How a Recovering Travel Industry Could Hurt Expedia & Priceline

Hard to believe? Most would expect the leading online travel agencies (OTAs) such as Expedia (NASDAQ:EXPE) and Priceline (NASDAQ:PCLN) to rejoice due to improving demand for both business and leisure travel following the horrific downturn in 2007-09. However as major hotel groups beef up their own online sales channels and rely less on OTAs due to a better aggregate demand, these trends could spell trouble ahead for the most popular OTAs.

We value Expedia with a $30.60 Trefis price estimate of its stock, which is slightly below its current market price; and Priceline’s stock at $50, which is a 5% discount to its current trading price.

Hotel Chains Becoming Less Reliant on OTAs

With increase in travel demand, hotel chains are no longer as desperate to liquidate their inventory of hotel night stays through online travel agencies by offering highly discounted rates. At the same time they are beefing up their own direct sales network which is attracting users to the hotel sites directly.

Since the hotel chains can sell more hotel stays themselves and rely less on OTAs to fill up spare inventory, fewer hotel nights are available for bookings through online travel agencies. If this leads to reduced number of hotel bookings translates for OTAs this will hurt commission revenues.

For instance Marriott, Hilton, Starwood and other chains provided online travel agencies only 9.1% of their inventory in the first quarter of this fiscal year, down 14% from the same period in the recessionary 2009. ^[1] This shift among major hotel groups could put a dent in OTAs inventories giving customers fewer choices.

Also online travel agencies attract traffic due to deep discounts users expect to find on the OTAs. While the average rate found on online travel portal was almost 22% cheaper than that available at hotel chain websites over January-March 2011, these discounts will decrease for major hotel groups as the travel industry improves. This provides less incentive to book via OTAs, which are generally less flexible and require up front payments vs. booking directly with hotels. ^[1]

How does this impact Expedia & Priceline

All of this spells trouble for OTAs and could help explain the spate of recent alliances these companies are pursuing with airlines. See Expedia’s Partnership with Travel Agents Adds New Leg of Growth

For Priceline’s stock is much more sensitive to hotel bookings, which make up almost 92% of its stock compared to Expedia where hotel bookings account for only 56% of the stock.

Drag the graph below to see the impact on Priceline’s stock price estimate.

See our $30.60 Trefis price estimate of Expedia’s stock | $506 Trefis price estimate of Priceline’s stock

1. Expedia, Orbitz, Priceline handle fewer rooms from big chains, USA Today, May 9’ 2011 [↩] [↩]