Are Online Travel Companies About to Take Off?

Lior is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If you are like me, then you usually plan your trips via big online travel companies such as Orbitz Worldwide (NYSE: OWW) and TripAdvisor (NASDAQ: TRIP). Even though I still occasionally use travel agents for international flights, the majority of my flights and hotel bookings are done via online travel sites. Considering the little growth in the U.S airline business, will these online-travel companies continue augmenting their revenue? 

During 2013, online-travel companies have done very well in the stock market: Shares of TripAdvisor jumped by 86% (to-date); Orbitz’s stock spiked by 239%. Finally, shares of (NASDAQ: PCLN) sharply rose by 49.5%. Let’s examine the recent developments of the airline industry and see how it could affect these companies’ revenue. 

Is the airline business taking off?

According to the Bureau of Transportation, in the first four months of 2013 the number of airline passengers increased slightly by 0.2%. Conversely, the number of flights fell by 3.2% compared to 2012. These data points suggest that perhaps airlines are improving their bottom-line performance as they have fewer flights but more passengers. Do these developments help big online companies such as Priceline or Orbitz? Well, yes and no.

On the one hand, companies such as Priceline are paid mostly for booking flights, hotels and car rentals. So if the number of passengers increases, this trend behooves Priceline. On the other hand, fewer flights and very moderate growth in the number of passengers won’t be enough for online companies to maintain high revenue.

Moreover, airline fares remained nearly unchanged in the first quarter of 2013, which could also reduce the profit margins of online-travel companies such as Orbitz and Priceline. If this trend persists, it could also curb the growth in revenue. 

In terms of growth in revenue and profitability, both TripAdvisor and Priceline shares similarities: in the second quarter, TripAdvisor’s revenue rose sharply by 25% and its profit margin remained high at 38%. In the first quarter of 2013, Priceline’s revenue also spiked by 25.5% (year-over-year), and its profitability remained stable at 24%. Conversely, Orbitz didn’t do well in the first quarter of 2013: the company’s revenue rose by only 6.9%,.while its operating losses were nearly $3 million.  

So even though all three companies are in the same industry, their financial performance is very different. The leaders in terms of revenue and profit margins are TripAdvisor and Priceline. Let’s see how these companies plan to expand their operations.  

Going international

Using online companies to plan your next trip have become ubiquitous in the U.S. The main growth generator for companies such as Priceline and TripAdvisor is likely to come from the international arena. Let’s see how these companies are doing on this front. 

North American success

Most of TripAdvisor’s  revenue comes from click-based advertising, which accounts for 74% of its revenue. But the highest growing segments are subscription, transaction and other revenue that grew by 68% in the past quarter. This group accounts for only 13% of its revenue. But if this high growth rate persists, it will eventually become a significant revenue base. 

The company is currently operating in 30 countries including China, under Despite the many countries the company reached, its international revenue didn’t grow by much: international revenue rose by 18.4% during the second quarter (year-over-year). In comparison, North America revenue grew by 32%.

One way the company maintained its growth in North America was by social networks, such as Facebook. But the figures above and the wide outreach suggest the company has much more room to grow in the international arena.

International focus

Most of Priceline’s growth came from its international segment: the company’s international gross profit jumped by 45% (year-over-year). Looking forward, Priceline also projects most of its growth will continue to come from the international segment, which is expected to rise by around 40%. Its domestic operations will grow by only 7%. The slow growth in domestic travels suggests this company will need to keep relying on the international segment to maintain its high growth.  

One factor to consider is that in order to expand internationally, these companies’ operational costs are likely to rise – costs such as translating sites to other languages and advertising. This could lower the profit margins of these companies but could keep their growth in revenues high.  

Relying on the local market

Orbitz is still mostly relying on the domestic market: in the first quarter, the domestic segment accounted for 74% of its revenue. In comparison, TripAdvisor’s domestic revenue accounted for only 54% of its total revenues. Orbitz projects its total revenue will rise by only 4% to 7% in 2013. If the company can't augment its operations outside of the U.S, its revenue growth will remain low. 

Sustainable growth?

One factor to consider is their debt-to-equity ratios: TripAdvisor and Priceline have reasonable ratios of 0.4 each. This means that if these companies require additional funding to expand their operations, their debt-to-equity ratios won’t hold them back.  

Conversely, Orbitz’s debt-to-equity ratio is 31.6 – a very high ratio due to Orbitz’s low equity. Down the line, this could adversely affect the company’s attempts to expand its operations.  

The bottom line 

Despite the little growth in the number of passengers flying, online-travel companies continue to benefit from the rise in domestic demand for their services. The ongoing rise in the international arena could keep their revenue growing, even though it may also lower their profit margins.

But the growing competition from other companies and a decline in the number of flights could eventually curb growth in revenue. Finally, the high profit margin, sharp rise in revenue and financial stability of TripAdvisor and Priceline make them appear to be better investments than Orbitz.  

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Lior Cohen has no position in any stocks mentioned. The Motley Fool recommends and TripAdvisor. The Motley Fool owns shares of and TripAdvisor. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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