The skies have been anything but friendly lately for online travel stocks. Not long ago, investors had high hopes for the likes of Expedia ( EXPE), Travelocity and Orbitz. These Internet upstarts were going to simplify the travel business by drawing traffic from travel agents and reservation phone lines. Profits were going to soar both for the sites and for their airline and hotel industry partners. But it hasn't worked out that way. Increasing competition from players ranging from Google ( GOOG) to the big airlines themselves are slowing growth at outfits like the Travelocity unit of Sabre Holdings ( TSG) and Orbitz parent Cendant ( CD). "People are overall fairly negative on the whole sector," says Aaron Kessler, an analyst with Piper Jaffray who rates Expedia market-perform and Priceline outperform. "They are most positive on the international side of the market. Domestic is going to remain a challenge." Like other Web-based services, online travel is no longer a novelty. Competition is intensifying as airlines and hotels expand their efforts to get travelers to buy on their sites. Plus, there's the added problem of specialized search engines, including
Kayak and Sidestep . These operations help people find the best deal by comparing prices over multiple sites. These trends are tempering Wall Street's enthusiasm for online travel stocks. Expedia, which reported disappointing fourth-quarter earnings, is down 25% this year. Travelzoo ( TZOO), another online travel site, is down 20%. Expedia, which last year was spun off from Barry Diller's IAC/InterActiveCorp ( IACI), is in the doghouse with Wall Street after giving lackluster guidance. Three analysts have downgraded the stock this year. None of the three analysts who follow Travelzoo recommends that investors buy the stock. Shares of Sabre and Cendant have barely budged this year, even though both of their travel businesses are posting strong performances. Sabre expects Travelocity to triple operating income this year, while Cendant, which is spinning off its online travel business this year, is expected to realize an 18% to 22% gain in bookings in the first quarter.
Priceline ( PCLN) 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.
"While Expedia has been very successful in building the world's leading online travel site in under a decade of operations, we also believe there are opportunities to meaningfully improve our travelers' experiences," says Expedia spokeswoman Wendy Grover in an email statement. "More specifically, we are setting out to reinvent the way travelers plan, purchase and enjoy travel -- again -- through investments in our technology infrastructure, investments in our data warehouse to enhance our CRM capabilities, improvements to our traveler care centers, the introduction of a significant loyalty program in early 2007 and other improvements." Expedia also will refund the difference in price and kick in a $50 coupon if someone finds a cheaper rate for any service it offers. Travelocity and Orbtiz also have price guarantees. To complicate matters further, airline, hotel and rental-car companies also vow that consumers can get the best deals on their sites. "We do think it's confusing for consumers," says Travelocity's Peluso.