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The house rules are simple in this weekly column. I bash a stock that I think is heading lower, and I offset the sting by recommending three stocks as portfolio replacements.
Who gets tossed out this week? Come on down, Republic Airways (Nasdaq: RJET ) .
The flight's going to get a bit bumpy
Frontier Airlines, a subsidiary of Republic Airways, turned heads last week. In an effort to shave the costly commissions it shells out to Expedia (Nasdaq: EXPE ) , Travelocity, and other travel websites, Frontier will begin penalizing passengers who don't book flights directly through the carrier's own website.
We're talking about being unable to select seats until check-in, collecting half as many frequent flier miles, and paying more in some subsequent fees.
The method behind Frontier's madness is simple. Last Wednesday's launch of FlyFrontier.com, with meatier incentives to bypass the portals, will result in huge commission savings. Just 42% of its revenue was generated from passengers who booked directly with the airline. If it can encourage more travel-website visitors to book directly, margins should ascend as nicely as one of its departing flights.
The problem is that the measures being taken to penalize portal users have gone too far. Earning half of a carrier's frequent-flier miles is not a dealbreaker. Folks use portals because they like to shop around, so odds are they'd never fly enough on Frontier to score reward flights anyway. However, forcing folks to wait until check-in to be assigned seats -- when it's often a crummy selection of middle seats or rows in the back -- will be a turnoff.
Will folks rely solely on a carrier's own website in researching an itinerary? No one is that narrow-minded in these days of aggregators. What's more, do you really think these people will take the trouble to fire up FlyFrontier.com after checking out fares on comprehensive portals? Even if that did happen, portals would smarten up quickly. Expedia didn't grow into a $7.5 billion company by ignoring trends.
This could all backfire at a time when Republic, after overpaying to acquire Frontier three years ago, is trying to spin it off.
Frontier isn't broken. Its load factor ran at an impressive 92% last month, meaning that just 8% of its seats were empty. However, will the same thing be possible as savvy travelers begin avoiding Frontier flights on the major portals? All Frontier has done is create two classes of passengers, and many will avoid the airline altogether on principle.
Republic Airways is profitable, but it's struggling to grow its top line. Like too many airlines, Republic is too leveraged in an industry that has wiped out public investors in bankruptcies when debt becomes burdensome.
Frontier's move is desperate. Investors can do better.
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three replacements.
- Southwest (NYSE: LUV ) : Republic outbid Southwest for Frontier in 2009, and it has been the rare success story of an airline that's been able to thrive without help from the portals. Southwest's powerful "bags fly free" marketing and the "ding" bargain missives that predate the success of daily-deals websites help it be a self-contained ecosystem in air travel.
- Travelzoo (Nasdaq: TZOO ) : You know what's even better than Southwest's "ding" platform? Travelzoo's Top 20 email, featuring sponsored travel deals that go out to more than 22 million willing recipients throughout North America and Europe. Its latest quarter was mixed, as revenue growth disappointed, but Travelzoo's bottom-line spurt of 48% turned heads. Profitability is booming, and operating margins are the highest they've been in five years.
- priceline.com (Nasdaq: PCLN ) : If you have to invest in a conventional portal, you may as well go for the star pupil. The "name your own price" travel portal has beaten analyst profit targets for a whopping 25 quarters in a row. The stock got rocked this summer on concerns that portals will suffer until Europe bounces back, and that's a legitimate beef with Priceline, since most of its bookings originate outside North America. However, the global travel website is too cheap to ignore. Eighteen times next year's earnings may not seem inexpensive, but it is given the company's historic growth rate.
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