- B2B constitutes 99% of the Trefis price estimate for Expedia's stock.
WHAT HAS CHANGED?
- Expedia Sees Improvement in Q3 Performance
Expedia's losses from the impact of the pandemic moderated in Q3 2020, but gross bookings and revenue still were down considerably compared to 2019, dropping 68% and 58%, respectively. Lodging revenue decreased 52% in the Q3 on a 58% decrease in room nights stayed, while air revenue decreased 87% with a 74% decline in tickets sold. The internet travel company also saw over $300 million in adjusted EBITDA, a drop of 67% compared to the same period in 2019, but a dramatic improvement over the second quarter of this year, when adjusted EBITDA was negative $436 million. In addition, the company became essentially cash flow neutral in September for the first time since February.
- Vrbo's long-term growth prospects
Similar to Q2, the bright spot for the company remains Vrbo, which saw both bookings and revenue increase compared to the third quarter of 2019, although the company does not release figures specifically about Vrbo. The company cited “drive-to destinations” as one of the first segments of travel to recover from the global health crisis that has restricted travel worldwide since March. We remain an optimist about the company's long term growth prospects in home-vacation rentals going forward. The idea of individuals renting out their homes to make extra money could be quite lucrative. Vrbo competes with Airbnb and is live in 15 countries. Interest in vacation rentals and camping-related accommodations is up as people look for low-risk travel alternatives.
- Focus On Growth
Expedia's main aim will be to grow organically through in-house brands including Hotels.com, Expedia, and Vrbo. The company's total property count stood at around 1.6 million (including 765,000 integrated Vrbo listings) in 2019. The formerly Homeaways segment has been renamed to Vrbo.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are the key drivers of Expedia's value that present opportunities for upside or downside to the current Trefis price estimate:
- Expedia's Core OTA gross bookings: We currently forecast Expedia's gross bookings to increase from $87.6 billion in 2019 to over $125 billion by the end of our forecast period. There can be almost a 10% downside to the Trefis price estimate if Expedia's gross booking grows slowly to only $115 billion over our forecast horizon.
- EBITDA Margin on Core OTA Bookings: We currently forecast EBITDA Margin from Core OTA Bookings to increase to around 16.6% throughout our forecast period. There would be around 5% upside to the Trefis price estimate if the margins were to increase to around 17.2% over our forecast period.
Egencia Corporate Travel Services
- EBITDA Margin on Egencia Corporate Travel Services: We currently forecast EBITDA Margin for Expedia's Egencia Corporate Travel Services to increase from 12.5% in 2019 to close to 13.2% by the end of our forecast period. There would be a marginal upside to the Trefis price estimate if the EBITDA Margins were to grow to 14.2% by the end of our forecast period.
Expedia (NASDAQ: EXPE) is the second-largest online travel service provider in the world, in terms of revenues. It operates online travel portals such as expedia.com, hotels.com, and hotwire.com, that help connect travelers with travel suppliers, such as hotels, airlines, cruises, and car rental companies.
Expedia's corporate travel business, Egencia (egencia.com), provides custom travel products and services to corporate travelers and businesses seeking to optimize travel costs and to improve their employee's travel experiences.
While serving as a global travel marketplace, Expedia broadly makes money by either (i) acting as a travel agent and charging a commission (known as the processing fee or the booking fee) on every transaction, or by (ii) acting as a merchant and purchasing the travel inventory (air tickets and hotel stays) from the travel providers (airlines and hotels) in bulk at discounted prices and selling the same to the customers at a premium. In addition to this, Expedia sells advertising on its websites, and companies (mostly travel suppliers-hotels and airlines) either pay-per-click or pay a flat fee for the duration of advertising. Trivago, the meta-search engine acquired by Expedia in 2012, is the primary source of advertising revenues for Expedia.
SOURCES OF VALUE
Expedia's Core OTA business is the primary source of value for the following reason.
Significant Revenue Margins from Core OTA Bookings
Revenue margin earned on OTA bookings is significantly high and has been growing steadily. Gross bookings in 2019 were around $87.6 billion, and the revenue margins (revenue earned by Expedia as a percentage of the size of booking) earned were around 10.8%. As a result, Expedia's revenue from OTA bookings grew at 7.6% annually over the past few years.
The following factors determine the fate of the online travel industry:
- Due to the discretionary nature of leisure travel, 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 prime indicators of economic activity and is influenced the most by macroeconomic conditions. During the recessionary times of 2008-2009, both corporate and leisure travel plummeted. Amidst 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 online travel service providers, depends on the level of business activity. Amidst 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 and priceline.com.
- 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 Expedia and Priceline, earn revenues from international bookings in foreign currencies, but incur most operating expenses in dollars, and report the earnings in dollars. Thus, adverse foreign exchange movements could erode profits of travel service providers. Since an increasing proportion of bookings are coming from the less penetrated emerging economies, the exposure to foreign exchange is expected to increase in the future.
Significant impact of unforeseen events on travel
- Rising fuel prices has the immediate impact of increasing airfares which discourages travel. This not only impacts air ticket bookings but also negatively impacts hotel bookings and destination services such as car rentals and cruises. A decline in the overall bookings hits travels service providers' revenues.
- With rises in fuel prices, airlines are no longer able to offer significant discounts on bulk bookings to travel agents such as Expedia. As a result, the revenue margins earned by travel service providers (under the 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 (hurricanes, tsunamis, volcanic eruptions), travel related health concerns (Influenza H1N1, avian bird flu, SARS), 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 the U.S. has over 78% of internet users, the proportion of Europe’s population online is close to 61%, with the internet penetration in Asia being even lower, at 26%.
Hence, the increased internet adoption and rise in e-commerce will favor travel providers such as Expedia and Priceline.
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 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 airfares, occupancy rates, and profits.
- Many airlines are figuring out ways to grow their top lines through ancillary means such as baggage fees, access to onboard 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 the profits of all airlines. Fewer players in the market have 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 are highly competitive niche segment within the travel industry.
- During the recessionary times of 2008-2009, as travel declined, so did hotel 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), 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). Hotels bookings took a hit and adversely impacted the revenues for travel service providers.
- At 16.3%, hotel Bookings offer markedly higher revenue margins (revenue earned by the travel service provider as a percentage of the size of booking) compared to air ticket bookings (~2%). Hence, travel service providers make maximum profits from hotel bookings.
- 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. Travel agencies stand to make higher revenue margins from independent budget hotels under their merchant business model, hence expansion into the hotel markets in Asia and Eastern Europe presents U.S. based online travel service providers with significant growth opportunities.
Threat from Online Search Engines
- Competition in the U.S. online travel market remains intense and traditional online travel companies are creating new promotions and consumer value features in an effort to gain a competitive advantage.
- In June 2007, Priceline eliminated processing fees for its price-disclosed airline ticket services, 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, Expedia and Orbitz reduced booking fees on hotel room reservations. As a result of this, 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 revenue.
- 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 looking 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 decision. 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 for the company have increased at a faster rate than gross profit, a trend which is expected to continue in the future.
- Large and 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 acquired ITA Software, Inc., a major flight information software company, which could allow it to pursue the creation of a new flight search tool which enables users to find flight information on the Internet without using the services of Expedia or Priceline, etc. Google has also invested in HomeAway, a vacation home rental service.
- Google has also 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 for customers.