Related tool
Choose a company and see a list of recent stock sales by corporate insiders.
|  | | Price | 23.480 | | | Change | -0.150 | |
Research Wizard
Add to MSN Stock List
Message Board
|  | | Price | 26.130 | | | Change | +0.040 | |
Research Wizard
Add to MSN Stock List
Message Board
Company Focus
Recent articles:
• Tech insiders are buying; should you follow?, 7/31/2002
• A stock hangover as big spenders sober up, 7/24/2002
• 5 safe sectors in a stormy market, 7/17/2002
More...
| | Company Focus
Online travel leaders face skeptics, new rivals
Few still doubt the long-term viability of booking airline flights and hotel rooms over the Internet. In the short term, though, Expedia and Hotels.com seem pricey and vulnerable.
By Michael Brush
Despite Americas newfound fear of flying following last years terrorist strikes, the shares of online travel companies Expedia (EXPE, news, msgs) and Hotels.com (ROOM, news, msgs) had no problem gaining a lot of altitude. Expedia jumped 286% before peaking in early May; Hotels.com was up 244% at its peak in late March.
But since then, theyve been caught in a downdraft, tempting some investors to climb aboard for a return to those previous highs. Are they doing the right thing? Probably not, say some hedge-fund managers who are still betting against the stocks despite recent sharp declines in the 40%-50% range.
To be sure, a few important long-term trends favor these leading online travel vendors. Chief among them is that online travel is one of those rare places where the Internet really is delivering on its promise to disrupt a cozy world of embedded middlemen living off archaic fee structures. Web-based travel companies such as Expedia and Hotels.com will continue to benefit as more business moves to the Internet.
Near term, however, the two leading online airline and hotel booking agencies face the following headwinds.
A brash upstart
Like many skeptics of Web-based travel companies, hedge fund manager Terry Bedford of Toronto-based Greyhawk Equity Partners has had trouble understanding why online ticket vendors have done well while airlines continued to lose money. Why should the airlines take all the risk and own all the planes, and then give away the only business that is profitable, which is selling the tickets? he asks.
The answer, of course, is that they shouldnt. Thats one reason five major airlines decided to set up their own online agency. Launched barely a year ago, Orbitz now generates half the bookings of Expedia. The company has filed to go public, but the offer may be delayed because of weak market conditions.
Orbitz competitors -- like Expedia -- first challenged the upstart by claiming it got up to speed so quickly simply because of questionable arrangements with the airlines that own it. Heres how the deal worked: Orbitz got the cheapest fares airlines normally reserved for their own Web sites. In exchange, it agreed to channel back the fees airlines typically fork over to one of the cogs in the complex airline-ticketing machine -- the companies that run computerized reservations systems, or CRS. When you buy a plane ticket, airlines pay a CRS such as Sabre a fee of around $4 for each leg of your journey. Then the CRS shares that fee with travel agents, who normally just pocket it. Orbitz, on the other hand, hands it right back to the airlines to get those cheap fares.
As it became clear antitrust regulators werent buying the case that Orbitz had an unfair advantage -- after all, everyone is free to strike the same deal -- competitors such as Expedia began copying Orbitz to grab the discount fares. Some of our leading competitors have gone to the airlines and offered similar concessions, and they get lower fares says Orbitz spokeswoman Carol Jouzaitis. Expedia has many of the Web fares that Orbitz has, and thats good for consumers.
To be sure, industry analysts never thought the airlines could get along without a huge distributor such as Expedia. In some cases Orbitz has better fares, says Expedia Chief Financial Officer Gregory Stanger. But on most flights we have the equivalent fares, and they charge a customer service fee which we do not. The problem is, even though Expedia is catching up, it has had to give up some of its take. Thats one reason Expedia profit margins have come under pressure recently.
For its next trick, Orbitz is developing direct connect software that will allow it to make reservations without going through a CRS network, which should also save travelers money, says James V. DeLong, senior fellow at the Competitive Enterprise Institute. Thats a move Expedia will likely match, too, as long as antitrust regulators in Washington dont step in and block changes because of lobbying by travel agents and CRS players.
Fresh competition in the hotel space, too
Analysts bullish on Expedia discount the challenge that Orbitz poses in airline ticket sales. The reason: Expedia makes so much money selling hotel rooms and travel packages, which carry higher profit margins. Thats true, but theres fresh competition popping up for Expedia and Hotels.com here, too.
This September, for example, travelers hungry for hotel bargains will be shopping at a new site called Travelweb.com, set up by six major hotel chains, points out Bedford, who has short positions in Hotels.com and Expedia. Shorting stocks means you sell borrowed shares in hopes of replacing them when they're cheaper. The six chains include major players such as Marriott International (MAR, news, msgs), Starwood Hotels & Resorts (HOT, news, msgs), Hyatt and Hilton (HLT, news, msgs).
Cendant (CD, news, msgs) recently revved up ad campaigns for its Internet travel sites, Cheaptickets.com, and Trip.com. Meanwhile, Starwood, whose properties include Sheraton and Six Continents (SXC, news, msgs), which runs Holiday Inn, recently launched a price war aimed at online vendors such as Expedia and Hotels.com. They claim theyll knock 10% off any cheap room rate you find on the Web.
Insiders and analysts who like Expedia and Hotels.com, however, arent too worried that these changes amount to much of a threat. They point out that so few rooms are rented online that theres still plenty of room for growth. Only about 5% of hotel rooms are sold on the Internet, says Travelweb.com Chief Executive Officer Joe Humphry. There is so much opportunity in the space.
Lodging is also a fragmented business with lots of small operators who dont have the backing of big chains. They like to use travel Web sites to reach customers. The bottom line is that we are extremely optimistic about our growth prospects because we see huge migration from offline to online booking, says Bob Diener, president of Hotels.com. And we havent even started to go into other parts of the world. We expect high rates of growth for years to come.
Other challenges
Though Expedia and Hotels.com are set up as separate companies, Barry Dillers USA Interactive (USAI, news, msgs) holds a controlling stake in each. This means potential problems at USA Interactive, such as its ownership of shares in troubled Vivendi (V, news, msgs) or sluggish revenue growth at its Home Shopping Network, could rub off on these two online travel companies. In early June, USA Interactive seemed to postpone plans to buy up outstanding shares in Expedia and Hotels.com and refused to sweeten the premium in its offer, leaving investors uncertain about its merger plans, notes Standard & Poors analyst Scott Kessler.
Next, its no secret the economic recovery may not be all that it was cracked up to be, raising doubts about the strength of consumer travel spending. However, Kessler, like other analysts who are bullish on these stocks at these levels, points out that consumers look for bargains when times get tough, and this leads them to online travel sites. When airlines and hotels have extra capacity because the economy is slow, they, too, turn to online travel sites for help.
Finally, the shares of Expedia and Hotels.com look vulnerable to technical analysts, who consider things such as price movement in relation to volume levels to try to gauge where a stock is heading next. Phil Erlanger, of Erlanger Squeeze Play, for example, doesnt trust the recent rebound of Hotels.com from around $33 late last month because it has happened on relatively light volume. Expedia is not a healthy-looking stock because volume on up moves is weak compared to volume on down moves, says Erlanger. If it breaks the low $40s, you dont really have support until $30. Likewise, Terry Bedford, whos been short since May, has his seatback in an upright position hoping a landing at around $25-$30 for Expedia, and $20 for Hotels.com.
|
