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JANUARY 14, 2005
By Scott H. Kessler Online Travel: All Over the Map S&P sees consolidations, spin-offs, tighter supplies, and global expansions dominating the industry in 2005, creating a rough ride for many
It's mid-January, and I'm thinking about travel. That news probably isn't surprising, given that it has been mostly cold and dark outside since Thanksgiving. Alas, right now, I'm not thinking about taking an actual vacation -- although that sure sounds nice. Instead, I'm thinking about the business of travel, and online travel in particular. Also, I'm thinking that the online travel agencies and their owners are going to have a tough time in 2005, particularly Sabre Holdings (TSG: S&P Rating: Hold; share price: $20), which owns Travelocity. In our opinion at Standard & Poor's, 2004 was hardly a banner year for online travel companies and their shares. The three stocks we cover in the segment, IAC/InterActiveCorp (IACI: Hold; $25), priceline.com (PCLN: Buy; $24), and Sabre all fell significantly from their 2004 highs. They also underperformed both Internet and leisure-company stock indexes. On average, these three stocks rose only 5.7% in 2004, while the S&P 1500 Internet Retail Sub-Industry Index surged 80%, the Internet Software & Services Index advanced 59.6%, and the Hotels, Resorts & Cruiselines Index climbed 45.4%. Heck, even the S&P 500-stock index was up 9%. FEWER ROOMS. Moreover, in 2004 the online travel outfits often provided quarterly results and forward guidance below our forecasts. Management changes have been occurring regularly throughout the industry, and it has been difficult to keep track of them all. Intense, ever-mounting competition and reduced access to inventory remain notable concerns, in our view. At S&P we believe the most significant issue for Internet travel agencies is competition. There are a number of established segment players: Cheap Tickets, Expedia, Hotels.com, Hotwire.com, Orbitz, priceline.com, and Travelocity come to mind. We expect Orbitz to be a more formidable competitor following its November, 2004, acquisition by Cendant (CD: Hold; $22). In our opinion, Expedia and its sister businesses, Hotels.com and Hotwire, should be emboldened by their pending spin-off (under the Expedia moniker) from IAC. Pending necessary approvals, we expect that to happen around March, 2005. LATEST ARRIVALS. Not surprisingly, the travel suppliers -- airlines and hoteliers, for example -- are increasingly focused on the Internet as a channel for sales, marketing, and customer communications and service, continuing to invest heavily in their Web sites. Travel-search services such as those provided by FareChase, Kayak Software, Mobissimo, QIXO, and SideStep, which are often referred to as "metasearch" offerings, are becoming increasingly popular. Also, major Internet players are getting more involved in travel. FareChase was acquired by Yahoo (YHOO: Buy; $36) in July, 2004, and Kayak announced AOL as a minority investor in November, 2004. In addition, more traditional travel giants such as American Express (AXP: Hold; $53) are becoming increasingly active online. Emerging players such as G2 Switchworks and ITA Software are working on technologies that we believe will promote even greater competition. Clearly, as companies pursue what JupiterResearch predicts will be $62 billion in U.S. online travel booking revenues in 2005, the segment is pretty crowded. BOUGHT AND BEEFED-UP. However, despite significant anticipated market-share gains from off-line players, JupiterResearch forecasts only 10% average annual growth from 2005 to 2009. And we believe competition will have a negative impact on profit margins. In early 2004, a number of online travel agencies made pricey, multichannel marketing pushes featuring characters from William Shatner to the Roaming Gnome. We expect more of the same in 2005. There has been significant industry consolidation over the past 18 months. But even though Expedia, Hotels.com, Hotwire, and Orbitz have been acquired, all remain important and aggressive industry participants, in our opinion. Ironically, we believe these services have actually become more competitive following their acquisitions, as they now have the greater resources of parent companies to tap. Much of these resources are being deployed to expand internationally, and consolidation and competition are really heating up abroad.
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