Travel Sites Get Boost from Four-Star Hotels at Three-Star Prices

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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.

Steverman is a reporter in Bloomberg's Chicago bureau.

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