travel spending in July was up 12 percent while hotel spending rose 5 percent.
Airlines have reduced capacity, a trend that has allowed them to raise prices. Average domestic airfares rose 4.7 percent in the first quarter of 2010 from a year earlier, the most recent data available from the Bureau of Transportation Statistics. Expedia Chief Executive Dara Khosrowshahi told analysts July 29 that airfares rose "sharply" last quarter.
Hotel chains don't have that option, as development projects initiated in previous years are just now being opened and add to the supply of rooms.
Still, low hotel rates are bringing in guests, says Jan Freitag, vice-president of global development at STR Global, a firm that tracks the hotel industry. "We're definitely seeing demand pick up," he says. In the U.S. in July, more hotel rooms were sold than ever, with occupancy up 7 percent, according to STR. However, because so many new rooms have been built, hotels haven't translated those extra guests into significantly higher prices. The average room rate rose 1.3 percent last month.
The mismatch between higher airfares and stagnant hotel rates is clearest for destinations like Mexico, the Caribbean, and Hawaii, according to Orbitz's Harford. On hotels, "there's some really good deals," he says. "The challenge is that airfares are high." So, it's more expensive to get to those destinations and take advantage of cheap lodging.
New Online Markets
For investors, the online travel business isn't just a way to profit from a budding economic recovery. It's also a way to benefit from the expansion of Internet access into many new parts of the world.
Longtime players like Expedia may be "mature" in the U.S. market, Aggarwal says. But, he adds, "these companies have significant growth opportunities in non-U.S. regions."
Orbitz's Harford says the opportunities are greatest in Asia, Latin America, and the Middle East.
"These markets are just coming online," he says.
That growth means the online travel business is likely to keep attracting new competitors. In July, Google Inc. (GOOG) agreed to buy flight-data provider ITA Software for $700 million.
Kessler, the ThinkEquity analyst, says Google could shift traffic in unpredictable ways—for example, away from the large travel sites and toward individual airline and hotel sites.
"Google wields considerable market power, whether it's in the travel business or many, many other industries," Expedia's Khosrowshahi told analysts July 29. "And so their actions can have very significant consequences."
Whatever its consequences, Google's move can be seen as a recognition of the Web's growing role in tourism all over the world. "People are increasingly more dependent on online travel websites," Aggarwal says.