August 8, 2008

After Years of Fast Growth, Online Travel Agencies Brace for a Slowdown

By Kyle Peterson

Online travel agencies, after growing rapidly for years, could face a slump in bookings later this year when U.S. airlines start reducing the number of tickets for sale.

All three publicly traded U.S. online travel agencies - Expedia, Orbitz Worldwide and - have warned that downsizing efforts by carriers could hurt other travel businesses.

None predicted a specific impact on their industry, but at least one expert said the implication was clear.

"We expect it to hurt" online travel agencies "because it could lead to higher air pricing, which could deter travel," said Marianne Wolk, an analyst at Susquehanna Financial Group.

Cuts in capacity are certain to put a crimp in U.S. air travel sales, she said, adding, "there should be a secondary negative impact on travel over all."

The trouble stems from a crisis in the airline industry resulting from soaring fuel prices that have not been completely offset by higher ticket prices, which has led to steep quarterly losses for carriers.

Major airlines like American Airlines and United Airlines have responded by downsizing in an effort to reduce their spending and generate higher fares.

American has promised to shrink its U.S. capacity by up to 12 percent in the fourth quarter, while United has said it will cut its fourth-quarter mainline capacity by up to 16.5 percent.

Airlines also have angered travelers by introducing fees for items and services like in-flight refreshments, baggage checks and even pillows that once were complimentary.

But it is not just passengers who will share the pain. The entire travel industry will feel the effects, online travel leaders say.

"We would expect the capacity cuts coming up in Q3 and Q4 to continue to push air fares higher, putting ongoing pressure on ticket volumes," Mike Adler, chief financial officer at Expedia, said during a conference call in July.

Jerry Boyd, chief executive of Priceline, said during a conference call this week, "As most publicly traded travel companies have reported, economic uncertainty and high fuel prices are affecting the broad travel market, and significant airline capacity reductions in the fall will also have a negative impact."

Wolk, the Susquehanna analyst, said the best defense against weakness in U.S. air travel bookings was to diversify operations.

U.S. travel companies that have operations across Europe and Asia, for example, are better insulated against trauma in the domestic market.

She added that Orbitz had a higher dependence on the U.S. market than Expedia and Priceline, saying that 80 percent of Orbitz's business was derived from domestic air bookings.

Expedia and Priceline each reported a net profit for the second quarter as well as growth in U.S. bookings. Orbitz, on the other hand, posted a quarterly net loss of $5 million on Wednesday and said its domestic bookings dipped 1 percent.

Orbitz's chief executive, Steve Barnhart, acknowledged that the company leaned heavily on U.S. air bookings.

But he said only 21 percent of Orbitz's revenue was driven by domestic leisure bookings.

Leisure routes will see more capacity cuts and fare increases than routes frequented by well-heeled business travelers, he said.

"I think the broader point is that the actual revenue we get from the markets that are being impacted by these capacity cuts is relatively modest compared with our overall business size," Barnhart said during an interview.

He said the company was diversifying its businesses further by beefing up its revenue from advertising and international bookings.

Barnhart said no one knew exactly how the capacity cuts by airlines would affect online travel agencies.

Travelers may decide to drive instead of fly, or they may try to find online bargains in lodging and entertainment to offset the higher air fares.

"How it flows through will depend a lot on how consumers will react," Barnhart said.

"Clearly there has to be some downward pressure on travel."

Originally published by Reuters.

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