Will Kayak Make a Big Splash in the Online Travel Market?

By Tom Gibbs - July 10, 2012 | Tickers: EXPE, FB, HTZ, INTU, PCLN | 0 Comments

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The online travel industry has taken off and soared into the skies following the global travel slowdown experienced in 2009, with key players including Expedia (NASDAQ: EXPE) and Priceline.com (NASDAQ: PCLN) enjoying huge top line growth over the past three years.  Online travel spend now represents half of all global e-Commerce transactions (IDC, 2011), and with a continued rebound in the global travel industry and an increased penetration of online-based bookings, there is little chance that the industry’s Internet niche will slow down anytime soon.

With market conditions ripe for a successful IPO, the relatively young Kayak Software has recently laid out its plans to fetch close to $90 million through shares priced between $22-$25/share.  This is not the firm’s first push into the publicly traded realm.  Kayak management delayed its original IPO plans for almost two years following the industry slowdown and most recently cancelled its investor roadshow following the Facebook (NASDAQ: FB) IPO debacle this past May. 

With Facebook comfortably (nearly 30%) above its post-IPO price low, and with recent upgrades targeting higher prices for Facebook stock by the end of the year, Kayak management once again foresees a favorable landscape for an upcoming share issuance. 

What’s Kayak All About?

Kayak was founded in 2004 by cofounders from three competing online travel players – Orbitz, Expedia, and Travelocity – with a goal of getting closer to a one-stop shop than the other alternatives in the market.  Steve Bafner, cofounder and current CEO of Kayak, recently explained that one of the primary issues associated with the three aforementioned competitors was that consumers would frequently visit and aggregate travel information on these sites, but would make the actual bookings on airline and hotel websites.  Kayak attempts to take a different approach by giving consumers powerful filtering tools to locate specific travel criteria and then give them all of the available options on where to book those reservations – airline/hotel/rental car websites, the websites of competitors including Expedia, Travelocity, Orbitz, and Priceline, or on the Kayak system itself. 

Kayak management explains that the corporation is more of a tech player than it is an online travel agency.  Nearly 60% of Kayak’s employees are software engineers, and several key executives were pulled from software companies like Intuit (NASDAQ: INTU), which is the creator of QuickBooks, TurboTax, Quicken, and other software solutions.

The corporation generates revenue through several different avenues.  First, Kayak allows prospective travelers to compare its prices side-by-side with other travel sites.  These competitors compensate Kayak for the advertisement of this comparison.  Similarly, after presenting a multiple choice card to consumers based on their travel criteria, Kayak gets paid a commission for every click-through that its site generates.  On-site advertising via smart text and display ads, which give users other offers specific to their travel searches, round off Kayak’s full portfolio. 

Does the System Work?

With several well-established firms already operating strongly within the online travel space, it is difficult to imagine that a new player can come along and steal a significant share of the market.  Based on Kayak’s past several year performance, however, it does appear that the enterprise does have a winning formula. 

Kayak’s model is different from other travel booking sites in that it is more of a search engine, aggregating all hotel/flight/rental car combinations based on a consumer’s travel criteria, than an itinerary reservation system.  The corporation is pushing nearly 100 million travel searches per month at this point, up nearly 43% from ten months ago.  As one would expect, query growth – fueled by awareness of Kayak as an online option for travelers and continued advances in its ease-of-use – directly drives the corporation’s top line.  Both metrics have grown at around a 41% CAGR since 2009 (through Q1 2012):

Number of search queries on left margin, all figures in millions

The corporation is also enjoying a higher level of profitability as it continues to mature – EBITDA margins over the past twelve month period of 22.4% represent a meaningful increase from the 14.2% margins reported in the 2009 fiscal year. 

Associating more with software companies than the comparable online travel agencies in its field, Kayak’s growth platform thus far is to drive consumer awareness by optimizing key features and ease-of-use.  One of the latest changes the corporation has launched is its “Book with Kayak” tool, giving consumers the ability to complete booking transactions within the Kayak experience on mobile devices or on the web. 

Due to the nature of such transaction – it is not only referring users to airlines, hotels, and rental cars online but it has the capacity to actually book the reservations – Kayak receives a higher commission if the user fulfills an order through the Book with Kayak tool.  This process improves the site’s ease-of-use because it limits the number of landing pages a traveler must hit to book a given trip.  As such, the corporation is actually pushing an increasing amount of its customers through such a route, pulling in larger revenue streams at the same time.  Nearly 39% of hotel booking link clicks on Kayak’s U.S. website in Q1 2012 were done through the booking path tool, which is more than double the penetration rate in Q2 2011 (18%), and is up from essentially zero several quarters prior when the tool did not exist.   

Kayak has also recently launched its Trip Management feature, giving traveler’s easy access to all of their vacation info.  Consolidated onto one simple web page, itineraries can easily be shared with family/friends, and is viewable on all of Kayak’s mobile apps.  Consumers that feel the site is more personalized to their specific vacation will undoubtedly build a higher enthusiasm and loyalty for the site. 

Growth Drivers

One of the exciting points about Kayak’s upcoming IPO is the fact that there are quite a few growth drivers that will continue to drive the corporation’s positive performance going forward.

• International Growth: Nearly 63% of all online travel bookings are made in the international space, yet Kayak only generates 18% of its revenues from non-domestic countries.  Even though the corporation has boosted international-based revenues at a three year CAGR of 124%, it is still only scratching the surface of the international travel market.

• More Partners: The more airline, hotel, and rental car agency partners Kayak can add to its booking path tool, the more profitability the corporation will squeeze out of each on-site booking.  The corporation recently added Air Canada to the feature, as well as Hertz (NYSE: HTZ) and Advantage Rental Car as partners. 

• Increased Awareness: Kayak is one of the youngest players in the online travel game and commands around half of the consumer awareness as do other more entrenched players in the field.  The corporation is gaining awareness points very rapidly, however.  Based on a recent TNS Brand Tracker survey (Q1 2012), nearly 32% of respondents were familiar with Kayak’s offerings, which was up from 9% in late 2009.  Travelocity, Expedia, Orbitz, and Priceline all gained relatively little awareness points over the same time period.  Higher traffic volume is the name of Kayak’s game, so any and all boosts to the site’s awareness among consumers is a positive growth driver over the future.
• Travelocity: 61% of respondents were currently familiar with offerings, up from 59% in Q4 2009.
• Expedia: 55% versus 54%
• Orbitz: 46% versus 44%
• Priceline: 36% versus 30%

• Scalability: With less than 200 employees, low fixed costs and minimal maintenance capital expenditures ($5 million per year, per recent pre-IPO conference), Kayak’s business is highly scalable in any market it enters.  The corporation, for example, spent $82 million in marketing expenditures in the United States market in 2011, which was up from $79 million in 2010.  Revenues jumped 20% between the two years, driving down the cost per unit of revenue from 51% to 44%.  The corporation is still in a growth phase and will not be able to enjoy such drastic cost (per revenue) savings in the near future, but seeing that marketing costs currently represent 50% of the corporation’s operating expenditures, future scalability will have a huge positive impact on Kayak’s bottom line as awareness in each of its markets continues to grow. 

With no date currently set for the IPO, there is no reason for prospective investors to get too excited about Kayak just yet (it could, after all, once again postpone the big event as it has done in the past).  However, with the corporation’s financial stability ($44 million in cash/equivalents and no debt burden), the dramatic growth prospects as the global travel industry continues to shift to the online medium, and its increased awareness among consumers in the online travel market, there is no doubt that Kayak does contain the right recipe for a closer look into what it has to offer.  

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