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WIKI ANALYSIS
Expedia is the world's largest online travel company by transaction volume. Through its portfolio of travel websites, including Expedia.com, Hotels.com and Hotwire.com, 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. As a result, Expedia's revenue per airline ticket has been falling since 2004; in 2006 Expedia's total revenue from ticket sales declined by 14%. The company has been able to maintain positive revenue growth by exploiting other healthier segments of the travel industry, like hotels [1], but the company could see a significant drop in demand for its services, if economic conditions continue to worsen throughout 2008. The company should benefit, however, from its expansion into the still relatively underpenetrated European and Asian online travel markets.
Business Financials
Expedia makes money in 3 ways: Merchant sales, agent sales and advertising.
- Merchant model: 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.
- Agent Model: Under the agent model, Expedia acts as a travel agent for the various services that can be purchased through its portfolio of websites.
- Advertising : Expedia also sells advertising on its site. Companies can either pay-per-click or pay a flat fee over the advertising period.
Although worldwide air revenue declined by 14% in 2006, Expedia recorded a net gain in revenue due to a 13% gain in revenue from worldwide hotel bookings.[4] Expedia’s spending includes administrative fees for incorporating acquisitions into its existing business and expanding its customer base and physical assets overseas. To cope with the intense competition in the travel agency industry, Expedia spent 35% of its revenue on sales and marketing in 2006, an increase of 7% from 2005, and expects to spend more on marketing expenses in future years.[5]
Gross bookings increased by $1.6 billion, or 10%, in 2006; the growth in gross bookings in the past two years have been driven by international transactions.[7] 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.
Trends and Forces
Consumer demand for travel services: one of two major factors that determines Expedia's business outlook, since 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:
- Higher Fuel prices lower consumer demand for travel: It is estimated that for every increase of $10 a barrel of crude oil, airlines must generate an additional $18 of revenue per customer.[8] In order to remain financial sovent, airlines are forced scale back amenities while charging higher ticket prices. This may reduce consumer demand for travel and consequently Expedia's revenue.
- Threat of terrorism lowers willingness to travel: after the September 11 terrorist attacks, long-distance travel declined by 11%.[9] 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.
- Weaker dollar makes international travel expensive for Americans: 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. For instance, in 2007, U.S. Tour Operators Association survey results showed that 50% of the organization's members suffered fewer bookings for European vacations.[10]
Industry Demand for Expedia Services: 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 less willing to sell inventory through Expedia The health of the airline industry is directly affected by the price of crude oil, which has quadrupled in the past five years. These contribute to higher costs for airlines, and in combination with other factors have sent United Airlines (UAUA) , Northwest Airlines (NWA) , and Delta Air Lines Inc. (DAL) into bankruptcy. Others have been forced to cut costs. As airlines struggle to achieve profitability, many are less willing to sell Expedia travel inventory at a discount. Since 2004, Expedia has seen its revenue per airline ticket steadily decrease.
- Discount airlines book travel through their own websites: 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. JetBlue, for instance booked 79% of its 2006 through its website, which cuts into Expedia's revenues.[11] Since the fourth quarter of 2004, Expedia has been earning less revenue per air ticket, and this trend is expected to continue.[12]
European and Asian online travel markets underpenetrated: The online travel markets in Europe and Asia are still relatively small and underpenetrated relative to the U.S, but growing fast. The number of visitors to the United States increased by 5% between 2006 and 2007, in part due to the purchasing power of the euro and the pound.[13] In 2006, international bookings accounted for 28% of revenue, and Expedia plans to increase that percentage by launching an Expedia-branded website based in India.
Competition
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, 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.
| Company | Gross Bookings (billions USD) | Revenue Margin | Net Income (millions USD) |
| Expedia | 17.2 | 13.00% | 245[14] |
| Priceline | 3.3 | 35.70% | 74.4[15] |
| Travelocity | 10.1 | ? | 233[16] |
Notes
- ↑ 2006 EXPE 10-k, Item 7, pg. 36
- ↑ 2006 EXPE 10-k, Item 6, pg. 29
- ↑ 2006 EXPE 10-k, Item 7, pg. 30
- ↑ 2006 EXPE 10-k, Item 7, pg. 37
- ↑ 2006 EXPE 10-k, Item 7, pg. 38
- ↑ 2006 EXPE 10-k, Note 16, F-36
- ↑ 2006 EXPE 10-k, Item 7, pg. 36
- ↑ "Oil Prices Push Airline Tickets Up," TIME Magazine
- ↑ Bureau of Transportation Statistics
- ↑ "Weak dollar will have '08 travelers cutting costs," Pittsburgh Tribune-Review
- ↑ 2006 JetBlue 10-k, Item 1, pg. 8
- ↑ 2006 EXPE 10-k, Item 7, pg. 30
- ↑ "Money Goes Far in New York, if You're European," Blue Ridge Now
- ↑ 2006 EXPE 10-k, Item 7, pg. 36
- ↑ 2006 PCLN 10-k, Item 7, pg. 59
- ↑ m-Travel.com
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