Expedia Earnings Preview: Trends We’re Watching

Leading online travel agency Expedia (NASDAQ:EXPE) plans to release its FY 2011 financial results February 9. The past year, Expedia saw its volumes being threatened by the general weakness in the economy which prompted some rough actions from the U.S. airlines. Weak capacity growth and regular fare hikes by major carriers weighed on the booking volumes at Expedia. Lower air ticket volumes also meant less opportunity to facilitate hotel rooms, car rental and other services that air passengers scout for along with ticket bookings. However, hotel bookings growth was strong aided by strategic alliances forged by Expedia with several airlines in 2011.

In another major development, Expedia spun its media and advertising business arm, TripAdvisor (NASDAQ:TRIP), winning overwhelming approval of the stockholders. This will allow Expedia to concentrate on its core travel bookings business, given the largely different dynamics of the travel media business operated by TripAdvisor.

Below we discuss these trends in more detail and their impact on Expedia’s FY 2011 performance and in the near term.

We value Expedia with $33 Trefis price estimate of its stock, at parity with its current market price.

See our complete analysis of Expedia stock here

Capacity Reduction, Fare Hikes by U.S. Airlines Hurt Expedia Volumes

The past year, Expedia reported a decline in air ticket volumes as rising air fares, lower capacity and a push by airlines to direct customers to book flights on their own websites weighed on the demand for the OTA inventory. Ticket volumes at Expedia decreased by 8% in the first nine months of 2011 after growing 11% for the full year 2010. High airfares have mostly impacted leisure travelers while demand from corporate customers is still holding up. Therefore Expedia is seeing solid volumes at its corporate travel subsidiary, Egencia, which caters to corporate travelers in North America, Europe and the AsiaPacific region.

During the Q3 2011 Earnings’ call, Expedia CEO and President Dara Khosrowshahi said,

Our leisure customers are price sensitive, and as a result in general, we’re seeing more weakness on the air side than the hotel side. There are some other factors that are affecting our air volumes. One, is that in general, some airlines are restricting their forward distribution on metasearch site, that hurts our traffic coming in. And again, the airfare environment is another factor. We have also introduced some fees on an opportunistic basis and some European point of sales, as well as some interline fees. For example, in the U.S., which helped our revenue per air ticket, but certainly hurt our air ticket volumes.

Hotel Volumes Benefit from Airline Partnerships

In 2011, Expedia entered into private-label partnerships with airlines where it offers hotel bookings at airlines’ websites. This not only helps airlines offer consumers a more comprehensive travel package including air travel and accommodation options at the destination, but also helps OTAs sell more hotel bookings on which they stand to make handsome commissions often in excess of 20%. The past year, Expedia announced partnerships with South African Airways, AirTran Airways, AirAsia and more recently with United Continental.

The agreement with United will provide travelers booking on Expedia.com and Hotwire access to all United and Continental fares, schedules and inventory. This is expected to have a favorable impact on Expedia’s market share in OTA airline bookings by attracting travelers looking for United or Continental’s experience and from an increase in booking options in general. Additionally, United will be giving its customers online access at united.com to nearly 145,000 hotels via the Expedia Affiliate Network (EAN). This means more hotel bookings for Expedia as travelers buying tickets from United’s website will tend to make hotel reservations along with air ticket purchases.

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