Rapids Ahead for Kayak
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Kayak Software (NASDAQ: KYAK) platform seems similar to an older search engine that I used to use, Metacrawler. Metacrawler offered searchers a more detailed picture of the early Web by combining search results from several sites, such as Yahoo! and Lycos. Although Metacrawler was very popular in the late 1990s, eventually most users switched to Google (NASDAQ: GOOG), which effectively eliminated the need for other search engines. Kayak operates in the travel industry, but it will also have to fight off Google to succeed.
Kayak has a strong executive team, as it is run by former Priceline (NASDAQ: PCLN), Travelocity, and Orbitz veterans who have devised strategies to hold off Google at their own firms. These relationships have already paid off to some extent for Kayak. The other travel agencies pay Kayak commissions for sending travelers to their own sites, which has helped Kayak's revenue and income rise rapidly in recent years. Kayak does note that it relies on other travel agencies for income, as Kayak's prospectus explains that it earned a third of its revenue in the first quarter of 2012 from Expedia (NASDAQ: EXPE), Priceline, Orbitz, and their affiliates. Expedia reported 12 percent revenue growth last quarter, and Priceline reported a 28 percent figure, so Kayak's main customers seem like they're in decent shape at the moment.
Kayak has captured a great deal of brand loyalty, as repeat travelers often visit Kayak's site directly instead of performing a Google search, and Kayak attracts mobile visitors as well. The meta search concept makes a lot of sense, as a traveler who's in a rush won't want to check each travel broker's site individually to find the cheapest tickets. Although each travel broker does have its own repeat bookings, the travel market is very price competitive and cheaper plane tickets could be just a click away.
Kayak effectively serves as an affiliate marketing site for the other travel booking agencies. Affiliate marketers always have to worry about Google entering their niches itself, especially in major markets like the travel sector. Kayak's prospectus does mention Google's own travel reservation services, although Kayak seems like it's retained enough repeat travelers to keep its profits rising anyway, which is a good sign.
Kayak needs to maintain a technology edge over established companies like Google that have much greater resources. Faring software from ITA helped Kayak quickly check airline sites, hotel sites, and travel brokers' sites for its own customers. If ITA's software was Kayak's main advantage, Kayak could be in trouble because Google now owns ITA. It's already risky to rely on another firm for critical technology, and when your main competitor buys the firm that provides your edge, your situation becomes even more perilous.
Regulators did establish some conditions on Google's ITA acquisition to prevent Google from monopolizing the online travel marketplace, so Kayak does have the right to renew its ITA faring software license until October 2016. Although Kayak doesn't have to worry about losing access to this faring software over the short term, its managers have planned ahead for potential problems, so Kayak arranged a deal with the Spanish faring software provider Amadeus. Amadeus called one of its search technologies Meta Pricer, promoting its expertise with the meta search concept.
Amadeus' 2Q 2012 press kit goes into great deal about Amadeus' relationships with European airlines and travel agencies, and also mentions that Amadeus has made a deal with Expedia. Amadeus is publicly traded on Spanish exchanges, and major European airlines Air France, Lufthansa, and Iberia all have stakes in Amadeus. The Amadeus deal does seem like it might help Kayak gain an edge over Google in Europe, and Kayak does have plans for international expansion.
Kayak seems like it's held off Google so far, but Google's ITA acquisition seems like it could have damaged Kayak's original technology advantage. Amadeus could give Kayak another edge that might be more difficult for Google to match, while opening up new markets for Kayak, but making a move toward the European travel market looks very risky right now. Kayak has some big strengths, such as its leadership team and customers' brand loyalty, but challenging Google could mean that Kayak is headed for some rough waters.
enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and Priceline.com. Motley Fool newsletter services recommend Google and Priceline.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.