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Investment Overview for Priceline (NASDAQ:PCLN)
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Hotel Bookings
Priceline's market share of occupied hotel rooms: We currently forecast Priceline's share of the global occupied hotel rooms to increase from 3.9% in 2012 to approximately 5% by 2019. There could be around 10% downside to the Trefis price estimate if the market share were to remain flat at current levels over the forecast horizon
Revenue Margin on Hotel Bookings: We currently forecast the revenue earned by Priceline as a percentage of the size of hotel booking to decline from 21% in 2012 to 18% by 2019. There could however be a 10% upside if the revenue margins were stable at 2012 levels throughout our forecast period.
EBITDA Margin: We currently forecast Priceline's EBITDA Margin from Hotel Bookings to marginally increase from 37.4% in 2012 to 38.7% by 2019. There could be a marginal downside to the Trefis price estimate if the EBITDA Margin were to remain flat in the future.
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Priceline is the second largest online travel company in the world after Expedia (in terms of gross bookings). It provides its customers a broad range of travel services which include bookings for hotel stays, airline tickets, car rentals, cruises and vacation packages via its online travel portals: priceline.com, booking.con, agoda.com, rentalscars.com, breezenet.com and lowestfares.com. Its websites connect travelers with suppliers of different travel products such as hotels, airlines, cruises and car rental companies.
In the United States, Priceline enables its customers to purchase a full range of travel services under the traditional price disclosed model (in which it earns a commission) or lets them bid for services at discounted prices under Name Your Own Price model, where it earns the difference between the price an individual is willing to pay and the price charged by the travel service establishment (hotel, airlines etc).
Under Priceline's proprietary Name Your Own Price service, customers can quote their own price for a travel product (hotel room stay, air ticket etc). Priceline matches the quotations with the discounted but otherwise undisclosed fares provided by the suppliers and determines whether to accept the booking without disclosing the identity of the supplier. Customers opting for this service are expected to be flexible in terms of the date and time of travel and other specifications. Booking once made, under Name Your Own Price service cannot be cancelled and no refunds are offered. The advantage of this service is that it lets suppliers sell excess inventory (hotel room stays, air tickets etc) without harming their existing retail pricing structure while offering leisure travelers highly discounted prices in exchange for some flexibility in their itineraries.
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We believe International Business and Hotel Bookings are the main sources of value for Priceline
- High growth in online travel industry outside US (International Business)
- With the acquisition of Booking.com, Agoda and TravelJigsaw, Priceline has been focusing on developing its international operations. Priceline's international business contributed approximately 82% of its gross bookings in 2012 as compared to 55% in 2007.
- Rising income levels and expanding middle class combined with high population growth rates in emerging economies such as China, India and South-East Asia is expected to contribute to increasing budget leisure travelers outside US.
- The extremely competitive online travel industry in US with stiff competition from the likes of Expedia, Orbitz and Travelocity, among others, has led to lower revenue margins and high promotional spending thereby eroding operating margins.
- The relatively low internet penetration in Europe (63.2%) and Asia Pacific (27.5%) as compared to US (78.6%), presents a huge upside to online travel industry outside US, as customers increasingly access the internet for making travel plans.
- The lack of standardization in travel services outside US along with a fragmented lodging industry in Europe and Asia Pacific, leaves much scope for premium pricing. Hence, Priceline stands to make higher revenue margins from its international business.
- Higher Revenue Margins for Hotel Business
- Hotel bookings offer online travel agencies (OTAs) markedly higher revenue margins (~20%), compared to other travel segments - air ticket bookings (~3%), car rentals and cruises (~9%).
- Priceline's opaque bookings model- Name Your Own Price facilitates even higher premium pricing leading to revenue margins in excess of 30%. Hence, Priceline's strategy of focusing on hotel bookings segment is in line with its stated goal of 'being the leading worldwide online travel reservation service'.
- Priceline’s significant share of the relatively lesser competitive and massive hotel business abroad combined with high growth will keep revenue margins at the higher end. Priceline.com competes with the leading online travel agencies in US for sale of airline tickets, car rentals and package services. Relatively smaller share of the saturated domestic market and intense competition for Priceline will continue to keep revenue margins lower for non-hotel businesses.
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The following factors determine the fate of online travel industry
- ${restartlist}Macroeconomic Environment
- Due to the discretionary nature of leisure travel, the online travel service providers, which earn revenue in the proportion (and as a percentage of) of travel bookings, depend entirely on the macroeconomic conditions (employment levels, inflation rates etc). Corporate travel is in fact one of the indicators of economic activity and is influenced the most by the macroeconomic conditions. During a recessionary period, both corporate and leisure travel plummet. Amid rising unemployment and declining disposable income levels, the consumers cut back on their travel plans first before making adjustments to other expenses.
- Advertising, which constitutes a significant source of revenue for the online travel service providers, too depends on the level of business activity. During recessionary times, businesses cut back on media and advertising spending and this translates into lower online advertising revenue for travel portals such as expedia.com, priceline.com etc.
- Foreign Exchange
- Leisure travelers unlike corporations do not hedge themselves against foreign exchange fluctuations. Hence, the spot foreign exchange rates determine the consumer demand for international travel. In times of adverse foreign exchange rate movements (such as a depreciating dollar), international travel becomes dearer and the same hotel booking and air tickets cost more dollars thereby discouraging travel bookings.
- Travel Service Providers such as Expedia, Priceline etc, earn revenues from international bookings in foreign currencies, incur most operating expenses in dollars and report the earnings in dollars. An adverse foreign exchange movement could erode profits. Since an increasing proportion of bookings are coming from the less penetrated emerging economies, the exposure to foreign exchange is only expected to increase in the future.
- Fuel Prices
- Rising fuel prices has the immediate impact of increasing airfares, which discourages travel. This not only impacts Air Ticket bookings but reduced travel also negatively impacts hotel bookings and destination services such as car rentals and cruises. Decline in overall bookings impacts travel service providers' revenues.
- With rise in fuel prices, airlines are no longer able to offer significant discounts on bulk bookings to travel agents such as Expedia. With the result, the revenue margins earned by travel service providers (under Merchant model) take a hit. The lower revenue margins translate into lower profit margins for the travel service providers.
- Impact of Unforeseen Events on the Travel Industry
- Events which are beyond the control of any travel services provider and can critically impact travel include terrorist attacks, unusual weather patterns and natural disasters such as hurricanes, tsunamis, volcanic eruptions (April 2010, volcanic eruption in Iceland), travel related health concerns such as Influenza H1N1, avian bird flue SARS etc, political unrest and other unpredictable events. Unlike other industries, such events have a very significant impact on travel bookings and consequently on the revenues of travel service providers.
- Internet Penetration
- While 78.6% of the US population has internet users, the proportion of Europe’s population online is 63.2%, with the internet penetration in Asia being even lower at 27.5%. Hence, with rising affluence in emerging economies of South Asia and increasing adoption of internet and e-commerce, the proportion of travel bookings over the internet is expected to rise in the future, a trend which favors online travel providers such as Expedia, Priceline, Travelocity and Orbitz.
- Airline Industry
- The airline industry has been suffering from chronic overcapacity leading to lower occupancy rates. This coupled with high volatility in fuel prices has led to the following structural changes in aviation industry.
- Domestic airlines have recently reduced capacity and increased fares. In addition, the threat of carrier bankruptcies and the emerging prospect of industry consolidation, as evidenced by the mergers of United Air Lines with Continental Airlines and Delta Air Lines with Northwest Airlines and the acquisition of AirTran by Southwest Airlines, has led to an additional decreases in capacity, reducing the amount of tickets available to online travel service providers for bulk purchase under their merchant business model. Going forward, the air seats capacity is expected to increase at a lower rate compared to the demand for air travel. This shall not only increase the airfares as a whole but also as consumers shy away from travel, the hotel bookings and other travel services are also expected to be hit by this, leading to lower revenues growth for travel service providers.
- Airlines are increasingly selling tickets online directly from their own websites, thereby eliminating the middle man, the online travel agents. With the result, online travel service providers have been compelled to remove processing fees on air ticket bookings and cancellation / rescheduling fees in excess of that charged by the airline itself.
- Hotels and Lodging Industry
- During the recessionary 2008-09, as travel declined as a whole, so did the hotels occupancy rates (the proportion of hotel rooms occupied per year). To meet the operating expenses (since hospitality business has a significantly higher proportion of fixed costs), the hotel owners resorted to offering discounts and lower tariffs. This led to drop in Average Daily Rate (the average rate per night of hotel booking). The Hotels Bookings took a hit and adversely impacted the revenues for travel service providers.
- Hotel Bookings offer markedly higher Revenue Margin (Revenue earned by the travel service provider as a percentage of the size of booking) at over 20% compared to Air Ticket bookings (~3%), Cruises and Car Rentals (~9%).
- The hotels market in Europe and Asia is much more fragmented with smaller, independent lodgings compared to US, where the hotel market is dominated by large hotel chains. Hotel chains are more likely to offer online bookings through their own websites, while online travel agencies such as Expedia are more appealing to small, independent hotels outside US. Also, travel agencies stand to make higher revenue margins from independent budget hotels under their merchant business model. Hence, expansion into hotels markets in Asia and Eastern Europe presents a growth opportunity to US based online travel services providers.
- Online travel services is highly competitive niche segment within travel industry
- Competition in US online travel remains intense and traditional online travel companies are creating new promotions and consumer value features in an effort to gain competitive advantage.
- In June 2007, Priceline eliminated processing fees for its price-disclosed airline ticket service, and in April 2008, it reduced processing fees for its domestic price-disclosed merchant hotel room service. Starting in March 2009, Expedia and Travelocity also eliminated air booking fees, and in April 2009, Orbitz followed. In April 2009, each of Expedia and Orbitz reduced booking fees on hotel room reservations. With the result, no one player could maintain a price advantage over the others on price-disclosed merchant air tickets and hotel room reservations and the online travel industry as a whole lost revenues.
- In October 2009, Travelocity announced the waiver of its cancellation and change fees for hotel and vacation packages, as well as an expanded hotel guarantee, under which consumers who book a hotel room and then find a lower published rate for the same room anytime before the day of check-in are eligible to receive a refund of the difference.
- Since consumers are now increasingly hunting for bargains and discounts, Traffic obtained through online advertising has increased as a percentage of total demand since the same consumer visits several websites before making a purchase. This increased shopping behavior has reduced advertising efficiency and effectiveness as traffic obtained through online advertising becomes less likely to result in a purchase on the web site. Therefore, online advertising expenses have increased at a faster rate than gross profit, a trend which is expected to continue.
- Threat from Online Search Engines
- Large, established Internet search engines with substantial resources and expertise in developing online commerce and facilitating Internet traffic are creating and intend to further create inroads into online travel, both in the U.S. and internationally.
- Google's acquisition of ITA Software, Inc., a major flight information software company, has enabled it to create its own flight search tools which enable users to find flight information on the Internet without using the services of Expedia or Priceline etc. Google has also invested in HomeAway, a vacation home rental service.
- In addition, Google has launched a travel “meta-search” site to show searchers specific hotels and rates in addition to text advertisements.
- Microsoft has launched Bing Travel, a “meta-search” site, which searches for airfare and hotel reservations online and predicts the best time to purchase them. “Meta-search” sites leverage their search technology to aggregate travel search results for the searcher’s specific itinerary across supplier, travel agent and other websites and, in many instances, compete directly with online travel service providers for customers.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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