Expedia, Travelocity Compete to Impress the Street

1st May 2001

Travelocity and Expedia are such neck-and-neck competitors that they managed to declare profitability within a week of one another. When their CEOs presented at the PhoCusWright Investor Conference last week the room was packed, with analysts, investors and travel industry competitors.
Expedia’s Rich Barton was able to point to the fact that Expedia would be able to declare earnings of $.09 per share for its results for the first quarter of 2001 on Monday, April 30. Barton pointed out his blue-haired senior vice president of marketing and programming Erik Blachford, who made good on his promise to dye his hair Expedia blue if Expedia met some aggressive sales goals.
Then Barton got down to more serious business. He pointed out the error of gauging the success of an online travel company by its ability to sell airline tickets. The world travel and tourism market totals $3.7 trillion, air travel accounts for $270 billion of that. Lodging is far bigger—$350 billion. In addition, Barton said, it is unwired, globally distributed and fragmented and represents a “fantastic” opportunity for the Internet. He said that the vacation and cruise products Expedia has introduced over the past few months are becoming a large business and added that Expedia is one of the largest cruise sellers in the U.S.
Technology is what Barton believes is Expedia’s “critical differentiator.” That’s one reason it has been able to integrate published and unpublished rates on the same page, a functionality that increases its conversion rate and increases its ability to cross sell multiple products. Finally, that is what is enabling Expedia to “hit the turbo on CRM,” Barton said. As far as the potential of online travel goes, Barton believes “We have barely scratched the surface.”
Barton said that what Expedia considers its great conversion driver the fact that it is providing a “superior shopping experience that makes people confident and pushes them to hit the ‘buy’ button.” Increasingly, he said, Expedia is adding net fares (that is, negotiated rates on to which it can add its own profit margins) that consumers can’t find anywhere else.
He also saw great opportunity in cruise. He estimated that right now, it takes 12 to 15 phone calls to sell a cruise.
‘We believe it should be two or three,” he said, adding that the richness of the online experience makes this goal, which takes much of the costs out of selling a cruise, achievable.
He added that corporate travel accounts for about 25% of Expedia’s business; it is mostly employees of small and medium-sized businesses and corporate travelers going outside of policy. Travelocity’s Terrry Jones said that he, too, had purple hair (the shade of Blachford’s hair varied from blue to purple depending on the kind of light in the room)—but had left it at home that day. Then, he took the same tact that so many in the industry are today, one that managed to minimize yet still acknowledge the role of the Internet in Travelocity’s business plan.
“We have a great business that happens to be on the Internet,” he said. The company, which declared profitability a full quarter early, has a diversified revenue mix. It has moved into vacation packaging and now has packages to 800 destinations; it has more origin gateways, last minute packages and special deals. When it detects fare sales, it develops targeted, personalized e-mail messages to consumers about those sales. It uses point-of-sale advertising that is database driven with real time offers. Forty percent of its traffic comes from portals such as AOL, Yahoo and Excite.
The Travelocity World MasterCard is designed to generate rewards for infrequent travelers. Jones described Travelocity’s Best Fare Finder as an industry first and described its options function, which means a traveler might book a flight on a certain day but learn from Travelocity that by changing the departure date by a few days or driving to a more distant airport, the traveler can save as much as $100 or so on that ticket. Thirty percent of Travelocity’s sales are business related.
Jones said that Travelocity has been having great success with its vacation and cruise business, so much success that it has had to outsource about half of its cruise business. The company has “many more bookings” than it anticipated. It has 1,000 customer service agents who can help with those bookings.
It is also using voice recognition technology. Using this technology, an automated voice will recite a customer’s confirmation numbers and answers to similar frequently asked questions. About 15% of callers hang up after hearing that response, Jones said. The rest go on to talk to a customer service agent. Currently, about 55% of Travelocity’s revenues come from air, 23% from advertising and 15% is nonair.
Jones said that Travelocity has a “surprisingly large” amount of international outbound bookings. That segment of its business is growing. “It’s not that we sell only $280 tickets,” he said. Travelocity recently launched at travel club whose members, generally infrequent travelers, pay a fee to gain perks normally available only to frequent travelers. Its m-commerce capabilities include the ability to book and rebook air and it also has hotel bookings online. Jones said the he expects wireless to change the industry “quite a bit.”
He added that the Travelocity model has many rings to it, travel, advertising, merchandise, a magazine, a credit card, travel club and that it is an “extensible” brand with “lots more ‘rings’ to add.” He said that Travelocity is continually experimenting; it recently rolled in a yield management system from Sabre to use to manage its net fares. He said that not everything Travelocity tries works and it is not afraid to immediately abandon what looked like good ideas.
“Our motto is: ‘fail fast,’” he said.
Most of its advertising is long-term, 75% is travel related. Jones added that its advertising has very high gross margins and that he expects ad revenues to grow 30% to 35%. He made a thinly veiled reference to Orbitz, whose model does not include advertising. “There’s another big company about to enter the market, with no plans for advertising and I’m wondering how they’re going to make money,” he said.
Travelocity is continuing to spend more on technology this year, but its gross margins are rising and its operating costs as a percentage of revenue are declining. Ramesh Punwani, Travelocity’s executive vice president and CFO, said that Travelocity’s projected EPS for the second quarter of 2001 is $.03 to $.5 per share and he expects the full year EPS to be $.17 to $.21, excluding special items.



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