In
the heady days of late 2004 through the middle of last year,
Cendant and Sabre laid plans for international growth, then tossed
around billions of dollars, picking off high-profile European
travel companies. For Cendant, the prizes were wholesaler Gullivers
Travel Associates and its OctopusTravel consumer business, then eBookers. Sabre
subsidiary Travelocity landed Lastminute.com.
The spin-off
doctors at IAC/InterActiveCorp, meanwhile, busied themselves with a
separation agreement, cast off their travel businesses and created
Expedia Inc., which seemed content to grow in Europe at a measured
pace without a grand shopping spree.
Priceline.com also
got busy, making relatively small purchases of two European hotel
distributors, Active Hotels and Bookings B.V., for around $300
million.
U.S. online travel
agencies had visions of storming the Continent and gaining share.
The reality has been more humbling, as earnings for the four major
U.S. online agencies plummeted in the fourth quarter.
In the quarter
ended Dec. 31, Expedias net income dropped 43% to $25.2 million.
Cendant Travel Distribution Services earnings before interest,
taxes, depreciation and amortization (EBITDA) was a $332 million
loss. Pricelines profits declined 24.2% to $3.8 million.
Travelocitys operating loss more than doubled to $24.5
million.
There was no single
culprit to blame for these results but rather a number of snags,
ranging from slowed growth in Europe to an impairment charge for an
overvalued acquisition and myriad other company-specific
issues.
While it can be
argued that these companies are still in the early days of their
international conquests, the snags offer at least some cause for
concern. Expedia and Cendant, in particular, have cited stiff
competition abroad from supplier-direct Web sites, European tour
operators going online and other problems. Suppliers clearly took
share from intermediaries in 2005 in Europe. That was particularly
true in the U.K., Europes 
most mature
market.
The international
arena is key for the online agencies. In the U.S., margins on
domestic hotel sales have come under pressure, supplier Web sites
have made gains and price-conscious consumers are turning to
metasearch engines for bargain-hunting.
Still, their
fourth-quarter stutter-step begs the question: Are the expansion
plans of online agencies a bust? Or was this less-than-stellar
performance a momentary pause in a quest to plant their footprints
on the global travel market?
Organic
growth vs. acquisition
Expedias
international business in 2005 produced 22% of its gross bookings,
up from 12% in 2003, but the rate of organic growth in Europe
slowed in the second six months of 2005 compared with the first
half of the year.
Dara Khosrowshahi,
CEO of Expedia Inc., told analysts that the fourth quarter wasnt as
strong as we hoped it would be. But he also said the company had
embarked on a multiyear evolution from efficient transaction engine
to world-class retailer of travel products and services.
Expedia has plenty
of fuel to power its growth, which it hopes to nurture organically,
for now at least, rather than through acquisition. Expedia.com and its
international siblings are in the fold, as is Hotels.com, which did
$1.9 billion in gross bookings in 2005. That makes Hotels.com, with
a presence in 29 countries, the fifth-largest online agency in the
world, according to Expedia.
Expedias challenges
last year were most acute in the U.K., the companys largest Europe
market, where there was increased competition from supplier Web
sites and traditional tour operators who upped their efforts to
bring their businesses online, Khosrowshahi said. But Expedias
businesses are growing in France, Italy and Germany, which became
profitable for the first time last year. Expedia will launch in
Japan by the end of 2006, he said.
Dont think
short-term, Khosrowshahi advised, as Expedia is investing in its
international businesses, technology and people, and will break out
from the pack in 2007.
Sabre, meanwhile,
is largely hitching its wagon to the development and growth of its
Travelocity business, which has been the key driver of Sabre
revenue expansion.
Travelocity is
caught up in integrating Lastminute.com, which it acquired in July for
almost $1.2 billion, and turning it into its lead brand in Europe.
Travelocity spent about $9 million in the fourth quarter to
accelerate the integration efforts.
Expanding the brand
and growing the business are expensive. In the fourth quarter,
Travelocitys operating income according to generally accepted
accounting principles (GAAP) consisted of a $9.3 million gain
outside of Europe and a $33.7 million loss in Europe.
Sabre officials
view 2005 as an investment year for Travelocity. They forecast that
2006 will be a growth period, with Travelocity projected to post
GAAP operating income of around $50 million and global revenue
growth of about 40% to an estimated $1.2 billion.
However, there will
be some bumps in the first quarter of 2006, Sabre said. Travelocity
is projected to lose $8 to $10 million more than in the first
quarter of 2005 because of the seasonality of Lastminute.coms
business and the consolidation of Zuji, the Asia-Pacific travel
seller that Travelocity acquired in January.
Travelocitys
strategy, which hinges on growing internationally and increasing
its net rate programs, includes providing more U.S. inventory to
Lastminute customers, and offering more European inventory to
Travelocity users.
In North America,
Travelocity, with its Customer Championship program and other
initiatives, is growing faster than the competition. Revenue in
North America in the fourth quarter grew 28%, marking the eighth
consecutive quarter that revenue increases surpassed
25%.
One new element in
Travelocitys North America strategy has it putting new emphasis on
Lastminute.coms existing U.S. Web site at http://us.lastminute.com, marketing it as a lifestyle
site.
We believe it is a
good brand for people looking for last-minute opportunities, not
only to travel but just to get out to dinner, a concert or a show,
said Joel Frey, a Travelocity spokesman. Of course, Travelocity
will continue to be the primary brand [in North America], and Lastminute.com
will be marketed in more online and viral ways, so the costs will
be relatively low.
Cendant
spends, then pays
Cendants
difficulties in Europe have been well publicized. TDS EBITDA fell
from a $101 million profit in the fourth quarter of 2004 to a $332
million loss in the fourth quarter of 2005.
Cendant said 2005
earnings were hurt by the $425 million impairment charge it took
related to its online consumer travel businesses, and $28 million
in integration costs tied to its purchases of Orbitz, eBookers and
Gullivers Travel Associates (GTA).
Cendant acquired
Orbitz in November 2004, eBookers in February 2005 and GTA in April
2005. With too much of eBookers inventory available only for
off-line booking and with its 14 European Web sites underperforming
in other respects (the technology platform is unstable and cant
scale to handle growth), eBookers loss was $30 million in
2005.
We did three years
worth of acquisitions in six months, Ken Esterow, president and CEO
of the TDS Travel Industry Services Americas Group, said at a
recent conference. That was painful.
Cendant, which
recently hired Gordon Bethune as TDS chairman and plans to recruit
a CEO and spin off the unit in October, tied much of its woes to
underperformance in Europe, particularly at eBookers. Officials
project that eBookers will remain in the red in 2006 but will show
improvement in 2007.
Cendants
acquisition objective was to attain scope and geographic reach as
an order maker by selling directly to consumers instead of just
crunching transactions through Galileo and other businesses as an
order taker.
GTA, for example,
is a wholesaler of hotel, ground and sightseeing products with 32
offices in 24 countries, primarily in Europe and Asia. Cendant
plans to make Gullivers content available to Galileo-wired travel
agencies around the world and to Cendants consumer businesses,
including Orbitz, CheapTickets, OctopusTravel.com, HotelClub.com and RatesToGo.
Like its peers, Priceline.com
warned that growth has slowed in the online domestic travel market
because of supplier-direct initiatives and because increased
airline load factors and higher hotel occupancy rates limited
inventory to intermediaries.
With Pricelines
name-your-own price opaque business declining, it has emphasized
its new retail business in the U.S. and Europe. Priceline Europe,
with hotel reservations services covering about 40 countries, grew
its gross bookings in the fourth quarter about 88% on an organic
basis, to $158 million.
Pricelines European
hotel business is humming because of its purchase of U.K.-based
Active Hotels in September 2004 and Netherlands-headquartered
Booking B.V. in July 2005.
With the European
hotel market more fragmented than in North America, the two hotel
distribution businesses have contracts with about 20,000 chains and
independent hotels in 40 countries. Bookings can be taken in 12
languages.
Pricelines European
business has traditionally focused on the U.K., but its strategy
now is to expand rapidly into other European countries with its
retail hotel business.
In Europe, we
believe Priceline took meaningful market share from our major
competitors in the fourth quarter, said President and CEO Jeffery
Boyd, adding that the company would double its marketing spending
in Europe to almost $20 million in the first quarter.
Scott Devitt, a
senior analyst of Internet consumer services at Stifel Nicolaus,
said Priceline Europe was uniquely situated, comparing it to the
position Hotel Reservations Network, which became a force in U.S.
hotel distribution as Hotels.com, held four years ago.
The nature of
Pricelines business in Europe consists of consumers booking hotel
rooms outside of packages and, in many cases, purchased in
combination with a supplier-direct air ticket from a discount
airline, Devitt wrote to investors. In other words, Pricelines
European business operates in the most fragmented, least
competitive component of the market.
Devitt told TravelWeekly.com that suppliers are gravitating toward
Priceline Europe in part because it is taking about a 15% margin on
hotel sales, whereas competitors are demanding at least
20%.
Devitt said the
online agencies are in investment mode in Europe and have the
ability to grow in the region -- although they are finding it
tougher than initially envisioned.
The ability to
distribute inventory in Europe exists for those with the best
assets over a long period of time, Devitt said. Expedia has grown
organically in Europe. Cendant is struggling in terms of
acquisitions, and Sabre is still in execution mode, so you dont
really know what you have there yet.
Devitt noted that
Travelocity, which was late in its entry into the merchant hotel
arena, has performed flawlessly in the U.S. over the last few
years.
However, Devitt
said Expedia is the best-positioned online agency in Europe,
although he previously thought that by now Expedia would be in a
period of leverage instead of facing a period of
investment.
Analysts
unimpressed
Over the long term,
Devitt is not bullish about the prospects of the online agencies,
saying that the industry doesnt have the most compelling
compensation in terms of margin structure.
They own no content
or inventory, and suppliers are pushing back, Devitt
added.
Heath Terry, a
Credit Suisse analyst, took an even harder line, arguing that 2006
is likely to be difficult for the online travel agent
model.
While Expedia owns
the most valuable set of travel assets online, we believe that
pressure from suppliers, competitors and the emergence of the
travel-search model will intensify in the year ahead, impacting
growth rates, booking margins and operating margins, Terry said in
a February client note cited by the Associated Press.
Caroline Bremner,
global travel and tourism manager for Euromonitor International in
London, said suppliers grew a bit faster than intermediaries in
western Europe in 2005, but intermediaries are projected to answer
back by 2007, reversing the trend. That dynamic is particularly
evident in the U.K., Europes largest travel market, she
said.
Suppliers share of
online transactions in the U.K. are projected to increase 3.5
points to 42.7% in 2006, while the intermediaries share is forecast
to drop 3.5 points to 57.3% in 2006.
I dont believe the
online players have run out of steam. They are increasingly looking
at ways to refresh their product offer, along with continued
investment in their Web technology, Bremner said.
And, she added,
2006 may represent a year of consolidation in terms of systems and
market strategy, especially by groups such as Cendant and Sabre. By
2010, Euromonitor International projects a stable balance of power
between the channels with intermediaries maintaining over 55% of
the online market.
Bremner said the
online agencies business models are expected to adapt in the same
way weve seen the suppliers evolve in response to a changed
marketplace.
Hugo Burge,
president of U.S. operations and international business for
U.K.-based Cheapflights, said he expected the U.S.-headquartered
online agencies to play a considerable role in the European
market.
But Burge also said
that Europe has a history of proving more challenging than U.S.
companies predict.
It is important to
recognize the very different marketplace in the different European
countries, Burge said. The T word -- tour operator -- is an
important part of the equation that seems to have been understated
over the last few years. It is also worth noting that the low-cost
airline market is much more advanced and brutal [in Europe] than in
the U.S., which is a challenge because low-cost carriers dont play
ball with the online travel agencies.
Tour operators and
established brands like Thomson Holidays, TUI and Thomas Cook have
challenged the online agencies, but the online agencies are
resilient, Burge said.
In the global
context, the online travel agency model is still youthful, with
plenty of growth to come in geographical reach, consolidation and
product evolution, Burge said. The European market alone is widely
expected to outgrow the U.S. market within three years.
Henry Harteveldt,
Forrester Researchs vice president of travel research, said the
next few years should be viewed as investment periods for the
online agencies, with Asia-Pacific becoming a primary
focus.
Europe is a matter
of rounding out, filling in the blanks, whether it is through
acquisitions or start-ups, Harteveldt said. I see Russia, central
Europe and the Middle East as areas of investment.
But Harteveldt also
cautioned that the U.S. online model doesnt exactly translate
abroad, and that Europe and Asia are not slam dunks.
In Asia, people use
mobile phones to make payment and they also go to convenience
stores, Harteveldt said. PayPal is the third-most preferred method
for travelers to pay for things online in the U.K., and phone
support and instant messaging will be critical.
Michael Cannizzaro,
director of information services for PhoCusWright, agreed with
other analysts that tour operators and suppliers provide tough
competition for online travel agencies in Europe.
However, the online
agencies surpass their rivals in their potential to provide
personalization, community, planning and research tools, he
said.
Although few
observers predicted the scope of Cendants problems in integrating
eBookers, which itself grew through acquisitions, Cannizzaro said
that the online agencies activities in Europe seem to be proceeding
according to plan.
It seems like the
big agencies are relatively on track, Cannizzaro said. They may
have missed a few points in terms of Wall Street, but they are
still on the growth trajectory that we would expect.
To contact
reporter Dennis Schaal, send e-mail to [email protected].