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E-Tourists Turn To Booking On The Fly

Whether he's taking advantage of a last-minute hotel deal or planning a Disney vacation, Gennady Kupershteyn loyally books all of his travel arrangements through Priceline.com or Expedia.com.

"Priceline got me when I was able to rent a really nice car for $20 a day for our trip to Florida. Ever since, I check them first," Kupershteyn said in a Facebook chat. "Each site has a learning curve to navigate, so once one site hooks you, who wants to re-learn how to navigate a new one?

Online travel agencies proved to be one of the hottest destinations on the stock market this year. IBD's 11-stock Leisure-Travel Booking industry group — including Expedia (EXPE), HomeAway (HWAY), Priceline (PCLN) and TripAdvisor (TRIP) — collectively rallied 81% in the past year vs. 28% for the S&P 500. Investors are betting on rapid growth in mobile bookings, underpenetrated emerging markets and an explosion in metasearch — searches across multiple search engines — to drive future growth.

The Last-Minute Market

Smartphone transactions offer boundless growth potential, as more than one in five people on Earth own a smartphone. Yet only one in four travelers uses the devices to book airline tickets, hotels, cruises and car rentals, according to an Ipsos MediaCT poll commissioned by Google (GOOG), released in November.

Mobile devices accounted for 12% of online travel agency (OTA) sales this year. They're projected to climb to nearly 30% — worth $39.5 billion — by 2015, according to PhoCusWright. Mobile gross bookings more than doubled to $5.5 billion in 2013 from $2.7 billion in 2012.

A big part of this year's jump in mobile bookings was a rise in last-minute, same-day bookings — territory in which OTAs have the first-mover advantage, said Cindy Henn Olsen, an analyst at Franklin Equity Group. Her firm owns about $235 million in shares of Priceline along with stakes in TripAdvisor, Expedia and HomeAway.

She says last-minute booking is "not a core competency for the hotels.

Mobile bookings could drive increased customer loyalty. Customers are most likely to use just two or three favorite travel apps, research suggests, unlike Web browsers with easy access to countless choices.

"More direct traffic through travel apps and less competition for search traffic could also lower customer acquisition costs," Goldman Sachs analysts wrote in a Nov. 20 client note. The shift to mobile should benefit Priceline, and smaller screens could lead to more clicks on paid search ads in the native browser, the report added.

In November, Priceline rolled out a beta version of its iPad app that combines booking and travel research. The Norwalk, Conn.-based firm has not released data about its mobile apps business.

Apps All Over The Map

OTAs are prioritizing mobile app development to gain traffic, process transactions and app downloads. HomeAway, a service that connects owners of vacation rentals to prospective renters, reported 400,000 downloads of its new mobile app.

Mobile is a key focus for TripAdvisor. The site, which publishes travel information and reviews, says mobile business accounts for 40% of its total traffic, with 69 million mobile app downloads and 108 million monthly active mobile users.

Expedia's mobile apps have been downloaded nearly 80 million times, with downloads occurring at a rate of 200 per minute, according to spokesperson Mallory Seubert.

Rapid growth in the mobile market has spawned startups that offer mobile-only rates and local, last-minute booking. HotelTonight, founded in 2010, offers mobile-only booking and last-minute deals on hotels. As of mid-November, it's counted more than 7 million customers in North America and Europe. Some wary hotels avoid such last-minute services, for fear of training customers to book last minute and dragging down room rates.

Emerging Potential

In many emerging markets, mobile phones are the primary source of Internet access. For OTAs, that opens the door to millions of newly wired potential customers, said Douglas Quinby, vice president of research at PhoCusWright.

Online penetration, as a percentage of the total travel market, has only reached 24% in Asia, 21% in Latin America, 19% in Eastern Europe and 18% in the Middle East, said Quinby. In the U.S. and Europe, penetration rates hover near 40%.

The number of visitors from Asia to the U.S. is projected to jump 9% in 2014 and nearly 60% between 2012 and 2018, the Department of Commerce said in a report Nov. 26. Visits from South American residents are seen climbing 65% over the same periods, Eastern Europe 56%, and the Middle East 60%. By contrast the number of tourists from Europe is expected to rise only 14%.

Expedia is making inroads to China via its Elong.com unit. Priceline is aggressively pursuing expansion in Asia. It bought Agoda, an online travel company specializing in discount hotel bookings in Asia, in November 2008. It formed a partnership with Chinese travel portal Ctrip.com in August 2012. Goldman Sachs forecasts Priceline's Asia bookings to increase at a compounded annual growth rate of 14% between 2013 and 2016 while Latin America enjoys a CAGR of 19% over the same periods.

HomeAway in early December acquired Australia-based Stayz.com for $198 million, which nearly doubles its Asia-Pacific region listings. The deal could also add $22 million to $25 million in revenue in 2014, according to Deutsche Bank. HomeAway also bought a 55% stake in Bookabach of New Zealand.

TripAdvisor recently unveiled four new local sites in Spanish, serving Peru, Colombia, Chile and Venezuela. It continues to invest heavily and operates at a loss in China with the DaoDao and Kuxun brands, the company said its third-quarter SEC filing.

The Metasearch Surge

Metasearch sites are the fastest-growing channel of the travel industry. OTAs are heavily investing in this technology, used by an increasing number of airlines and hotels, which allows users to search for deals from numerous OTAs and travel providers at the same time.

"This fast-growing category cuts into OTAs' biggest advantage — the ability to offer travelers multi-carrier shopping," PhoCusWright wrote.

TripAdvisor launched a hotel metasearch this year. Expedia paid $632 million for a majority stake in German metasearch leader Trivago in March. In May, Priceline completed its acquisition of Kayak Software, which accounts for 90% for domestic airlines' metasearch traffic. Some 36% of online travelers use metasearch tools for leisure travel, up from 28% in 2010, according to PhoCusWright.

Rising Competition

The knife fight for page views and commissions is fierce in a commoditized market with low barriers to entry.

"Competition for customers is driving customer acquisition costs higher," Tom Vandeventer, portfolio manager of Tocqueville Opportunity , which owns Priceline shares, said in an email. "Other risks include the potential for price wars and valuation, because the stock prices have increased a lot this year and look to be fairly valued.

Travel service providers — hotels, airlines, car rental agencies and others — are wooing customers with loyalty rewards programs and posting deals on their social media pages and on daily deal sites.

"Suppliers are retaining greater control over their inventories, putting the OTAs at a disadvantage," Michael Souers, analyst at S&P Capital IQ, wrote in a note about Expedia Nov. 30.

In Expedia's Q3 conference call Mark Okerstrom, chief financial officer, said revenue per room night dropped 7% in the quarter because of growth from chain hotel partners, growth in loyalty programs and various customer incentives. He expects that trend to continue. Expedia is so far making up for it with volume growth.

In 2012, hotel chains Choice Hotels, Hilton Worldwide, Hyatt, Intercontinental, Wyndham and Marriott joined forces to develop their own rate aggregation site called Roomkey.com.

Google rolled out Hotel Finder in summer 2011 and launched a mobile app in November through which users can book hotel rooms. The metasearch service results often appear at the top of hotel-related searches. Apple has received a patent for the iTravel mobile app that would allow it to enter the online bookings business.

"If any of these new services are successful, we may experience less demand for our services and are likely to face more competition for access to the limited supply of discounted hotel room rates," Priceline stated in its third-quarter report.