Already a Bloomberg.com user?
Sign in with the same account.
A year ago, Travelocity.com Inc. (TVLY
) CEO Terrell B. Jones remembers feeling gloomy at big e-commerce conferences. Travelocity's stock had fallen to $15 from its peak of $46 in March, 2000, and few analysts were talking about online travel bookings. "Travel was not even on the radar screen. They would track e-commerce and leave travel out of it," he says. "We didn't get no respect."
He's no Rodney Dangerfield now. Online travel companies Travelocity.com, Expedia (EXPE
), and Hotel Reservations Network (ROOM
), are rare e-commerce birds, indeed: All have shown the first glimmerings of profitability. Even Prudential Securities analyst Mark J. Rowen, best known for vociferous sell ratings on Amazon.com, rates Expedia and Travelocity strong buys after they reported profits, before noncash items such as stock-option expenses and depreciation, in the March quarter. Expedia Inc. made money five quarters sooner than expected, while Travelocity's profits came one quarter sooner than predicted. Travelocity and Expedia are the market share leaders, with 35% and 25%, respectively, of gross online bookings in 2000. Now, Wall Street expects the black ink to spread this year to all five top sites. "Among the public companies, all are profitable or will be profitable by the end of the current quarter," says analyst Thomas S. Underwood of Legg Mason Inc.
That bright profit picture is helping shares of Travelocity and Expedia. Prices of both have doubled since March. And that's in spite of some worries they will be hurt by Orbitz.com, a rival site launching in June that's owned by five big U.S. airlines, including giants United (UAL
), American (AMR
), and Delta (DAL
Profits at Expedia and Travelocity are small for now but are expected to grow rapidly. According to researcher First Call Corp., Expedia is expected to report a $16.6 million profit before noncash items this calendar year but will see those earnings climb to $23.4 million in 2002. Travelocity will see this year's expected $3.7 million in profit before noncash items climb to $11.3 million next year, First Call says.
Some of the best news is that online travel leaders are turning the corner by attracting more customers, not by slashing costs. "We grew into profitability. We didn't shrink into it," boasts Richard N. Barton, CEO of Expedia. Expedia's revenue of $110 million was up 88% in the third quarter, ended Mar. 31.NO TRUCKS. How did travel companies beat the dot-com odds? For starters, they now capture 30 cents of every dollar U.S. consumers spend online, according to PhoCusWright, a Web travel consultancy in Sherman, Conn. Second, their operations are almost entirely online. Most air travel sold online uses e-tickets and electronic confirmations, so products need not be stored in warehouses or shipped. That lets the agencies dodge overhead now bedeviling e-tailers. "There are a bunch of businesses that don't make sense at all on the Internet. Travel is the quintessential one that does," says Mitchell J. Rubin, a money manager at New York-based Baron Capital Inc. who has about 10% of his $125 million fund in Internet travel companies.
Even a sluggish economy isn't likely to dampen the outlook for these Internet startups. Online travel could flourish in a tougher environment as penny-pinching travelers turn increasingly to the Web for deals. "When I travel, I always go through Internet sites," says Utah State University graduate student Catherine C. Woolley. She recently scored a $100-a-night hotel room with a view of New York's Central Park through Priceline.com Inc., the name-your-price travel site. Such tales have analysts projecting more growth: Online travel bookings are expected to hit $23 billion this year, up 59% over last year, according to PhoCusWright. That would represent only 10% of the travel market, leaving a vast opportunity for Internet players.
Analysts say even the arrival of Orbitz.com leaves plenty of room for the already-established online agencies to thrive. Orbitz' edge: It claims new technology will allow it to search 100,000 times as many options as other sites can search. "Orbitz will be the first travel Web site that searches 100% of the possibilities," says Orbitz CEO Jeffrey Katz. Orbitz also claims that cutting-edge technology will make it so efficient that it can pass on hundreds of millions of dollars of savings to the airlines.LEGAL CHALLENGE. Consumer advocates and rivals are fighting regulatory approval of Orbitz, contending the airlines could use the site to more easily signal pricing moves. And competitors fear Orbitz will have access to rates that they won't get. Orbitz denies it has exclusive fares. The Transportation Dept. has given Orbitz the go-ahead, but the Justice Dept. and two dozen states' attorneys general are still evaluating it.
Even if Orbitz gets past regulators, it probably won't keep the Travelocities of the world from prospering. Competition is not new: Consumers already make about 60% of U.S. online air bookings through Web sites owned by the major carriers. And not the least of Orbitz' handicaps may be its airline owners. "Can these venom-spitting competitors called airlines really collaborate in owning a retailer?" asks PhoCusWright President Philip Wolf. Legg Mason's Underwood doesn't see where Orbitz will find many cost advantages. "We will see if they can make money, but I'd be surprised if they do," he says.
Most of all, though, the online travel agents have established their brands in a market that still has a long way to grow. Baron Capital's Rubin says leading players like Travelocity and Expedia can expand their profits 5 to 10 times over the next five years even with more competition. "They can all coexist for a long time."
Online travel agencies increased their likelihood of profitability by making smart adjustments. Even before the Nasdaq crash, they were scrambling to make their sites easier to use and to turn more lookers into bookers. Expedia, for example, has invested more than $30 million in new technology that helps it search and price travel options. Expedia credits the changes with boosting the percentage of visitors who actually book travel to 5.7%, up from 3.8% a year ago. Travelocity's approach has been different. It launched a credit card--users earn points that can be redeemed for anything bought on the site--and started a travel club with special perks for paying members, such as hotel-room upgrades and travel discounts. It hopes to appeal to infrequent travelers who often don't benefit from other industry loyalty programs.
Online leaders also are slashing their dependence on miserly online airline commissions, capped at $10 a ticket. Northwest Airlines Corp. (NWAC
) recently cut that to zero, though no rivals followed. Travelocity and Expedia are selling more vacation packages, in which they buy air tickets, hotel rooms, and other travel services in bulk, then bundle them and mark them up for sale to consumers. Expedia has been able to reduce its commissions paid by airlines and hotels to 25% of revenues, down from 30% a year ago.
Travelocity and Expedia are even getting a boost from online advertising, which is fizzling on most Web sites. Travelocity will get 25% of this year's revenue from ad sales, from the likes of Holland America Cruises and Budget Rent a Car, Jones says, after a 221% jump in first-quarter ad revenue. Expedia gets about 10% of revenue from advertising and licensing, which generates gross margins topping 90%.
None of this guarantees that online travel won't crash someday like the rest of the dot-coms. But as the market takes off, these skies are starting to look downright friendly. By Wendy Zellner in Dallas