Launching “Express Deals” earlier this month, Priceline (NASDAQ:PCLN) now offers three ways to book hotels on its website – Clear listing, name your own price and the express deals. In light of the tough macroeconomic scenario, an increasing number of travelers are opting for the opaque booking option, which offers discounts as high as 50% over traditional online booking options.
While the “name you own price” model (where the buyers bids a price and is only made aware of the hotel’s star level and neighborhood) is available for hotels, air ticket bookings and car rentals, “Express Deals” only offers deals in hotels.
This new opaque booking system offers great deals in thousands of hotels around the world where you can see the price but not the name of the hotel until you make a non-refundable payment, though the user can view the star rating as well as the neighborhood where the hotel is located.
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By introducing “Express Deals”, Priceline directly competes with similar deals that some of its competitors offer – Hotwire’s hot rates, Travelocity’s top secret hotels and Expedia’s (NSDQ:EXPE) unpublished rates hotels. However, the company differentiates itself by offering an additional feature that provides added information of a complete set of amenities and guest policies at each hotel.
How Will This Benefit Priceline ?
We estimate hotel bookings to contribute more than 90% to Priceline’s valuation. Not only does this division contribute over 95% to the company’s revenue; but, with over 20% revenue margins it also is the most profitable. Thus, how the company fairs in this market, both domestically as well as internationally, will to a large extent determine the stocks future value.
The expansion into hotels markets in Asia and Eastern Europe present a tremendous growth opportunity for US based online travel services providers. The hotels markets in Europe and Asia are 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 Priceline are more appealing to small, independent hotels outside US. Small independent hotels are also more likely to make use of the opaque booking system compared to large hotel chains.
Priceline’s international business contributed approximately 78% of its gross bookings and 88% of its operating income in 2011. With a growing focus on expanding in European and Asian markets, we feel that “Express Deals” is a good step ahead to leverage growth.
We are in the process of updating our current price estimate of $588 for Priceline.