Summary
EXPE makes a big bet on traffic and cross-sell OWW potentially crushed PCLN punished unfairly
Analysis
This morning Expedia announced
a new promotion offering free nights at 700+ hotels based on a three,
four or five night minimum stay. This isnt particularly new or exciting
as Expedia has long offered hotels this capability. What is
earth-shattering is the reduction on booking fees on airline tickets.
Priceline
started this trend over a year ago on what was at the time called a
special promotion. It was quickly matched by Priceline's key competitor
Hotwire (which is owned by Expedia.) But Pricline and Hotwire both had
little to lose as neither one sold very much published airfare anyway.
And, getting people to buy air, even without making any profit, was key
to getting people to buy highly profitable hotels and cars in follow-on
transactions.
But now Expedia has followed. This is billed as a
promotion, but we would not be surprised to see it become permanent,
just as it did at Priceline and Hotwire.
Clearly there will be winners and losers.
Consumers
are the big winners as they will gain a major distribution outlet for
fare shopping and comparing that will now have prices equal to the
supplier sites.
We don't think Priceline has too much to fear
because while their sales of air have grown significantly following the
removal of fees, they are still a much smaller player with the majority
of their profits and revenues coming from the sale of hotel rooms But
clearly, Expedia has taken notice.
The biggest loser in this is
probably Orbitz. Orbitz derives a much bigger share of their revenues
and profits from these fees. In fact, Citi analyst Mark S. Mahaney
calculates that Orbitz (OWW) derives nearly 60% of their operating
profits from these fees vs. just 10% for Expedia. Expedia's strong
stand-alone hotel product and robust cross-selling may enable it to
make up for the loss of booking fee revenue on other products.
And
another question mark will be the meta-search sites such as Kayak,
fly.com and Tripadvisor.com. Kayak in particular depends on significant
revenue streams from its partnership with Orbitz. If Orbitz's fee goes
to zero, it will be hard, if not impossible, for Orbitz to continue
paying Kayak a referral fee.
Which brings us back to an
interesting question: Is there more than meets the eye here with
Tripadvisor's new air meta-search product? (Note: Expedia also owns
Tripadvisor) If Expedia is now at parity with supplier sites (e.g.
Delta.com, AA.com etc) on a meta-search site, they stand to benefit
from a substantial up-tick in traffic......
