Is Priceline's a Winning Strategy?

On November 5, Priceline.com (NASDAQ: PCLN), the online travel company, announced the elimination of airline ticket booking fees on tickets purchased on published price basis. This move by PCLN is a permanent extension to a limited time promo that PCLN started in June. Earlier, PCLN was charging $5 per ticket while competitors Expedia (NASDAQ: EXPE), Orbitz Worldwide (NYSE: OWW) and Travelocity has been charging $5-12, $5, $5-11 respectively per ticket.

The competitors are yet to follow suit, and would find a retaliatory measure difficult. PCLN has significantly less exposure to air travel as compared to its competitors. On the trading day following the announcement, Expedia came down by 2%, Travelzoo (NASDAQ: TZOO) by almost a percent while Orbitz tanked 14.3%. (The largest share of the Orbitz's gross bookings and revenues comes from air travel.)

However, a price-cut by other players cannot be ruled out. Travelocity already has a similar booking fee free mechanism through cheptotravel, albeit, restricted to domestic tickets. If there is a price cut, it will further the consolidation in the travel booking landscape as smaller pure-play companies in the online travel services segment would feel the pinch and will put themselves on the block for sale to the larger players. The ripple can also extend to the offline travel agents, who would feel the pressure to eliminate booking fee.

The reasons behind the aggressive pricing strategy are clear. A recent study by Forrester Research concluded a 9% decrease in the number of US leisure travel bookers in 2007 in comparison with 2005. Also, airlines do not make a similar ticket booking charge when the booking is done through the airline website. Finally, it is a known fact that travelers who use general search engines are looking for price deals. As per Jupiter research, 43% of the online users search for price deals while the rest use it for convenience.

The immediate financial impact, however, remains unknown. The Q3 results due today will be the first time one gets to know the financial impact of the move that was introduced first in June. One may assume, from the management's change to make the move permanent, that it is a winning strategy. However, it would be prudent to wait to see the impact.

Disclosure: none

Comments

[justanotherhedgie]

great job Ajith...people who read this piece missed a 23% jump in the stock on earnings that night. you really know your stuff. why even bother commenting if you're just guessing?

[justanotherhedgie]

great job Ajith...people who read this piece missed a 23% jump in the stock on earnings that night. you really know your stuff. why even bother commenting if you're just guessing?