How Do We Expect Expedia’s Hotel Business To Grow In The Next 5 Years?

Expedia’s hotel business contributes to around 70% of its revenues and this percentage is expected to increase to almost 80% by the end of our review period. We expect Expedia’s hotel revenues to rise by about 129% over the next 5 years. Below, we outline some of the reasons for this.

Growth In Number Of Hotel Nights Booked Through Expedia

• Being the second largest online travel agency (OTA) in terms of revenues, Expedia has one of the most extensive network of accommodations on its platform. In 2015, Expedia acquired big players including Travelocity, Orbitz, and HomeAway which helped in the consolidation of the U.S. OTA market. On the global front, Expedia entered into a partnership with China’s OTA leader, Ctrip, and sold its stake in the loss-making Chinese OTA, eLong.
•  As a growing number of people move to buy their travel online, and online penetration of travel expenditures increases, it will benefit Expedia.
• With an increasing shift towards online spending, there is tremendous room for growth for OTAs. We believe that Expedia is well positioned to gain share from traditional brick and mortar shops as well as smaller travel agencies.

Growth In ADR Per Hotel Room

• OTAs are now increasingly using the agency model, as it allows guests staying at hotels to pay post the stay. Hotels get to charge their guests higher rates on this basis as compared to the merchant model, which was more prominent earlier, where OTAs buy inventory from hotels at wholesale rates.
• In light of the economic slowdown, hotel suppliers deferred their expenditure (increasing number of hotel rooms by undertaking new construction) and increased the focus on improving operational efficiency instead. Increasing consumer demand for a limited supply of hotel rooms is expected to increase hotel room prices and hence increase ADR per Hotel Room for Expedia.
• As the global economy recovers from the downturn, we expect bookings to rise. The suppliers (hotels) amidst rising traffic shall no longer be compelled to offer discounts to attract guests. As the occupancy (percentage of rooms occupied) improves, we expect hotels to withdraw discounts leading to a rise in ADRs.

Decline In Revenue Margin

• Hotel bookings offer the highest revenue margin to OTAs. Hence, all OTAs are increasingly focusing on hotel bookings and trying to gain share in this highly profitable market segment. With increasing competition, we expect the margins to decline in the future.
• As the travel industry increasingly moves towards online reservations as a result of rising internet penetration, large hotels and hotel chains are using their own websites for accepting travel bookings. The intent behind the move is to eliminate the need for travel agents, thereby earning higher margins and also gaining greater control over pricing.

Have more questions on Expedia? See the links below.

• Top 3 U.S. OTAs: A Comparison Of Operating Margins
• What Drove Expedia’s Revenue And EBITDA Growth Over The Last Five Years?
• What Is Expedia’s Fundamental Value On The Basis Of Its Forecasted 2015 Results?
• Top 3 U.S. OTAs: A Comparison Of Operating Margins
• Expedia Year 2015 Review
• How Have Expedia’s Different Segments Performed Over The Last Five Years?
• Expedia Q1 2016 Earnings Results
• How Does Expedia’s Financial State Currently Look?
• What Percentage of Expedia’s Stock Price Can Be Attributed To Growth?
• Who Relies More On Debt: Priceline Or Expedia?

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