With over $1 billion in Q1 2013 revenues (a 24% y-o-y increase), leading online travel agency Expedia (NASDAQ:EXPE) made a promising start to fiscal 2013. However, while all of its other brands continued to grow at healthy rates, Hotwire.com faced some challenges which limited Expedia’s growth. The company anticipates the weakness in Hotwire to continue in the current quarter as well and consequently lowered its 2013 EBITDA guidance by $20-$30 million.
Hotwire is an opaque travel website that offers its users travel deals for airfare, hotels, car rentals, cruises and vacation packages at discounted rates. In an opaque pricing model, which offers discounts as high as 60% over traditional online booking options, a user can see the price but not the name of the supplier until they make a non-refundable payment. In a tough macro environment, an opaque booking system offers lucrative deals to travelers and enables suppliers to get rid of their excess inventory. Opaque bookings accounts for approximately 10% of Expedia’s revenue and an even higher percentage of its profits. 
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Expedia claims that the sluggishness in Hotwire’s business can be offset by increasing revenues from VIA Travel and the recent acquisition of leading meta-search company Trivago. It aims to focus on innovating and improving its products and services by investing in new technologies to drive growth across geographical segments. We believe that with an expanding international presence, the robust growth in hotel bookings and a focus on developing its mobile platform, the company is well-equipped to leverage growth in the global online travel market.
In this article we discuss in detail the key factors that impact Hotwire’s growth potential.
Priceline’s Launch Of Express Deals Has Increased Competition
With the launch of “Express Deals” in July 2012, Priceline (NASDAQ:PCLN) now offers three ways to book hotels on its website – clear listing, “name your own price” and the “Express Deals”. In the last few months, Priceline has increased its advertising efforts both online and offline, which has contributed to the popularity and success of Express Deals.
Offering thousands of great deals on hotels, “Express Deals” allows users to view price, amenities, star level of the hotel, locality and user ratings, but not the name of the hotel, which is only revealed post a non-refundable payment by the customer. Offering discounts of up to 45%, Express Deals is covered by Priceline’s Big Deal guarantee, which promises to pay the user an amount of $25 and match any lower price that the user finds for the same hotel on competing websites.
Priceline has extended “Express Deals” as a mobile booking application available for the iPhone, Android and Mobile Web, and claims to be getting a good response on the same. In addition to rising rental car reservations, improved hotel room nights aided by express deals helped Priceline register 9% annual growth in domestic gross bookings. (Read: Priceline’s Pulsing Growth Will Inevitably Slow Down)
Hotwire faces competition from other leading players in addition to Priceline such as Travelocity’s top secret hotels and from smaller players such as Get Going, lastminute.com and Wotif’s Wot hotel?
Improving Macro Conditions Lead To A Decline In Opaque Bookings
Opaque booking systems are more attractive to leisure travelers in a tough macro environment as they offer deep discounts over the traditional online booking option. However, with an improving macro environment, travel suppliers witness higher occupancy rates for their products and are less likely to offer their inventory at discounted prices.
Though Hotwire offers the opaque booking option for all travel products – air tickets, hotels, cruises and car rentals – the system is more popular for hotel bookings. We estimate hotel bookings to contribute close to 70% to Expedia’s valuation. With revenue margins of approximately 20%, hotels are also the most profitable travel product for OTAs as compared to air tickets (~2%) and car rentals & cruises (~9%).
The opaque booking model is more attractive for OTAs in terms of revenue margins earned. Thus, if there is a drastic decline in opaque bookings, it can reduce hotel revenue margins earned by Expedia.
Weakness In The Domestic Car Business
The continued fleet constraint along with rising prices created a tough environment for the opaque pricing model last quarter. Car rental rates are expected to absorb operating expenses such as fuel costs, rising cost of automobiles and other operating expenses. Given that the car rentals industry is becoming more competitive, there is increasing consolidation which is reducing the number of players in the market.
We believe that the above trends are likely to persist for the rest of the year. The opaque pricing model is more suitable for price-sensitive customers. With rising car rental fees, we expect a lower percentage of car booking through the opaque model.
Though Hotwire is expanding internationally, Expedia believes that the footprint is not large enough to drive growth in the business. On the other hand, the acquisition of VIA travel has contributed to Expedia’s growth in the last few quarters. Additionally, the company recently acquired Trivago which is a leading meta-search engine for hotel bookings in Europe. In Q1 2013, the inclusion of Trivago for less than a month added more than 1.5% to Expedia’s global revenue growth.  While the company expects to witness weakness in its Hotwire brand for the rest of 2013, we believe that higher revenues from Trivago and VIA Travel will contribute to its growth momentum. (Read: Can Expedia Take More Share In The European Hotel Market With Trivago Deal?)
Our price estimate of $69 for Expedia is at a premium of over 10% to the current market price.Notes:
- Expedia Drops As Priceline Wins Discount Travel Wars, Investors.com, April 26, 2013 [↩]
- Expedia Management Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, April 25, 2013 [↩]