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JANUARY 14, 2005
By Scott H. Kessler Online Travel: All Over the Map [Page 2 of 2]
GLOBAL REACH. In November, 2004, Cendant acquired ebookers, a leading European online travel agency. In December, 2004, Cendant announced the proposed acquisition of two more significant British-based Internet travel businesses, whose purchase we expect to be completed by April, 2005, pending necessary approvals. In October, 2004, Sabre consolidated ownership of its Travelocity Europe joint venture. The month before, priceline.com acquired Active Hotels, a European provider of online hotel reservations. Interestingly, as competition has grown more intense, travel suppliers have provided less inventory to online travel agencies. A few years ago, when times were tough and people weren't traveling as much, hotel chains needed help. That's where the Internet travel companies came in. They bought inventory in bulk and used their marketing muscle to sell rooms. This merchant model was great for online travel agencies. However, as travel demand improved, hotel companies have taken greater control of their inventories and directed would-be purchasers to their own Web sites, which are now quite good and increasingly focused on customer loyalty, in our opinion. Would-be travelers often search third-party travel Web sites to obtain information and comparison shop, but make their actual purchases via supplier sites. Travel-search services have largely sprung from this behavior, enabling users to engage in searches of agency and supplier offerings and go directly to the Web sites of their choice, often of the suppliers. DULLER EDGE? With better-known brands and offers of loyalty benefits, we believe the travel suppliers pose a substantial threat to the online travel agencies. Remember, you can't always get so-called frequent-flier miles when booking on Expedia, Orbitz, or Travelocity. Moreover, we expect suppliers to promote their Web sites more aggressively through mass marketing, targeted advertising, and personalized incentives. We also expect travel-search services to gain momentum and capture material traffic and transactions from the Internet agencies. Based largely on this challenging outlook, we have a hold recommendation on Sabre. We previously carried a sell opinion on the stock, but upgraded the shares on Jan. 7, following a 12% decline since early December, 2004. We believe Sabre faces substantial competition and will deliver growth in earnings that will disappoint some. We see Sabre's current cash cow, its global distribution system (GDS), as likely to experience pricing pressure and margin erosion. Longer term, we believe companies such as G2 and ITA could render the GDS business, which accounted for 71% of Sabre's third-quarter adjusted total revenues, largely irrelevant. EARNINGS DISAPPOINTMENT. Travelocity has had a pretty good 2004, in our view. Adjusted revenues for the first nine months of the year rose 30%. A new brand image and advertising campaign helped deliver market-share gains, a revised and extended marketing arrangement with AOL resulted in cost savings, and the acquisitions of its Travelocity Europe joint-venture and SynXis, a provider of reservation systems for hotels and casinos, made strategic sense to us. However, we believe 2005 will be a different story. Comparisons will be tougher. The acquisitions will likely consume resources and management's attention. In December, 2004, Sabre said it expected 2005 earnings per share to increase only 5%, below our prior double-digit forecast, owing in large part to new business initiatives. In addition, the important exclusivity agreement with Yahoo is set to expire in December, 2005. Sabre does have a healthy balance sheet consisting of $474 in net cash and investments, as of September, 2004. We believe it will deploy at least some of this capital to continue making acquisitions to bolster its competitive positioning and spur growth. ROCKY ROADS. In particular, we think the purchase of priceline.com would make sense for Sabre. One of the reasons for our buy recommendation on priceline is because of the outfit's acquisition potential. Nonetheless, we are generally skeptical of growth strategies predicated on acquisitions. We believe the world of online travel is growing increasingly challenging for the major agencies and their parents. While this bodes well for consumers and perhaps for suppliers, we foresee trouble ahead, particularly for Sabre, the parent of Travelocity. For many in this sector, 2005 will be a year to forget -- even before it really starts.
 Kessler is Internet Software & Services and Internet Retail Equity Analyst at Standard & Poor's
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