Expedia (NASDAQ: EXPE) is the world's largest online travel company by transaction volume. Through its portfolio of travel websites, including includes: Expedia.com® , hotels.com®, Hotwire.comTM, TripAdvisor Media Network (Expedia spun off TripAdvisor in December 2011), Expedia Affiliate Network (formerly “Worldwide Travel Exchange” and “Interactive Affiliate Network”), Classic Vacations®, Expedia Local ExpertTM, Expedia® CruiseShipCenters®, Egencia TM, eLongTM, Inc. (“eLong”) and VenereTM Net SpA (“Venere”), the company allows travelers to book plane tickets, hotel rooms and customized vacation packages. Expedia makes money by either charging a fee per transaction or by purchasing the travel inventory(plane tickets/hotel stays) from the travel provider at a discounted price and charging the customer a premium on top the original price.
In recent years, major U.S. airlines have struggled to remain profitable in the face of surging fuel prices and increased competition from discount airlines. As their economic outlooks have worsened, major airlines have become less willing to sell travel inventory to Expedia at highly discounted prices. The company has been able to maintain positive revenue growth by exploiting other healthier segments of the travel industry, like hotels, but the company could see a significant drop in demand for its services, if economic conditions continue to worsen throughout 2010. The company should benefit, however, from its expansion into the still relatively underpenetrated European and Asian online travel markets.
Total revenues have remained relatively flat, as Expedia earned $2.96 billion in 2009, compared to $2.94 billion in 2008. However, there was a vast difference in net income, as Expedia has a net income of $300 million in 2009 as opposed to a net loss of $2.5 billion in 2008. The huge loss in 2008 was due to a one time charge associated with goodwill impairments.
Gross bookings in 2009 was $21.8 billion, a slight increase from the previous year's $21.3 billion. Revenue margin, defined as revenue as a percentage of gross bookings, have decreased due to a spike in worldwide air fares. Unlike hotel booking transactions, Expedia does not gain revenues proportionally to air ticket prices. The increase in air fares caused a downturn in the number of travelers, which then translated to lower revenues per booking.
Expedia makes money in 3 ways: Merchant sales, agent sales and advertising.
Under the merchant model, travelers pay Expedia for hotel, plane ticket, and other reservations before traveling, and Expedia then pays the service provider a predetermined wholesale rate when the traveler uses the service.
Under the agent model, Expedia acts as a travel agent for the various services that can be purchased through its portfolio of websites.
Expedia also sells advertising on its site. Companies can either pay-per-click or pay a flat fee over the advertising period.
Consumer demand for traveling is a huge factor that determines Expedia's business outlook. Expedia relies on businesses' and individuals' willingness to travel for its revenue. Consumer demand on a global scale is affected by several economic and political conditions, including the following:
It is estimated that for every increase of $10 a barrel of crude oil, airlines must generate an additional $18 of revenue per customer. In order to remain financially solvent, airlines are forced scale back amenities while charging higher ticket prices. This may reduce consumer demand for travel and consequently Expedia's revenue.
After the September 11 terrorist attacks, long-distance travel declined by 11%. Unpredictable events may also cause travelers to cancel their plans at the last minute. Not only does this decrease Expedia’s revenues, since Expedia does not record revenues until the traveler uses the service purchased, it may incur Expedia additional costs if Expedia does not charge cancellation fees or refunds reservations to travelers affected by political instability.
Since most of Expedia’s customers are located in the United States, a weakened dollar may reduce the amount that American customers are willing to spend on travel services. This is because each dollar translates into fewer units of a foreign currency, making everything more costly for travelers. Less travelers translates to less revenues for Expedia.
Expedia depends on airlines, hotels and other travel service providers for the travel inventory that it sells to its customers. Several factors including fuel prices can affect the price at which Expedia can purchase airline tickets, hotel rooms and other travel services, as well as the overall availability of travel inventory.
Airlines such as JetBlue Airways (JBLU) and Ryanair Holdings (RYAAY) often cut out the middle man and sell tickets through their own websites. As these these airlines have stolen market share from their larger competitors, it has also impacted online travel vendors like Expedia.
Expedia faces intense competition including airlines and hotels that sell services exclusively through their own websites. Because they have greater control over pricing, these companies are able to offer loyalty programs and discounts which can make them more attractive than an Expedia-owned website. There are also many other online travel agencies similar to Expedia, such as Travelocity and Priceline.com (PCLN), the latter of which recently eliminated booking fees. This strategic move may force Expedia to do the same.
Since Expedia is currently the largest and most diversified online travel agency in terms of gross bookings, or the value of travel services purchased, it enjoys certain competitive advantages. It is better able to negotiate with participating merchants and partners. Expedia also has the advantage of owning a number of websites that cater to many different market segments ranging from families with children to luxury travelers. Unlike Orbitz, for instance, the impact of troubles in the airline industry have been limited due to its strong hotel-booking business. By expanding the breadth of its travel service searches and the variety of packages it puts together, Expedia can take advantage of its brand name recognition and tap into a rapidly developing online travel industry.