Priceline's Heavy Baggage


By Amy Tsao William Shatner is back, two years after the actor of Star Trek fame first appeared on national TV as spokesman for Priceline.com (PCLN). This time, the Shatner media campaign isn't a blitz. He's doing radio ads in Britain, where Priceline has a small amount of business. And the focus of the offbeat ads is on travel -- not the myriad of products Priceline used to sell.

The campaign reflects Priceline's strategic shift in the last year and a half to aggressively cut costs and return to its travel roots. But investors remain skeptical -- and perhaps rightly so.

Priceline's stock has fallen 20% since September 11, while online-travel stocks as a group, including Expedia (EXPE) and Hotel.com (ROOM), have jumped 40%. Travel Web sites' performance on Wall Street reflects the notion that the sector will continue to do well as leisure and business travel rebounds. But Priceline, now around $4 after trading as high as $130 in the spring of 1999, sends a different message. Even though the Internet pioneer is expected to have its second profitable year in 2002, it could continue to struggle as its rivals strengthen.

TOO MUCH TROUBLE? Competition for online-travel shoppers is fiercer than before the September terrorist attacks and shows no sign of letting up. Services -- and prices, too -- are improving for consumers as a result. That could make Priceline's name-your-own-price system an inconvenience most travelers won't find worth dealing with, except for a small group of hard-core bargain hunters who are willing to give up control over brand and convenience for cut-rate prices. "Ultimately, the company has an uphill battle," says Scott Kessler, who covers online travel for Standard & Poor's.

The Norwalk (Conn.) outfit is also at a disadvantage as long as airlines are cutting fares, which has been the case more often than not since early 2001 when the economy started to soften. Priceline gets the majority of its revenues by keeping the difference between a ticket's wholesale price and what customers pay for it. "The site helps people get rid of distressed inventory in a cost-effective way that provides value to the consumer and supplier," says Henry Harteveldt, senior analyst with Forrester Research. But when airlines' published fares are low, the discount Priceline can provide is comparable to what consumers can find elsewhere.

What was a good deal a few years back when ticket prices were sky-high seems hardly worth the sacrifices that Priceline's reverse-auction system requires. Meantime, No. 1 player Expedia, which relies less on the airline ticket business and more on revenue from hotel/flight package deals, has been able to show stronger profits.

SMALL CORNER. Low airfares are just part of Priceline's problem. It simply doesn't have the ease-of-use appeal of Expedia and Travelocity.com (TVLY), which have become more flexible and comprehensive in recent years. On average, Expedia has more than three times as many unique visitors a month as Priceline, according to Nielsen/NetRatings, which tracks Internet audiences. Though Priceline may have a place in the online-travel sector, analysts believe the market may be limited, even when airline ticket prices move higher.

Not so, says Priceline CEO Richard Braddock. During the most recent earnings call with analysts, Braddock said "airlines have to increase prices in order to get back to a financially respectable situation." And when they do, Priceline expects its business to improve.

But analysts who recommend Priceline's stock caution that it won't likely rise at the same rate as the rest of the sector. In April, Thomas Weisel Partners analyst Jake Fuller raised his rating to buy from hold, on expectations that higher airfares should eventually drive more travelers to Priceline's deals. But "long-term, I don't think Priceline can grow as fast as the others," he says.

WELL-HEELED BACKERS. Jared Blank, analyst at Jupiter Media Metrix, agrees. "Priceline fills a niche. It's not for everybody," he says. According to a recent Jupiter survey, about 5% of respondents said they purchased their last trip from an "opaque" site such as Priceline, which doesn't reveal the airline brand until a bid is accepted. That compares to about 20% buying from an online-travel agency like Expedia, which discloses the airline before the buyer makes a selection.

Meanwhile, privately held Hotwire, another auction-based travel site, is dogging Priceline. And the pioneer's chief competitors are gaining share with the help of well-heeled backers. Media giant USA Networks (USAI) has a controlling stake in Expedia. Travel-booking company Sabre Holdings (TSG) owns Travelocity.com. Cheaptickets.com was bought last year by diversified-services concern Cendant (CD). And airlines, through sites like Orbitz.com and other efforts, are also becoming tough competitors, though the Justice Dept. has said it's investigating whether the carriers are fairly distributing their share of discount tickets to online-travel sites.

No one is predicting Priceline's demise. Over the first quarter, the company posted revenues of $261.9 million and earnings of $3.9 million, much improved from a loss of more than $13.7 million a year ago. Although sales declined 3% from a year ago, Priceline's cost of doing business fell significantly to $37.5 million in operating expenses, down 35% from last year. Priceline now employs just 350 employees vs. 630 in the late 1990s.

NEEDED FOCUS. After exiting businesses like groceries and gasoline in late 2000, Priceline gets 99% of revenues from travel-related products, though it's diversifying into areas less tied to airfares. Revenues from rental-car and hotel-room bookings are strengthening but still account for just a quarter of the total business, according to Thomas Weisel's Fuller. Priceline recently signed marketing deals with eBay and AOL, and is also offering vacation packages and cruises.

Clearly, the former Internet juggernaut is making valiant efforts to compete, and it gets credit for focusing on its travel business. Priceline managers "did a lot of things they needed to do fundamentally. They adjusted marketing efforts, improved the site, and are now more up-front about fees," says Forrester's Harteveldt. But that doesn't mean this stock is going to be a highflier any time soon, even if Priceline's quirky Shatner ads can score again with consumers. Tsao covers financial markets for BusinessWeek Online in New York


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