Expedia (NASDAQ:EXPE) is a leading online travel agency (OTA). It operates online travel portals such as expedia.com, hotels.com and hotwire.com that help connect travelers with travel suppliers such as hotels, airlines, cruises and car rental companies. Expedia also operates a corporate travel business, Egencia (egencia.com), which offers custom travel products and services to corporate travelers and businesses, helping then optimize travel costs and improve their employees travel experiences.
Despite persistent weakness in the global economy, Expedia’s top line has witnessed an y-o-y increase, though the growth rate has slowed down. With a price estimate of $63, we believe that the current market price assigns a fair valuation to Expedia. (Read: Here’s Why We Feel Expedia’s Stock Is Capped At $63)
In this article we provide a snapshot of how Expedia makes money and the important segments that contribute to its growth.
- Where Might Expedia Be Looking For Acquisition Opportunities Currently?
- How Rapidly Is Expedia’s Car Rentals, Cruises, And Other Segment Growing?
- What Might Be The Long-Term Impacts Of Brexit On The Online Travel Agencies?
- How Do We Expect Expedia’s Hotel Business To Grow In The Next 5 Years?
- What Has Been The Immediate Impact Of The Brexit Decision On The Online Travel Companies?
- Who Relies More On Debt: Priceline Or Expedia?
Who are Expedia’s customers? How does the company make money?
Expedia simplifies its user’s travel search by providing them easy access to booking details for airlines, hotel, cruises and car rental packages on a single platform. Expedia’s customers include users looking for travel products/deals for leisure or business purpose. Expedia’s customer base also covers the various travel products and services suppliers who advertise on its website.
Expedia makes money via –
1) Booking/ processing fees on transactions or buying travel inventory in bulk at discounted prices and selling the same to its customers at a premium, and
2) Advertising fees – either pay-per click or a flat fees for the duration of advertising.
Important segments that contribute to Expedia’s Growth
Historically, Expedia’s top-line has increased at a steady pace. Expedia made close to $3.5 billion in 2011 and earned 20% operating profit on the same. We expect Expedia’s growth to continue in the future as well, albeit at a slower pace. With good execution, innovative technology, an expanding international presence and a robust hotel business, we believe Expedia has strong fundamentals to grow its business in the future.
These are the key business segments that contribute to Expedia’s growth –
With a 73% revenue contribution, hotel bookings is the most important division in Expedia’s portfolio. In addition to accounting for majority of its revenue, hotel bookings offer around 23% revenue margin which also makes it the most profitable division, compared to airlines (3%) and car rentals & cruises (9%).
We estimate that the hotels division to be an important driving force for Expedia’s growth. However, while we forecast a rapid increase in gross bookings in the future, we expect the revenue margins to decline slightly. Competition from large hotel chains directly selling via their website and the intense competition from other OTA’s in the market would put a downward pressure on margins.
Expedia saw 10.7 billion units in hotel gross bookings in 2011 and we forecast the number to almost double by 2019. Apart from an improving economic situation, we believe that an increasing network of hotels and expanding international presence will help drive growth in Expedia’s gross hotel bookings.
Expedia earns around 21% operating margins on hotels, air tickets, car rentals & cruises as well as advertising. We expect the company to mark a slight decline in margins over our review period.
The online travel market is a highly competitive niche segment with stiff competition among OTAs. In an effort to gain competitive advantage, travel companies are creating new promotions and consumer value features such as eliminating processing fees, waiving cancellation and change fees, etc. We believe that the intense price competition would put a downward pressure on operating margins.
While airline tickets contribute over 50% to Expedia’s gross bookings, it accounts for only 10% of the company’s revenue. The airline industry is perhaps the most competitive of all travel products. It has been suffering from chronic overcapacity leading to lower occupancy rates. This coupled with high volatility in fuel prices has led to structural changes in the aviation industry.
Additionally, airlines are increasingly selling tickets online directly from their own websites, thereby eliminating the need for online travel agents. As a result, online travel service providers have been compelled to remove processing fees on air ticket bookings and the cancellation and rescheduling of fees in excess of that charged by the airline itself.
Nevertheless, booking an airline ticket remains an integral part of the entire travel plan. We believe that Expedia has been doing well to stay in line with changing consumer trend, primarily the increasing usage trends in mobile. With an improvement in the global economy and an increasing proportion of travel booking occurring online, we expect the gross bookings to continue increasing in the future. However, due to intense competition in the market, we forecast the booking commission on airline tickets to remain under pressure.
2. Cruises & Car Rentals
Car rentals and cruise bookings account for 9% of Expedia’s overall revenue. Cruises and car rental services have historically been clubbed together with destination services and offered complementary as part of holiday packages. However, with rising bookings recently, there has been an emergence of cruises as a separate travel product. Thus, going forward we estimate a marginal increase in revenue from cruise bookings and car rental services.
Expedia currently earns around 9% booking commission on these travel products. However, we forecast a decline in Expedia’s booking commission as we expect the suppliers to lower their distribution costs amid rising competition.
Advertising revenue contribute a mere 3% to Expedia’s overall revenue. On account of the recessionary macroeconomic outlook, businesses across the globe tightened their advertising budget which impacted growth in Expedia’s advertising revenue. However, as the macro conditions stabilize and the user traffic on Expedia’s website increase with expanding international presence, we expect a steady increase in its advertising revenue.
4. Egencia Corporate Travel
Expedia offers travel products and services to corporate travelers in North America, Europe and Asia-Pacific through Egencia. The company earns around 5% of its revenue from corporate deals and earns 12% operating profit on the same.
We believe Egencia will see high single digit growth in the future as it invests in and expands the geographic footprint and technology infrastructure of Egencia. Additionally, the acquisition of VIA travel,the largest management company in Nordic countries, will help Expedia further enhance its growing corporate travel service portfolio, strengthening its position in international markets.
As the global economy recovers from the recession and business travel picks up, we expect the fixed costs and expenses to decline over higher booking volumes for corporate travel, thereby leading to a rise in margins in the future.