Online hotel reservation company Hotels.com
on Monday slashed its earnings outlook as the looming possibility of war with Iraq further dampened already tepid travel demand, triggering a 25 percent plunge in its stock price.

Other online travel and lodging shares slumped as well, as Hotels.com`s warning hurt expectations for the fourth quarter, ordinarily seen as a strong period with family visits and vacations during the Thanksgiving and Christmas holidays.

Results at Hotels.com, which books rooms at more than 4,500 hotels worldwide through several Web sites, were marred by a drop in average daily rates that was “unusual, sudden and straight down,” Chief Executive David Litman said in a conference call.

The Dallas-based company is forecasting little change in room rates this year, and lowered its original revenue forecast by $150 million in part based on the possibility of war with Iraq. The company said it now expects revenue of $1.25 billion in 2003 versus a previous estimate of $1.4 billion. It said it will post revenue of about $943 million for 2002.

The travel industry has been struggling to regain its footing since the Sept. 11 attacks on the United States and as a sluggish economy has stifled corporate and leisure travel.

Hotels.com said it expects to post fourth-quarter revenue of $270 million to $271 million, down from its previous forecast of $283 million to $289 million. This also lags analysts` average estimate for revenue of $293 million and earnings of 47 cents per share for the period, according to research firm Multex.

Hotels.com shares fell as much as 31 percent—the biggest drop since the company went public in March 2000—on Nasdaq, where the company was one of the largest percentage losers. The shares closed down 25 percent, or $15.02, at $44.02.

USA Interactive
, the Internet commerce company that owns about 67 percent of Hotels.com, said on Monday it would meet its previous estimates despite the disappointing performance of the unit. USA Interactive shares finished down more than 8 percent, or $1.99, to $22.23 on Nasdaq.

Expedia Inc. shares dropped $6.93, or nearly 10 percent, to $63.97 on Nasdaq and Sabre Holdings Corp
. (TSG.N), which owns the Travelocity.com Web site, fell 30 cents, or nearly 2 percent, to $18.22 on the New York Stock Exchange.

“The consumer is nervous about travel right now. It`s affecting everyone,” commented Jim Winchester, a lodging analyst at Lazard Freres. “And when you see the effects reaching this deep into the discount channel, it`s a pretty serious foreshadowing of what we`ll see from the hotel companies,”

Hotel company stocks edged down on the news, with shares of major chains such as Hilton Hotels Corp. (HLT.N), Marriott International Inc. (MAR.N) and Starwood Hotels & Resorts Worldwide Inc. (HOT.N) all drifting lower.
ROOM RATES DOWN

Hotels.com had previously expected room rates to average in the “mid- to high-$120s” in the fourth quarter, Litman said. Instead, the average was $117.93.

That is up from about $115 in the same period last year, but that comparison looks favorable because consumers largely stayed at home in the months after Sept. 11. The company saw average room rates of $143 in the fourth quarter of 2000, a peak year for the lodging industry.

Hotel companies cut prices as the slump in business travel persisted, and Hotels.com suffered partly because leisure travelers “who saw the lower rates canceled their original reservations and rebooked,” Litman said. This led to “higher cancellations and lower revenue,” he noted.

Hotels.com offers great price transparency for consumers, who can keep checking for lower prices, then cancel and rebook, said Bailey Dalton, an analyst at C.E. Unterberg, Towbin. “Their market is bargain shoppers,” she said. “In a way, they`re a victim of their own success.”

Litman and other executives said they expect room rates to be flat or slightly up heading into 2003.

“We believe we`ve hit rock-bottom,” Mel Robinson, the company`s chief financial officer, said. “We see further declines as unlikely,” he said, based on “flattening and a slight uptick at the end of December.”

Hotels.com also said it expects to post adjusted earnings before interest, taxes, depreciation and amortization of $33 million to $34 million and adjusted net income between $22.2 million to $23 million. Both fourth-quarter earnings targets fall short of its prior forecasts, the company said.

For 2003, Hotels.com said it anticipates adjusted net income of $118.4 million. That number includes net income plus depreciation, amortization of certain expenses and noncash compensation.

The company also said it will buy back up to $100 million of its common shares.

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