Orbitz has been struggling
to solidify its online presence as a major travel booking destination.
Competition is extremely high and product diversification is a difficult task.
This makes domestic growth for Orbitz a challenge. One area that can give
revenue a boost in the years to come is international expansion, as a result of
two recent partnerships.
Nowadays, users have too
many options when it comes to websites used for booking travels. This makes
companies like Orbitz hard to distinguish themselves from other competitors.
Websites like kayak.com enables users to directly compare rates from various
online booking websites in just a few clicks.
Another key newcomer to the
online booking market is trivago.com. The website is to booking websites what
google is to online searching: an overly simplistic, minimalistic, no
non-sense, straightforward search engine. Here is the way trivago works. The
user inputs the desired destination and gets results based on either
popularity, rating, price or distance. When the user chooses a specific deal,
he then gets redirected to the website that carries that specific deal.
This does not mean that
Orbitz has inferior deals to competitors, but that chances of users picking an
Orbitz deal are diminished. Good news for Orbitz is that trivago only offers
hotel reservation. At the same time, hotel bookings represented 38% of total
revenue, the highest percentage out of all 5 revenue segments in the latest
quarter.
So, what is OWW doing to
tackle this issue? As of February 12th 2014, Orbitz partnered up with Amadeus,
an IT company that offers solutions to the travel sector. Amadeus will help
improve the global distribution system (GDS), improving customer experience
across online and mobile devices. However, the venture will be limited to
business operations in North America.
While we see this as a
positive development for domestic customer retention, we also foresee an
indirect benefit coming from the Amadeus partnership, to the international
position of Orbitz. Currently, online travel booking penetration rates stand at
60% in the United States and 25% in Asia Pacific. OWW has recently partnered up
with Jetset, Australia’s second largest offline travel agency. Since online
booking has not been fully embraced by Australian citizens, this allow Orbitz
to share its online technology with JTS, positioning the company ahead of
existing competition.
Domestically, Orbitz is
pushing users towards the Orbitz rewards Program, whereby registered users get
to earn 1%-5% cash back for booking a hotel, flight or vacation package. This
can certainly help Orbitz in terms of customer retention rates, especially for
business travelers that use the service more often. However, the average
American only gets 2 weeks’ vacation time per year and would be less likely
inclined to take advantage of a rewards program.
So, what does this mean for
revenue?
Revenue has been declining
by 2.5% per year on average, for the last 5 years. International revenue
accounted for 28% of total revenue in FY2012. We can expect the proportion to
expand in the next few years due to the JTG partnership and greater international
online booking rates.
Orbitz has been having
trouble staying profitable, posting positive operating income only once in the
last 5 years. It looks like 2013 will be a breakthrough year, as we expect
Orbitz to post an operating income around $65 million. If international growth
pans out and domestic revenue remains steady, we can see operating income
continue growing in the next 5 years and operating margins in the mid-single
digit.
Conclusion
The recent partnerships are
an important step for Orbitz to remain relevant in the crowded market of travel
booking. The success of Orbitz is largely dependent on what it can do on an
international level. We see this as the catalyst for OWW moving forward, as
domestic growth remains challenging due to competition.
About MissionIR
MissionIR is committed to connecting the investment community with companies that have great potential and a strong dedication to building shareholder value. We know our reputation is based on the integrity of our clients and go to great lengths to ensure the companies represented adhere to sound business practices.
Sign up for “The Mission Report” at www.MissionIR.com
MissionIR is committed to connecting the investment community with companies that have great potential and a strong dedication to building shareholder value. We know our reputation is based on the integrity of our clients and go to great lengths to ensure the companies represented adhere to sound business practices.
Sign up for “The Mission Report” at www.MissionIR.com
Please see disclaimer on the MissionIR website http://www.missionir.com/disclaimer.html
