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Internet Travel Agencies Losing Some Luster

June 10, 2006

CHICAGO — A few years ago, Internet companies like Travelocity and Expedia revolutionized travel bookings with Web sites that appeared to spell doom for traditional brick-and-mortar travel agencies.

But these companies, once considered brash innovators, have been struggling as airlines and hotels promote their own sites and they attempt international expansion as younger competitors nibble at their customer base.

Uncertainty surrounding the leading online travel agencies (OTAs) — those that charge customers a fee to book on their Web sites — is reflected in their stock prices.

Expedia Inc. has shed about 38 percent of its value so far this year. Saber Holdings Corp., which owns Travelocity, has lost about 11 percent, and Orbitz-owner Cendant Corp. is down about 6 percent.

“A year ago, people could see the next stage: ‘OK, OTAs are going to rule the world.’ Now they look at it and say, ‘How are they going to rule the world?”‘ said Hugo Burge, president of Cheapflights.com.

Priceline.com is the only OTA stock on the up, notching a 36 percent gain this year. However, the company’s shares are still stuck around the same level as in late 2000.

Priceline stock has fallen some 97 percent from 1999 highs — adjusting for a 2003 reverse stock split — as investors raved about its revolutionary-seeming “name-your-own-price” strategy. It plunged along with many other Internet stocks in 2000.

In general, experts remain cautiously optimistic about online travel agencies. Research company PhocusWright predicts growth of 15 percent for online travel agencies this year, down from growth of 20 percent in 2005.

“I think that what’s happened now is more of a return to the real facts of life,” said Burge, whose company routes online customers to Web sites that sell tickets.

Full-service online travel agencies are having trouble distinguishing themselves from travel search engines like Kayak and Sidestep that locate fares and reservations but do not offer bookings, analysts said. Some travelers prefer search engines to travel agencies because they sometimes can duck booking fees.

Additional competition comes from supplier sites themselves. Airlines and hotels, for example, have beefed up their ability to sell tickets online.

THE DIFFICULTIES OF EUROPEAN EXPANSION

U.S.-based online agencies have seen a bookings explosion in European markets and are racing to establish supremacy there. Either by acquisition or by organic growth, the top travel companies have made European expansion a priority.

Expedia said in May its international bookings increased by 26 percent, compared with a 10 percent gain in domestic markets. Priceline said its bookings more than doubled in Europe in the first quarter.

The trouble is that while bookings growth is substantial, the companies have yet to realize benefits in line with the high costs of expanding into fragmented European markets, said PhocusWright analyst Lorraine Sileo.

She noted the high integration costs Cendant incurred in the wake of its February 2005 acquisition of European travel company ebookers.

“When they purchased it, it probably looked good, but it’s declined in popularity,” Sileo said.

Sileo and other experts said some travel companies are struggling to break into European markets where travel trends differ from those in the United States.

Some say Priceline may have hit the right strategy by developing partnerships with independent hotels that many European travelers favor over chain hotels.

MAKING THE SALE

Online travel agencies know that long-term survival in the highly competitive industry hinges on providing services that travelers cannot get from travel search engines and supplier sites. As a result, the companies have made customer service a top priority and are continually adding perks to their services such as travel tips and reviews.

But it’s not enough to provide those services when customers can simply use the information to plan a trip but book elsewhere, said Travel Tech President Norm Rose.

Online travel agencies are on the right track, he said, but they need to distribute information in ways that result in bookings, he said

“They need to think of more creative ways for people to take advantage of all these new sources of information,” Rose said.




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