Expedia Inc. and Travelocity.com, two online travel agencies that hit profitability ahead of forecasts, could be revving up to do a lot more. Some analysts say the early takeoff may help these firms fly high in online travel for years to come, leaving scant room for rivals.
“They’ve got dominant market position. They appeal to a wide variety of consumers. Their Web sites are well-designed, and they are constantly evolving and innovating,” said Henry Harteveldt, a Forrester Research Inc. analyst in Cambridge, Mass.
Expedia and Travelocity’s fast takeoff also is bad news for smaller online travel agencies, which may be squeezed out of the market by competition from the big boys.
Expedia, a travel Web site 70% owned by Microsoft Corp., wowed Wall Street on April 30 by posting its first profit more than a year ahead of schedule. It earned 9 cents a share on $110 million revenue, before charges, in the third quarter ended March 31. Expedia pegged earnings for 2002 at 30 to 40 cents a share, much higher than analysts’ estimates of 7 cents.
Travelocity is a Web company 70% owned by Sabre Holdings Corp.
, the dominant firm in computer reservation systems. It, too, surprised analysts in late April by posting a small net profit of 3 cents a share on revenue of $72.9 million for the first quarter, three months ahead of schedule.
Expedia and Travelocity get fees for sales of cheap plane tickets, hotel rooms and other travel products online. Expedia had $135 million in sales last year. Travelocity had $193 million. Both struggled in the red the last few years despite hefty revenue increases. Analysts say their first jump into the black shows the two online travel agencies have finally hit pay dirt by assembling a large and loyal customer base.
Analysts say they’ve been able to do this because consumers are honing a taste for known brands in online travel. Rather than take chances with small online travel providers, they’re choosing big Web sites like Travelocity that offer easy-to-use technology and a wide range of travel products and services, analysts say.
More than 1 million customers, for example, bought online travel products from Expedia in the third quarter, almost double the figure of a year earlier. Travelocity’s membership rose to 27 million in the first quarter, up 2 million from the fourth quarter of 2000.
Legg Mason Inc. analyst Tom Underwood says Expedia and Travelocity crossed key profit thresholds in their latest reports. Underwood says, for example, that the total value of airline tickets booked by Expedia grew 68% from a year earlier. At Travelocity, the number rose 65%. Gross profit margin is about 60% for both companies.
Underwood says the numbers show Expedia and Travelocity have reached a scale of business at which they can cover overhead costs and make money. “The outlook’s very bright,” Underwood said.
The only serious challenge facing Travelocity and Expedia is from Orbitz LLC, an online travel site backed by five big airlines. It will be launched in June.
Orbitz was given the go-ahead by regulators in April after a 10-month probe that checked the company’s airline ownership for antitrust issues. Nearly 60,000 consumers are using a pilot Web site Orbitz set up earlier this year to test its products and services.
When Orbitz enters the fray, some analysts think the three will edge out smaller players in online travel.
“One thing’s for certain,” Harteveldt said. “Once Orbitz launches in a couple of weeks, there’s no more room for another general online travel agency.” Some analysts say Orbitz will edge out rivals because the airlines will make sure it offers cheap air fares unavailable elsewhere. Expedia and Travelocity also will prosper because of the big beachheads they’ve built in the online consumer market. This puts pressure on smaller niche players in online travel that have been competing against Expedia and Travelocity, analysts say.
Those companies include Biztravel.com, a business trip- and vacation-planning Web site, and Trip.com, a travel booking site. Trip.com is owned by airline reservation company Galileo International; Biztravel.com is owned by Philadelphia-based Rosenbluth Interactive.
Harteveldt says some small firms might merge to stay in the game. Others may shrink their focus to serve a narrower segment of the online travel market, like hotel rooms and cruises.
Lots of business is up for grabs. Forrester reckons that 29 million households will be buying online travel products in the U.S. by 2004. That’s up from 14.9 million in 2000.
Travelocity Chief Executive Terrell Jones says the outlook is good even if the economy goes into a tailspin. He also brushes off notions the company will slip back into the red. “Even in a down economy, airlines cut prices quite a bit, hotels drop rates and people still go on vacation,” Jones said. He adds that more than 75% of Travelocity’s revenue comes from travel-related products and services. That includes sales of higher margin items such as package vacations and ocean cruises. Revenue from Internet ads makes up less than a quarter of total revenue, he says.
“It’s a nicely diversified revenue stream,” Jones said.
Richard Barton, Expedia’s CEO, also is confident the company can stay in the black. “We don’t have a crystal ball, but we don’t anticipate slipping back into the red, and we feel good about that,” he said.
One thing Barton counts on is that airlines and hotels will give bigger discounts on seats and rooms during an economic slump. He says that would draw more bargain-hunters to Expedia’s Web site. Other analysts are cautious about Expedia and Travelocity’s long-term prospects.
“To say Expedia and Travelocity have sewn up the market is overblown,” said Morningstar analyst Langdon Healy. Healy is impressed that the two companies reached profitability faster than anyone expected. But he says investors should wait to see what kind of competition Orbitz poses. Healy says Expedia and Travelocity, which sell plane tickets for major airlines, will be in trouble if these same carriers start giving Orbitz exclusive access to their cheapest seats. “Investors shouldn’t dive into (Expedia and Travelocity) without realizing the risks. These are Internet companies, after all,” Healy said.
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