Booking Holdings Inc. Company
- Agency constitutes 56% of the Trefis price estimate for Booking Holdings Inc.'s stock.
- Merchant Bookings constitute 39% of the Trefis price estimate for Booking Holdings Inc.'s stock.
WHAT HAS CHANGED?
- Booking Holdings Sees Improvement in Q3 Results
The online travel giant saw marked improvement in Q3 2020, with gross travel bookings improving from $2.1 billion in Q2 to $13.4 billion. Although this value decreased 47% over a year prior. Room nights booked in Q3 decreased by 43% year-over-year( y-o-y), compared to an 87% decrease y-o-y in Q2. Total revenues for Q3 were $2.6 billion, a 48% decrease from the year prior. Net income for the quarter was $801 million, a 59% decline y-o-y. The improvement in Q3 over Q2 was entirely driven by domestic travel with a very modest improvement in international travel.
- 3-phase Approach For Stabilizing Business
Booking Holdings has outlined this approach for optimizing the business to handle the decrease in demand and positioning the business to capture demand when it returns. The company has completed phase one and is now on the optimization phase in which Booking Holdings will assess its cost structure. Kayak, OpenTable, and Agoda completed this step in Q2, which reduced headcount by approximately 22% across the brands, and Priceline completed the phase in July. Booking.com, which is cutting its workforce by about 25%, is in the process of consulting with work councils and unions. Booking.com cost reductions could produce annual personnel savings from $250 to $300 million. In fact, the company has started to see some of the associated $80 million of annual cost savings during Q3.
- Booking Holdings Has Its Eyes Set On Alternative Accommodations
Booking Holdings aims to build a leading alternative accommodations platform by providing the largest accommodation choice with best value and experience to its customers. In 2019 Booking.com had a total of 6.3 million reported listings in homes, apartments, and other unique places to stay which made $3.1 billion in revenues. The company plans to consistently grow its reported listings, expand its properties on its online accommodation booking website, and improve its technological capabilities, which is expected to boost its growth in the near term.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Agency Gross Bookings: We currently forecast Booking Holdings' Agency gross bookings to increase from $70.6 billion in 2019 to ~96 billion by the end of our forecast period. There could be around 10% downside to the Trefis price estimate if the gross booking were to grow to $80 billion over our forecast horizon.
Take Rate on Agency Bookings: We currently forecast the take rate(revenue as a percentage of the gross booking) to increase from 14.3% in 2019 to 16% by the end of the forecast period. There could be a 5% downside if the take rate remains at around the current level during our forecast period.
Booking Holdings is the largest online travel company in the world (in terms of gross bookings). It provides its customers a broad range of travel services, which include bookings for hotel stays, airline tickets, car rentals, restaurant reservations, cruises and vacation packages via its online travel portals: priceline.com, booking.com, agoda.com, rentalscars.com, opentable.com, breezenet.com, and lowestfares.com. Its websites connect travelers with suppliers of different travel products such as hotels, airlines, cruises, and car rental companies.
In the U.S., it enables its customers to purchase a full range of travel services under the traditional price disclosed model (in which it earns a commission) or lets them bid for services at discounted prices under 'Name Your Own Price' model, where it earns the difference between the price an individual is willing to pay and the price charged by the travel service provider (hotel, airlines etc).
SOURCES OF VALUE
We believe that International Business and Hotel Bookings are the main sources of value for Booking Holdings -
- High Growth in the Online Travel Industry Outside the U.S. (International Business)
- With the acquisition of Booking.com, Agoda, and TravelJigsaw, Booking Holdings has been focusing on developing its international operations. Booking Holdings' international business constituted more than 85% of its gross bookings in 2019, as compared to 70% in 2010.
- The rising income levels and expanding middle class, combined with high population growth rates in emerging economies such as China, India, and South-East Asia is expected to contribute to an increasing number of people traveling to and from these regions.
- The extremely competitive online travel industry in the U.S. has led to lower revenue margins and high promotional spending, thereby eroding operating margins in the industry. Booking Holdings' key rival, Expedia, acquired its marketing partner Travelocity and acquired Orbitz (the third largest OTA player in the U.S.), among others.
- The relatively low internet penetration in Europe (63.2%) and the Asia Pacific (27.5%) as compared to the U.S. (78.6%), presents a huge upside to the online travel industry in these countries, as customers increasingly access the internet for making travel plans.
- The lack of standardization in travel services outside the U.S., along with a fragmented lodging industry in Europe and Asia Pacific, leaves much scope for premium pricing. Hence, Booking Holdings stands to make higher revenue margins from its international business.
The following factors determine the fate of the online travel industry:
- Macroeconomic Environment
- Due to the discretionary nature of leisure travel, the online travel service providers, which earn revenue in the proportion (and as a percentage of) travel bookings, depend entirely on the macroeconomic conditions (employment levels, inflation rates, etc). Corporate travel is, in fact, one of the indicators of economic activity and is influenced the most by the ongoing macroeconomic conditions. During a recessionary period, both corporate and leisure travel plummets. Amid rising unemployment and declining disposable income levels, the consumers cut back on their travel plans first before making adjustments to other expenses.
- Advertising, which constitutes a significant source of revenue for the online travel service providers, too, depends on the level of business activity. During recessionary times, businesses cut back on media and advertising spending and this translates into lower online advertising revenue for travel portals such as expedia.com, priceline.com, etc.
- Leisure travelers, unlike corporations, do not hedge themselves against foreign exchange fluctuations. Hence, the spot foreign exchange rates determine the consumer demand for international travel. In times of adverse foreign exchange rate movements (such as a depreciating dollar), international travel becomes dearer, and the same hotel booking and air tickets cost more dollars, thereby discouraging travel bookings.
- Travel Service Providers, such as Booking Holdings, earn revenues from international bookings in foreign currencies, incur most operating expenses in dollars, and report the earnings in dollars. Thus, any adverse foreign exchange movement could erode profits. Since an increasing proportion of bookings are coming from the less penetrated emerging economies, the exposure to foreign exchange is only expected to increase in the future.
Impact of Unforeseen Events on the Travel Industry
- Rising fuel prices has the immediate impact of increasing airfares, which discourages travel. This not only impacts Air Ticket bookings but reduced travel also negatively impacts hotel bookings, and destination services such as car rentals and cruises. A decline in overall bookings impacts travel service providers' revenues.
- With a rise in fuel prices, airlines are no longer able to offer significant discounts on bulk bookings to travel agents such as Expedia. With the result that the revenue margins earned by travel service providers (under Merchant model) take a hit. The lower revenue margins translate into lower profit margins for the travel service providers.
- Events which are beyond the control of any travel services provider, and can critically impact travel, include terrorist attacks, unusual weather patterns, and natural disasters such as hurricanes, tsunamis, volcanic eruptions (April 2010, volcanic eruption in Iceland), travel related health concerns such as Influenza H1N1, avian bird flu, SARS, etc, political unrest, and other unpredictable events. Unlike other industries, such events have a very significant impact on travel bookings and consequently on the revenues of travel service providers.
- While 78.6% of the U.S. population has internet access, the proportion of Europe’s population online is 63.2%, with the internet penetration in Asia being even lower at 27.5%. Hence, with rising affluence in emerging economies of South Asia, and increasing adoption of internet and e-commerce, the proportion of travel bookings over the internet is expected to rise in the future, a trend which favors online travel providers such as Expedia, Booking Holdings, Travelocity, and Orbitz.
Hotels and Lodging Industry
- Fuel expenses constitute the single largest cost head for airlines, making them vulnerable to hikes in crude oil prices. To reduce vulnerability to fuel price volatility, many airlines engage in fuel price hedging.
- Demand for flights is highly correlated to the global economic growth. Thus, a decline in economic growth, or recession, reduces demand for flights, impacting passenger traffic for airlines. On the contrary, steady growth in the global or U.S. economy, grows demand for air travel, allowing airlines to raise their air fares, occupancy rates, and profits.
- Many airlines are figuring out ways to grow their top lines through ancillary means such as baggage fees, access to on-board WiFi/food/drinks, etc. Accordingly, airlines are investing to enhance their product offerings that include in-flight WiFi and other entertainment options, improved lounge facilities, and extra legroom seats.
- During the past decade, low cost carriers such as Southwest and JetBlue have gained significant market share in the U.S. Looking ahead, we figure these low cost carriers to continue to grow their market share, as their lower fares attract passenger traffic.
- The U.S. airline industry has seen many mergers and acquisitions in the last decade including the five big combinations of US Airways and America West, Delta and Northwest, United and Continental, Southwest and AirTran, and American and US Airways. A more consolidated industry has worked to improve profits of all airlines. Fewer players in the market has made it easier for those remaining airlines to add capacity with restraint. Prior to this consolidation in the airline industry, individual airlines were adding capacity at higher rates in an attempt to grow their market shares. This rapid capacity addition resulted in an oversupply of seats, reducing margin and profits of all carriers. Going forward, we believe as long as airlines add capacity with discipline, the industry will remain profitable overall.
Online travel services is a highly competitive niche segment within the travel industry
- During the recessionary period of 2008-2009, as travel declined as a whole, so did the hotels' occupancy rates (the proportion of hotel rooms occupied per year). To meet the operating expenses (since the hospitality business has a significantly higher proportion of fixed costs), the hotel owners resorted to offering discounts and lower tariffs. This led to a drop in the Average Daily Rate (the average rate per night of hotel booking). The Hotels Bookings took a hit and adversely impacted the revenues for travel service providers.
- Hotel Bookings offer markedly higher Revenue Margin (Revenue earned by the travel service provider as a percentage of the size of booking) at over 19% compared to Air Ticket bookings (~3%), Cruises and Car Rentals (~9%).
- The hotels market in Europe and Asia is much more fragmented with smaller, independent lodgings compared to the U.S., 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 Expedia are more appealing to small, independent hotels outside the U.S. Also, travel agencies stand to make higher revenue margins from independent budget hotels under their merchant business model. Hence, expansion into hotels in Asia and Eastern Europe presents a growth opportunity to the U.S. based online travel services providers.
Threat from Online Search Engines
- Competition in the U.S. online travel industry remains intense, and traditional online travel companies are creating new promotions and consumer value features in an effort to gain a competitive advantage over competitors.
- In June 2007, Booking Holdings eliminated processing fees for its price-disclosed airline ticket service, and in April 2008, it reduced processing fees for its domestic price-disclosed merchant hotel room service. Starting in March 2009, Expedia and Travelocity also eliminated air booking fees, and in April 2009, Orbitz followed. In April 2009, each of Expedia and Orbitz reduced booking fees on hotel room reservations. With the result, no one player could maintain a price advantage over the others on price-disclosed merchant air tickets and hotel room reservations and the online travel industry as a whole lost revenues.
- In October 2009, Travelocity announced the waiver of its cancellation and change fees for hotel and vacation packages, as well as an expanded hotel guarantee, under which consumers who book a hotel room, and then find a lower published rate for the same room anytime before the day of check-in, are eligible to receive a refund of the difference.
- Since consumers are now increasingly hunting for bargains and discounts, Traffic obtained through online advertising has increased as a percentage of total demand, since the same consumer visits several websites before making a purchase. This increased shopping behavior has reduced advertising efficiency and effectiveness as traffic obtained through online advertising becomes less likely to result in a purchase on the web site. Therefore, online advertising expenses have increased at a faster rate than gross profit, a trend which is expected to continue.
- Large, established Internet search engines, with substantial resources and expertise in developing online commerce and facilitating Internet traffic, are creating and intend to further create inroads into online travel, both in the U.S. and internationally.
- Google's acquisition of ITA Software, Inc., a major flight information software company, has enabled it to create its own flight search tools which enable users to find flight information on the Internet without using the services of Expedia or Booking Holdings, etc. Google has also invested in HomeAway, a vacation home rental service.
- In addition, Google has launched a travel “meta-search” site to show searchers specific hotels and rates in addition to text advertisements.
- Microsoft has launched Bing Travel, a “meta-search” site, which searches for airfare and hotel reservations online and predicts the best time to purchase them. “Meta-search” sites leverage their search technology to aggregate travel search results for the searcher’s specific itinerary across supplier, travel agent, and other websites and, in many instances, compete directly with online travel service providers.