It has been a tough five year period for online travel agent Orbitz Worldwide, Inc. (NYSE:OWW), as it has continually lost ground to competitors Priceline.com Inc (NASDAQ:PCLN) and Expedia Inc (NASDAQ:EXPE). The company’s sales remain below the level in 2008 and its profit margin is far below those of its chief competitors. However, Orbitz’s stock price has been moving sharply higher recently, as investors bet on its potential as a strong #3 player in the online travel agent business. So, can Orbitz deliver on its promise?
What’s the value?
Founded by five of the major domestic airlines back in 2000, Ortibz offers discounted flights, hotel accommodations, and vacation packages primarily through its namesake website. The company has been hurt by a greater reliance on flight sales, a category that has been limited by carrier consolidation and a decline in the aggregate number of flights. In response, Orbitz Worldwide, Inc. (NYSE:OWW) has moved into the vacation package arena, including a new partnership to offer packages to customers of American Express Company (NYSE:AXP)’ Travel Network.
In FY2012, Orbitz posted relatively weak results, with increases in revenue and adjusted operating income of 1.6% and 10.9%, respectively, versus the prior year. While sales of flights were down during the period, Orbitz generated increases in the hotel and vacation package categories. In addition, the company’s operating margin benefited from higher average prices for both flights and hotel accommodations. Operating cash flow was also demonstrably higher in the current year, a positive development that should allow Orbitz to pay down its hefty debt load that was incurred during a previous leveraged buyout.
An uphill battle
Unfortunately, Orbitz Worldwide, Inc. (NYSE:OWW) has much work to do, as both Priceline.com Inc (NASDAQ:PCLN) and Expedia Inc (NASDAQ:EXPE) are currently growing at high, double-digit rates. The hotel accommodation segment has been achieving much faster growth than other travel segments, a trend that plays into the strengths of both competitors. In particular, Priceline’s hotel bookings were up 40% in 2012 and the company’s properties include booking.com, the world’s largest online travel agent for hotel accommodations.
In FY2012, Priceline.com Inc (NASDAQ:PCLN) reported another year of solid financial results, with increases in revenue and operating income of 20.8% and 30.8%, respectively, compared to the prior year. While the company’s trademark, name-your-own-price segment had lackluster sales growth, its traditional agent segment enjoyed strong gains across air, hotel, and car rental categories. In addition, its operating margin hit a five-year high as Priceline leveraged its global infrastructure, with international sales accounting for 82% of the company’s total business.
Meanwhile, Expedia Inc (NASDAQ:EXPE) also had a solid year in 2012, with increases in revenue and adjusted operating income of 16.9% and 9.6%, respectively, versus the prior year. The company has a strong offering in all segments and geographies of the travel business, including its leading hotels.com unit in the accommodations segment. Expedia’s financial performance in 2012 was paced by a 27% increase in hotel bookings, as well as strong results in its Egencia corporate travel unit.
Looking into the crystal ball
The online travel agents are one of the internet’s great success stories, as consumers have shifted their purchases away from traditional travel agents. However, the space is getting increasingly crowded as search engines, like Google Inc (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT)’s Bing, move into the business. For its part, Google has created a flight search tool that often sends users directly to travel providers’ websites, completely bypassing the online travel agents. In addition, consumers are gravitating toward travel research websites that provide information and recommendations, rather than just the ability to cheaply book travel plans.
The bottom line
Despite its name recognition, Orbitz Worldwide, Inc. (NYSE:OWW) has a rough road ahead as better-funded competitors try to encroach on the online travel business. Both Priceline.com Inc (NASDAQ:PCLN) and Expedia Inc (NASDAQ:EXPE) have recognized the risks posed by the search engines, which has led to recent acquisitions in the search area. Priceline acquired meta-search provider Kayak in 2012 and Expedia has agreed to buy a majority stake in search provider Trivago. With consumers looking for more guidance and ideas in their travel planning, Orbitz needs to improve its search capabilities if it wants to improve its position and enhance its growth opportunities. With $400 million in debt, investors should let this one pass and stick with the top two players.
Robert Hanley owns shares of Priceline and Expedia. The Motley Fool recommends Priceline.com. The Motley Fool owns shares of Priceline.com.