In fact, Orbitz Worldwide, Inc. (NYSE:OWW) is having a hard enough time generating profits as it is. As the third-largest U.S.-headquartered company in the industry, it has far greater scale than any newcomer could hope to achieve in a few years. However, the company has yet to earn a GAAP profit, and free cash flow is only now starting to become significantly positive.
Despite the inevitable increase in competition, the future is not all that bad for Orbitz and its peers. This is because, despite the barriers to entry, little capital investment is required to build and maintain a travel network. Those companies that have already achieved scale will benefit from the huge cash flows that come as a result of low maintenance capital expenditures.
Priceline.com Inc (NASDAQ:PCLN) generates more than $1.7 billion in free cash flow each year, Expedia Inc (NASDAQ:EXPE)close to $1 billion, and Orbitz close to $150 million. Each company’s cash flows reflect the size of its network relative to its competitors.
Expedia and Orbitz Worldwide, Inc. (NYSE:OWW) trade at less than 10 times trailing free cash flow, while Priceline trades at more than 25 times trailing free cash flow. This disparity reflects Priceline’s huge advantage in the international markets, but Expedia’s valuation does not reflect its stronghold in the U.S. and its share-grabbing potential in Priceline.com Inc (NASDAQ:PCLN)’s markets.
Although competition between the firms will surely intensify, and margins will surely fall, oligopolistic competition will hardly destroy these companies’ cash machines. It is unclear as to how much growth is in Priceline.com Inc (NASDAQ:PCLN)’s future, but it is clear that Expedia Inc (NASDAQ:EXPE) and Orbitz Worldwide, Inc. (NYSE:OWW) will continue generating a large portion of their current free cash flow in future years. As a result, the latter two companies may be worth a closer look.
Brick-and-mortar travel agencies are toast, but online travel agencies could reap huge profits in the future if competition between the firms does not become too intense. These firms may not have durable competitive advantages, but barriers to entry will help ensure that their competition remains direct at each other rather than a disruptive newcomer.
Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Priceline.com. The Motley Fool owns shares of Priceline.com.
The article Online Travel Booking: Great for Consumers, Bad for Business originally appeared on Fool.com.
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