Expanded Offerings on Air Carrier Websites Pose a Threat to Online Travel Agencies

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In an attempt to draw bookings from third-party distributors, U.S. airlines have been revamping their websites with a more user-friendly interface and are adding additional features like luggage pick-up and specialty snacks (at a price) beyond the traditional seating options. The U.S. carriers earned about $8 billion (~6% of revenues) in ancillary fees last year. As airline websites compete for air ticket bookings on more than just price, the impact will be felt by online travel agencies like Expedia ( EXPE ), Priceline ( PCLN ) and Orbitz Worldwide ( OWW ).

We maintain a $38.57 price estimate for Expedia's stock, of which 10% is generated by airline ticket bookings. Our price estimate is well ahead of current market price.

Online travel agencies enable travelers to compare fares for different airlines. Despite shrinking commissions in the form of distribution fees earned on air tickets, Expedia and other online travel agencies continue to focus on attracting air ticket bookings. Drawing customers through airline tickets enables them to sell other products like hotel stays, as well as destination services like car rentals or even cruises (for which they earn higher margins).

The Story So Far…

Driven by chronic overcapacity, financial losses and volatility in oil prices, airlines continue to aggressively reduce costs in every aspect of their operations, including distribution costs incurred in selling seats. Airlines have lowered (and in some cases, eliminated) travel agent commissions and reduced payments to global distribution system intermediaries such as Sabre, Amadeus and WorldSpan. These intermediaries aggregate data on fares and availability from hundreds of airlines and sell tickets on their behalf via travel agents, while passing on a portion of the distribution fee to the travel agencies.

Online travel agencies have competed with airlines' websites by removing booking fees and charging cancellation and rescheduling fees at parity with that charged by the airlines themselves. As a result, the airlines' websites have not been able to offer better fares than the online travel agencies.

The Road Ahead…

Most third-party distributors haven't been selling add-ons until now.  We currently estimate that online travel agencies' share of online bookings will rise from under 40% today to about 45% over the next five years. If, however, U.S. carriers choose not to offer the value-added services to third-party distributors in an attempt to draw booking volumes to their own sites, we could instead see the online travel agencies' share of online booking decline in the years ahead.

Drag the trend line in the modifiable chart above to see how various market share scenarios could affect Expedia's stock value.

You can see a detailed analysis of our $38.57 Trefis price estimate of Expedia's stock here .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: EXPE , OWW , PCLN

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