Wednesday, March 11, 2009

Expedia's bold move into the land of no air booking fees

This morning Expedia announced a new promotion offering free nights at 700+ hotels based on a three, four or five night minimum stay. This isn't particularly new or exciting as Expedia has long offered hotels this capability. What is earth-shattering is the reduction on booking fees on airline tickets.

Priceline started this trend over a year ago on what was at the time called a special promotion. It was quickly matched by Priceline's key competitor Hotwire (which is owned by Expedia.) But Pricline and Hotwire both had little to lose as neither one sold very much published airfare anyway. And, getting people to buy air, even without making any profit, was key to getting people to buy highly profitable hotels and cars in follow-on transactions.

But now Expedia has followed. This is billed as a promotion, but we would not be surprised to see it become permanent, just as it did at Priceline and Hotwire.

Clearly there will be winners and losers.

Consumers are the big winners as they will gain a major distribution outlet for fare shopping and comparing that will now have prices equal to the supplier sites.

We don't think Priceline has too much to fear because while their sales of air have grown significantly following the removal of fees, they are still a much smaller player with the majority of their profits and revenues coming from the sale of hotel rooms But clearly, Expedia has taken notice.

The biggest loser in this is probably Orbitz. Orbitz derives a much bigger share of their revenues and profits from these fees. In fact, Citi analyst Mark S. Mahaney calculates that Orbitz (OWW) derives nearly 60% of their operating profits from these fees vs. just 10% for Expedia. Expedia's strong stand-alone hotel product and robust cross-selling may enable it to make up for the loss of booking fee revenue on other products.

And another question mark will be the meta-search sites such as Kayak, and Kayak in particular depends on significant revenue streams from its partnership with Orbitz. If Orbitz's fee goes to zero, it will be hard, if not impossible, for Orbitz to continue paying Kayak a referral fee.

Which brings us back to an interesting question: Is there more than meets the eye here with Tripadvisor's new air meta-search product? (Note: Expedia also owns Tripadvisor) If Expedia is now at partity with supplier sites (e.g., etc) on a meta-search site, they stand to benefit from a substantial up-tick in traffic......

1 comment:

  1. I'm sure Expedia got very tired of being pounded with the never-ending Priceline ads featuring William Shatner.

    Good point about Tripadvisor. Their meta-search is like Kayak 2.0; it features airline fees. This battle will be interesting to watch.