Travel Sites Advised to Diversify

25th Oct 2001

Analysts remain positive for Web travel sites despite a terse announcement from Continental Airlines eliminating commissions on travel booked through the Internet.

Airlines, of course, are scrambling to preserve every cent of revenue following the events of Sept. 11, and it`s likely more carriers may follow suit, as they often play follow-the-leader when fares are reduced, as they were this week.

Goldman, Sachs said in an advisory to clients that pressure on Expedia (NASDAQ:EXPE) and Travelocity (NASDAQ:TVLY) due to Continental`s commission cuts could continue near term, “due to likely pending actions of other airlines.”

Stocks of both companies were down significantly yesterday and again this morning; however another analyst was quoted as saying the depressed prices represent “an attractive short-term opportunity.”

Priceline (NASDAQ:PCLN) has no exposure to air commissions, as its revenues are based on the spread between its wholesale cost and the price at which it sells air tickets.


“While volatility will remain high ... as the landscape evolves, we do not expect a long-term shift in secular growth nor relative attractiveness of each company,” GS said.

Analysts want to see the travel sites continue to diversify their revenue streams. “Continental`s decision ... illuminates the importance of our key themes for online travel: a combination of merchant and agency models with diversified revenue streams,” GS said.

Houston-based Continental, the nation`s fifth largest air carrier, said all other aspects of its commission structure for U.S. and Canada travel agents remain unchanged, and it also said it would brook no questions on its Internet decision. The decision is similar to the move made last March by Northwest Airlines. Southwest Airlines has never paid commissions to Internet-based travel agents.

Commissions on Internet sales are typically 5 percent per ticket with a $10 cap. The exception is Orbitz, the online travel company founded by American, Continental, Delta, Northwest and United, which is paid a flat fee of about $7 per ticket, Henry Harteveldt, an analyst at Forrester Research, told the Associated Press.

Goldman, Sachs said that its order of preference for the online travel companies remains Expedia, Priceline and Travelocity, but all are rated market outperform.

Travelocity has the highest exposure to airline commissions at 34 percent to 36 percent of revenue, though it continues to show improvements in diversifying its revenues and expanding its merchant business, GS said.

Expedia has air commissions at about 26 percent of revenues as it benefits from having diversified substantially with some merchant air bookings and the merchant hotel business with its acquisition of Travelscape, GS said, adding that “it could easily switch to a 100 percent merchant model.”

U.S. airlines have laid off more than 90,000 employees and cutting carrying capacity by about 20 percent since Sept. 11. Passenger volumes remain about 30 percent below year ago levels.

All the major airlines cut fares this week as American Airlines parent AMR Corp. recorded its biggest quarterly loss ever, a $414 million shortfall in the third


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