Wall Street smitten with online travel

Online travel may be as good as sex--at least in terms of dot-com business models that work
Written by Larry Dignan, Contributor

On Priceline.com's first-quarter earnings conference call, CEO Daniel H. Schulman sounded quite smitten about the online travel business. And who can blame him? Internet travel companies dominate the short list of dot-coms that are either profitable now or see profits coming in the near future.

After reporting a smaller-than-expected loss of 3 cents a share in the first quarter, Internet travel retailer Priceline should post an operating profit in the second quarter in the range of a penny to 2 cents a share on sales of $297m to $310m (£194m to £216m), Schulman said. For the third quarter, Priceline predicted earnings of 2 cents to 3 cents a share on sales of $320m to $330m.

"We can make a lot of money in online travel," said Schulman, who noted Priceline accounts for about 10 percent of online travel sales. "We will be on the short list of a few strong surviving Internet businesses."

That list includes a lot of Internet travel companies. Online travel agency Expedia reported its first operating earnings this week, and before that Travelocity turned a profit. Toss in earnings from Cheap Tickets and you got the makings for one profitable sector. That's not too shabby considering most dot-coms not named eBay are losing money.

Bottom line: Despite the economic slowdown, consumers are still spending on travel, and they are moving their transactions to the Web. The total US leisure and business online travel purchases will surge from $18bn in 2000 to $63bn in 2006, according to Jupiter Media Metrix.

And Priceline hopes to join the ranks of profitable companies such as Expedia soon. Priceline executives acknowledged that the "name your own price" company "remains in turnaround mode," but were confident it would be on stable ground shortly. And a little stability will be more than welcome. In recent months, Priceline has pared down its aggressive expansion plans amid profit misses and layoffs. The e-tailer had ambitious plans to expand into every market imaginable--auto sales, insurance, mortgages and groceries, to name a few.

Following earnings disappointments and a management revolving door that ushered out former Chief Financial Officer Heidi Miller, Priceline turned to its core travel business to get back on track. The company improved customer service and eliminated quirky flight itineraries that had customers flying from New York to Florida via San Francisco, said Schulman. "We will continue to focus on our core travel business," said Schulman, who noted that the company will be picky about expanding into new markets.

This time last year, that comment would have rattled Wall Street, which once believed Priceline could be all things to all customers. Today, investors are buying into the online travel theme. Priceline shares surged 36 percent Tuesday after Goldman Sachs upgraded the stock to "market outperform" from "market perform" largely based on the e-tailer's prospects in the travel market.

"Priceline has a sustainable business just in travel," said Goldman analyst Anthony Noto. "While we still view Priceline as a platform e-commerce company, an assessment of the investment opportunity based solely on travel given current conditions is attractive."

Investors obviously got the hint as shares of Expedia and Travelocity posted impressive 15 percent and 12 percent gains, respectively, on Tuesday. Despite a weak economy, consumers continue to book trips online. "Facilitating travel bookings on the Internet is a profitable business, unlike some other B2C (business-to-consumer) ideas," said Legg Mason analyst Thomas Underwood, who upped the price targets of Expedia and Travelocity to $36 per share Tuesday.

For proof that online travel can be profitable you don't have to look that far.

Expedia posted an operating profit of $4.4m, or 9 cents a share, on sales of $110m Monday. CFO Gregory Stanger told analysts to expect a profit, excluding one-time charges, of between 6 cents and 9 cents a share in the fourth quarter, well above the First Call consensus estimate calling for a loss of 5 cents a share.

Analysts cheered the results and boosted their financial targets. Pacific Crest analyst Steve Weinstein upped his fourth-quarter revenue and earnings estimates on Expedia to $128m and 7 cents a share, respectively, from $99.5m and a loss of 10 cents a share. For 2002, Weinstein is projecting Expedia will report a profit of 35 cents a share on sales of $605m.

Expedia rival Travelocity also checked in with a strong quarter, reporting an operating profit of 3 cents a share on sales of $72 million in its first quarter.

Can the good times last? Orbitz, the e-travel site jointly owned by American, United, Northwest, Delta, and Continental Airlines, will launch in June and could cause some turbulence in the industry, but online travel executives have said they aren't worried. The Transportation Department recently approved the Orbitz launch as long as it can review the site in December to ensure it's not crimping competition.

Analysts acknowledge the threat of Orbitz, but said the already profitable online travel companies can handle the competition. Besides, the market may be big enough to support a number of players. "We believe travel and destination services represents one of the best opportunities in e-commerce," said Weinstein. Sounds like quite a love affair.

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