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Evaluating Expedia's Upside from AirAsia Partnership
6/1/2011 11:25:00 AM
In a recent article, Expedia Partners With AirAsia , we explored the rationale behind the recently announced alliance between Expedia ( 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. After the Air Asia news, Expedia announced a similar arrangement with South African Airways, see After AirAsia, Expedia Now Partners With South African Airways .
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:
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.