January was a big month, as most airlines around the world reported record load factors. Load factor is a mathematical metric that calculates the utilization rate of an airline or a vehicle. Naturally, if an airliner has a high utilization rate, it would look to increase its fare. But the US airliners chose not to hike their air fares due to weak macroeconomic conditions. Since airliners are not capitalizing on their high load factors, consumers won’t have to pay extra and air travelers won’t suffer.
So who stands to benefit here? Online Ticketing Agencies (OTAs) like Expedia Inc (NASDAQ:EXPE) and Makemytrip Limited (NASDAQ:MMYT)!
A Strategic Acquisition
Its biggest competitor, Priceline Inc (NASDAQ:PCLN), acquired Kayak last year for $1.8 billion. Kayak is a meta search engine that compares airline fares offered by various online ticketing portals. The management of Priceline explained that with the acquisition, it would not only earn higher revenues by advertising but would also get higher targeted traffic, which would eventually boost the sales of Priceline.
Following the expansive drive, Expedia Inc (NASDAQ:EXPE) also announced that it would be acquiring a 61.6% stake in Trivago for around $628 million. Trivago is a simple hotel meta search engine based in Europe, covering over 600,000 hotels and spanning over 140 booking sites and 30 countries. The hotel search engine has been attracting over 20 million hits every month, and once the acquisition is through, Expedia Inc (NASDAQ:EXPE) will able to direct paid traffic to its booking portal. Moreover, this would boost its web traffic, and Expedia Inc (NASDAQ:EXPE) will not only earn more moolah from Cost per Click advertising, but will also have the option to hike its advertising fares. I think Trivago will be able to dominate and demand higher advertising rates on the back of heavier targeted traffic, post-acquisition.
The Final Word
Expedia competes with MakeMyTrip Limited (NASDAQ:MMYT), Cleartrip and Yatra.com. Asian markets are known to have low margins but huge volumes. Its peers have been giving better deals in the subcontinent, and consumers from the region do not prefer Expedia for their domestic travel needs. As a matter of fact, MakeMyTrip Limited (NASDAQ:MMYT) Limited (NASDAQ:MMYT) recently reported 25.4% growth in quarterly revenues, and expects the Bull Run to continue. But MakeMyTrip Limited (NASDAQ:MMYT) has a small global presence, and its shares appear to be hugely overvalued (forward P/E of 75x). Expedia has not been able to capture the Indian and Chinese markets, which leaves room for growth. Although its shares have risen by nearly 155% over the last 5 years, they trade at forward P/E of 14.9x. I think Expedia is a great growth pick, and deserves a Buy Rating.
The article Flying High, But Still a Buy originally appeared on Fool.com and is written by Piyush Arora.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
