Kayak is a travel search engine, which until now only facilitated quick and easy research and comparison of fares collected from hundreds of travel websites. Once the user selects a flight or a hotel, Kayak directs him or her to the supplier or online travel agency to complete the purchase. Kayak recently made a significant move by partnering with Travelocity to provide hotel bookings on its own website.  This move puts Kayak in direct competition with major online travel agencies such as Expedia (NASDAQ:EXPE), Priceline (NASDAQ:PCLN) and Orbitz (NASDAQ:OWW).
Hotel bookings make up 56% of our $29.12 Trefis price estimate for Expedia and over 91% of our $479 price estimate for Priceline. Given this impact, we would expect this to mean that Kayak has a plenty of upside, but we believe the outlook is muted for the near term.
Why Would Kayak Offer Hotel Bookings?
- While Kayak’s services are free for travelers, it had until now two streams of revenues – (i) revenues from referrals to travel suppliers and online travel agencies, and (ii) revenues from advertising placements on its websites and mobile applications. Offering bookings would bring in additional revenue.
- Reduced exposure to Google-ITA deal: Offering hotel bookings reduces Kayak’s dependence on air travel, the referral fees from which currently accounts for almost 14% of our $802 million valuation of Kayak. ITA licenses its airfare search and pricing software to Kayak under an agreement that expires in December 2013. The faring software accounts for 42% of Kayak’s overall airfare query results. In July 2010, Google announced an agreement to acquire ITA Software for $700 million and so hotel bookings on its own website reduces Kayak’s dependence on air travel queries to some extent.
Why Hotel Booking?
Online travel agencies earn a commission (revenue margin) as a percent of the booking size. Hotel bookings have the highest revenue margin often in excess of 20%. Compare this with the low revenue margins on air ticket bookings at around 3% and so there is a greater revenue opportunity in hotel bookings.
What Does it Mean for Travelocity?
Kayak would continue providing comparison between fares available across the innumerable online sources but by offering the option to make hotel reservations on its website, Kayak would significantly enhance Travelocity’s reach. While Kayak gains from retaining users on its website leading to higher advertising revenues with more clicks, this move also helps Travelocity increase its market share of hotel bookings.
Potential Impact for Kayak
Travelocity will be processing the transactions and providing customer service hotel bookings. The arrangement between Kayak and Travelocity will involve sharing revenues between the two on hotel bookings on Kayak. Given that Travelocity would incur the operating expenses, we expect a significant portion of the commission to accrue to Travelocity. Kayak would likely earn only a marginally higher amount than what it would have otherwise by simply directing the user to Travelocity’s website. And so in reality this move only means a marginally higher referral fee from Travelocity on hotel queries at Kayak.
We currently estimate the Kayak’s hotel referral fee per thousand hotel queries to increase at 5% year-on-year from $445 in 2010 to the end of our forecast period. Even if offering hotel bookings at its own website were to increase the rate by additional 1 percentage point, it would have only a 2% potential upside to our current $802 million valuation of Kayak.Notes: