Evaluating Expedia’s Upside from AirAsia Partnership

May 31st, 2011 by Trefis Team
-21.72%
Downside
184
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Trefis
EXPE: Expedia logo
EXPE
Expedia

In a recent article, Expedia Partners With AirAsia, we explored the rationale behind the recently announced alliance between Expedia (NASDAQ:EXPE) and the leading budget carrier in Asia, AirAsia. The joint venture will sell flights, hotel bookings and holiday packages in Southeast Asia, the world’s fastest growing aviation and tourism market. Expedia competes with other leading online travel agencies such as Priceline (NASDAQ:PCLN), Orbitz (NASDAQ:OWW) and Travelocity. We value Expedia with a $30.60 Trefis price estimate of its stock, which is roughly 10% premium to its current market price. Below we explore the potential impact of the Expedia-AirAsia deal.

Expedia forecasts that the Asian market will grow between 30-40% in the coming years. [1] After the Air Asia news, Expedia announced a similar arrangement with South African Airways, see After AirAsia, Expedia Now Partners With South African Airways.

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Partnering with an airline gives an online travel agency instant access to a wider audience, which will help it in selling its inventory of hotel stays. While airlines might offer best airfares, they do not offer the convenience of bundling hotel stays and holiday packages, which is where online travel agencies still have an edge.

We do some rough math on how to assess the impact of these partnerships. In the scenario below, AirAsia could potentially increase Expedia’s market share of hotel stays from 2.15% in 2011 to 2.66% leading to around 10% upside to our current $30.60 Trefis price estimate of Expedia’s stock.

Here’s how we calculated the impact:

  • 2.5 million more hotel stays for Expedia through the AirAsia partnership
    • AirAsia flew 25.7 million passengers in 2010. [2]
    • Assuming that 1 in every 10 passengers booked a hotel stay at Expedia, this would translate into a 2.5 million more hotel stays.
  • 3.75 million more hotel nights booked through Expedia
    • We estimate that on average there will be 2 persons per hotel room and 3 nights per stay leading to additional 3.75 million hotel room night bookings at Expedia in 2011 (2.5 million visitors / 2 visitors per room X 3 nights per stay).
  • Additional 0.29% of Expedia hotel market share by 2017
    • 3.75 million more hotel nights booked translates to 0.08% market share in occupied hotel rooms in 2011.
    • Given that tourism in the region is expected to grow in excess of 30% year-on-year, the incremental market share gains from this partnership shall rise to additional 0.29% by the end of our forecast period. [1]

Even with the above assumptions, which could be conservative, we expect 10% potential upside to Expedia’s Stock. We can do a similar exercise for South African Airways. You can drag the graph above to see the impact on the stock price estimate from changes in market share.

See our full analysis of for Expedia.

Notes:
  1. AirAsia and Expedia offer steep travel discounts, CNN GO, March 29’ 2011 [↩] [↩]
  2. 25.7 million pax for AirAsia Group in 2010; 4Q2010 marks strongest quarter ever, Centre For Aviation, January 31’2011 [↩]