Outlook bright for online agencies; Travelocity, Expedia see black

Despite the general sense of economic malaise dominating the business pages, the imminence of the much-ballyhooed launch of Orbitz and Northwest and KLM’s zero commission policy, there was good news from the online travel agencies.
Both Travelocity.com and Expedia announced that they had achieved profitability before special items ahead of schedule. Travelocity also reported positive cash flow for the quarter ended March 31, 2001; Expedia’s preliminary release of its fiscal third quarter highlights also showed positive cash flow for the period.
Travelocity’s gross bookings grew 65% over the first quarter of 2000 and 20% over the previous quarter to $833.6 million. Revenues of $72.9 million were up 104% year over year and 11% over the quarter. Travelocity had a record conversion rate of 8.9%, up from 4.7% a year earlier and 8.1% from the preceding quarter. Average unique monthly bookers were up 67% from the prior year.
Reaping rewards of a recent deal with Hotel Reservations Network, Travelocity also announced that the number of hotel nights booked in the quarter was 1.1 million, a 50% increase over the fourth quarter. Even the bad news wasn’t as bad as expected. Travelocity`s advertising revenues were down 10% from the previous quarter - but that was less than the 18% decline it originally projected. Advertising revenue also reflected the traditional first-quarter drop in advertising that follows the fourth-quarter holiday period.
Non-air revenues were 7% less than the preceding quarter (an important figure given the need to move away from the air-only business) but up 72% over a year earlier. Travelocity’s CFO Ramesh Punwani said that one reason for the quarterly decline in non-air revenue was the fact that some receipts, such as car rental, for the first quarter had not been received until April and would be recorded in the second quarter. Perhaps most importantly, high-margin cruise and vacation revenues were up 32% over the preceding quarter, and were three times greater than a year earlier.
Merchant model revenues made up almost 10% of Travelocity’s transaction revenue and are still growing. The company’s net profit was $618,000, or three cents per share. And, it projects modest growth for the rest of the year, with net profit, excluding special items, that will range from 17 cents to 21 cents a share in 2001.
Part of Travelocity’s profitability plan is taking control of marketing spend. Though sales and marketing expense will still be about half of total transaction revenue, it will be expensed in line with revenue growth, and will decline from 63.5% of revenue in 2000. Total revenues are forecast to increase about 60% to $310-330 million from $201 million in 2000.
Expedia’s preliminary results for its fiscal third quarter ended March 31 showed a 67% year-over-year increase in gross bookings to $670 million. Revenues of $110 million were up 38% from the prior quarter and 88% over the same quarter last year. Both companies report revenues a bit differently - Expedia includes the total value of products sold (merchant revenue) - that is, the price of the airplane ticket, hotel room, rental car, etc., in its revenues; Travelocity includes only commissions, even on its net fares. Expedia expects that its earnings before non-cash items will be $4 million for the quarter. Its full earnings report will be out April 30.
Both companies have introduced new products that take them far beyond their old reliance on airline commissions. Travelocity now has more than 30 carriers participating in net fare or opaque (a la priceline.com and Hotwire) agreements, its new Travelocity Vacations program, and a Preferred Traveler club. Expedia has long publicized its merchant model and has also added to its vacation package and cruise product. Both have introduced business programs and new or improved existing shopping and/or pricing tools and both appear to be benefiting from consumers turning to the Internet.
These results come at a time when there is an increasing perception, particularly among the media, that dot-com agencies are facing a tough time because of the economy, Orbitz‘s pending launch and the fact that airline Web sites now sell nearly 60% of all airline tickets sold online. But those perceptions are inaccurate.
For one, with just 11% of all travel sold online, there is plenty of room for growth. And, while Orbitz promises to be a formidable competitor, Travelocity and Expedia are as well and have five years of experience not just in selling travel online and establishing their brands but in competing with each other. Both are aggressive competitors with great intellectual and financial resources. When it comes to finances, Travelocity and Expedia may actually have an advantage over Orbitz. They both have deep-pocketed backers committed to the online space and therefore have no need to raise additional financing. Orbitz, on the other hand, conceived in the heady days of late 1999 and early 2000, when investors were eager to back dot-coms, finds itself trying to raise money in a much colder climate.
What about the dawn of the zero-commission world? That day has yet to come. No other carrier has followed Northwest - whose agreement with Expedia proves that it has retrenched. The details of the agreement are unknown, but Expedia made it very clear when Northwest and KLM announced their zero commission policy, that it would not sell tickets for free. The very fact that it continues to sell Northwest tickets is a strong indicator that Expedia is being compensated for the sale of Northwest tickets - if not by actual commission, then by selling negotiated rates, in which Expedia can build in its own profit margins, or some variation of that. And, although Travelocity is now charging a $10 service fee for any Northwest tickets sold, it is continuing to negotiate with Northwest as well.
Both Expedia and Travelocity already have many net fare agreements with carriers and it is an indicator of how the airlines are moving not toward zero commissions but instead toward a model in which they pay or negotiate net fares with various channels that produce sales for them. This is a very fluid model; a carrier may pay commission or incentives just on a certain route and just for a certain period of time. Or, it may be an across-the-board agreement. But, it reflects how effective the online agencies can be for airlines trying to keep their planes full. That is especially true in light of a softening economy and the fact that five of the nation`s six largest carriers reported losses in the first quarter because of a decline in corporate travel and higher labor and fuel costs.
The airlines do very well selling tickets on their own sites. But these customers tend to be frequent travelers or loyalty club members. The sites are a valuable way for the airlines to strengthen their relationships with their existing customers. But the online agencies offer airlines the chance to attract new business or help fill seats in markets where the airlines need help doing so. The fact that both Travelocity and Expedia are moving into the opaque fares arena shows how airlines increasingly value the way these sites can help the airlines sell distressed inventory without undermining their published fares.
Despite the economic downturn, the online sites are predicting continued profitability, although they are being conservative in their estimates. The fact is, when times are tight, anecdotal evidence indicates that Americans don’t travel less (for leisure travel), they simply travel less expensively. According to The PhoCusWright Travel E-commerce Survey, nearly half of the nation’s 48 million online consumers - those who have flown a commercial flight in the last year and visited the Web in the last month - consider the Internet the place to go for the best deals. And among those online consumers who actually buy their travel online, nearly 60% believe the online agencies offer the best price. That means the online agencies are marketplaces where consumers will shop - and, as a result, where suppliers want to be.