Priceline, Expedia Global Travel Empire Still Faces Hurdles, Threats

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Macy's ( M ) and Wal-Mart ( WMT ) are among the latest retail brands to reel under pressure from the rise of online alternatives. Video stores, bookshops, even handwritten letters are largely bygones in the internet age, and taxicabs are in many cities on the endangered list as Uber and Lyft continue to rise.

But one of the earliest industries to be gutted by online competition was the travel trade.

In the year 2000, there were 124,000 travel agents working in the U.S., according to the Bureau of Labor Statistics. That number fell to 70,000 by 2014, and the BLS forecasts that number will narrow to just above 61,000 over the next seven years.

Online travel options have more than made up for the lost services.

"Demand for travel has never been higher," said Phocuswright analyst Douglas Quinby. "The hotel industry in the U.S. is seeing record performance in terms of occupancy. Likewise, there are more fliers than ever before."

Expedia ( EXPE ) and Priceline ( PCLN ) hold two-thirds of the global online travel-booking industry and 95% of the market in the U.S. They also tend to own a large share of the rising contingent of smaller firms, like Germany-based metasearch outfit Trivago ( TRVG ).

In terms of stock performance, Priceline is up 28% since the start of the year. Expedia has scrambled up 33%. Trivago soared 77% to Wednesday's session, and traded a full 89% above its mid-December IPO price.

That show of strength lifted the Leisure-Travel Booking group to a No. 31 ranking on Wednesday among the 197 industry groups tracked by IBD . But for all its rising strength, the online travel trade faces its own threats and hurdles.

IBD'S TAKE:An industry advancing in IBD's industry rankings is generally seeing an influx of interest from institutional investors, which represent the critical I in the CAN SLIM trading methodology .

Among the threats, Alphabet 's (GOOGL) search-engine juggernaut Google occasionally drops hints that it might be interested in more aggressively pursuing the online travel trade, and Airbnb has stirred broad-based and innovative change in the vacation lodging market. The highest hurdle is also the world's largest travel market: China. There, regulators have tamped expansion efforts by Western travel brands, leaving homegrown Ctrip (CTRP) to dominate the market.

The industry group also includes Texas-based Sabre (SABR), which provides technology to connect services-providers such as airlines and hotels to travel agencies, and which was spun out from American Airlines in 2000. The U.K.'s Travelport Worldwide (TVPT) is an e-commerce platform for the travel industry, and India's MakeMyTrip (MMYT) online travel company. MakeMyTrip started as a way for Indian executives in the U.S. to book trips back home, then it expanded to service India's growing domestic travel markets.

Competition In The Online-Travel Funnel

The business model for online travel booking is like a funnel, said Jake Fuller, a managing director at Guggenheim Securities. General search tools such as Google, Yahoo (YHOO) and Microsoft's (MSFT) Bing are typically at the top.

Prospective travelers typically move from those results to metasearch sites such as TripAdvisor (TRIP) and Trivago to find information on rates and reviews of different airlines, hotels or cruises.

When someone is ready to book their trip, they travel down the funnel to booking sites like Expedia or Priceline, or go directly to websites of providers like an airline, or Marriott International (MAR) or Hilton (HLT).

Like most aggregators, Trivago doesn't actually allow users to make bookings. Instead it makes its money from referrals. In the first quarter, Trivago said qualified referrals increased by 60% to 177.2 million vs. a year ago and revenue per qualified referral was up 4% from a year ago.

That helped boost its Q1 revenue 58%, sending EPS up 300% - in line with analyst estimates.

Most of its Q1 revenue came from Europe, but the company still has a global reach. Trivago said in 2016 that its hotel-search platform offered access to 1.4 million hotels in over 190 countries It has 55 localized websites and has smartphone apps in 33 different languages. In Q1, it saw a 128% increase in revenue from operations from outside the U.S. and Europe.

Travel search remains competitive, Cowen analyst Kevin Kopelman wrote in a note dated June 2, but "Trivago has built a significant and multiyear lead over its specialist competitors and the lead appears to be increasing,"

Kopelman noted that unlike Kayak (which Priceline acquired for $1.8 billion in 2013) and other rival metasearch companies, Trivago is the only one to concentrate its "marketing message entirely on lodging and driving transactions for its advertisers.

Google or TripAdvisor could emphasize their own metasearch engines and bite into Trivago's market share, Kopelman said. TripAdvisor, which was known for its user reviews, is in the midst of a strategic attempt to shift lower in the travel funnel, according to Fuller.

The company has redesigned its website to switch from just reviews to offering more information on travel deals and packages. Fuller expects a big advertising push later this year and next, focused on TripAdvisor's new look.

Google is unlikely to invest in its own travel booking site outside Google Flights. Air travel isn't a large revenue boost for travel sites, and expanding its services could threaten the large chunk of paid advertising that the search giant receives from Expedia and Priceline.

If Google did decide to go into the travel-booking business, it would be one of very few companies with the ability to beat Expedia and Priceline at the search game. It's hard for smaller companies to retain market share, even in unique sectors, with behemoths Expedia and Priceline dominating searches.

Expedia and Priceline accounted for 66% of global online travel bookings last year, that up from 55% in 2014, according to Fuller. He expects that number to climb to over 70% by 2020.

Despite that dominance, there's always room for fresh ideas, Quinby says, and Airbnb is a prime example.

"Airbnb is now the fourth largest online travel booking site in the world after Ctrip," he said. "They did this based on an amazing product and a lot of innovation."

A Roomful Of 800-Pound Gorillas

The industry has been consolidating for several years. Trivago went public in December, but still has the backing of Expedia, which in 2013 bought a 61.6% stake for $632 million. Expedia has since increased its share to 63.5%.

In addition, Expedia bought Orbitz and Travelocity in 2015. Priceline bought metasearch site Kayak in 2013 and restaurant reservation site OpenTable in 2014.

"Globally, big platforms are squashing out smaller regional programs," Fuller said.

Priceline has gobbled up its own European company, buying Netherlands-based in 2005. But with Priceline and Expedia now in such dominant positions, Fuller doesn't see any major acquisitions in the near future.

"Not sure there is a whole lot left in the world they would need," he said of Priceline and Expedia.

The gaping hole on the map of Priceline and Expedia dominance? China.

"One of the fastest growing regions is the Asia Pacific and really China," said Quinby. "China is the future of travel. In terms of the global center of hospitality the gravity has shifted from East to West."

From a revenue perspective, China is the second largest travel market after the U.S., surpassing Germany and Japan.

Expedia owned the Chinese travel site eLong but sold its majority stake to Ctrip in 2015 after a long price war. Priceline still has a small stake in Ctrip, but the combination of government regulations, a difficult business climate and Chinese internet censoring means you're not likely to see Expedia try to aggressively pursue market share there, or Priceline starting its own China-based website, Fuller said.

"Without question, Ctrip is the 800-pound gorilla in the China market," Quinby said. "There are concerns on how could anyone compete with the likes of Ctrip going into China."

Priceline has taken a very cautious approach to investing and partnering with Ctrip, he said, while Expedia turns its attention to the rest of Asia.

"We continue to believe that Ctrip is a must-own for exposure to China travel, one of the largest sources of travel growth over the next decade," Kopelman wrote in a note dated May 11.

Outside of China, uncertainty over Google has kept many in the travel trades nervous. While the search giant isn't likely to do anything to threaten its healthy ad revenues from Priceline and Expedia, aggregators like Trivago and TripAdvisor could be potential targets.

Google is the gatekeeper, Quinby said. The recent findings of the European Commission - that led to the search engine incurring a $2.7 billion fine and long-term oversight against monopolistic behavior - raised clear concerns that Google could emphasize its own services above those of smaller travel-information providers.

"Google owns the funnel," Quinby said, "and they are competing in the funnel."


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

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

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