Online Travel Stocks Stranded

Priceline (PCLN Quote) has been the exception to the travel selloff, and a minor one at that. Its shares have gained 5% this year, buoyed by the strength of its operations in Europe, where demand for online travel is expected to soar at a faster rate than in the U.S.

The reasons for the skepticism about online travel are many. For one thing, the agencies are increasingly competing among themselves for an ever-shrinking pool of new customers. Then, they have to compete against their own suppliers. Web sites from airlines, hotels and car-rental agencies accounted for about 57% of online gross bookings in 2004, according to PhoCusWright, a market research firm. That's going to jump to 66% in 2007.

"It's not going to be an easy battle for them," says Forrester analyst Henry Harteveldt. "The suppliers are a lot smarter now."

There are some bright spots for the online travel agencies. The $153.2 billion corporate travel market remains largely untapped. The National Business Travelers Association, which represents corporate travel departments, says 24% of its members expect to begin using some sort of online tool within the next year or two.

Consumers aren't abandoning the sites either, which are among the most recognized brands on the Internet. Search engines are sending about the same amount of traffic to the agencies now as they did last year, says Lee Ann Prescott of Hitwise, an online market research firm.

"People are still in droves coming to online travel companies," says Michelle Peluso, the head of Travelocity, in an interview.

To fight back, the online agencies are improving their service. For example, Orbitz will notify up to six people for customers whose flights are delayed. If someone buys a flight for the wrong date, Travelocity will rebook it at no extra fee within 24 hours of the original purchase. Earlier this year, Expedia began providing customers with personalized information about their destinations.