Why Orbitz Worldwide Can't Compete With Expedia Inc

Orbitz Worldwide is operating in a space where size and scale matters most. Unfortunately, Orbitz has neither.

Jul 4, 2014 at 1:57PM

Orbitz Worldwide (NYSE:OWW) operates in an extremely intense competitive environment where the price of travelling continues to trend higher. 

While higher travel costs are a tailwind for the entire industry, Orbitz Worldwide is one of the smallest public online travel agencies, resulting in a scale disadvantage. There are other companies such as Expedia (NASDAQ:EXPE) and TripAdvisor (NASDAQ:TRIP) that are better positioned to utilize their reach and offer customers a better overall proposition.

Over-diversified to air
The U.S. airline market has seen high levels of consolidation from a historical perspective, leading to higher consumer pricing and lower commissions to online travel agencies. Naturally, airlines would prefer selling directly to the consumer and leaving out the middlemen.

In 2013, Orbitz saw 66% of its gross booking coming from air travel, which accounted for 29% of its revenue mix. On the other hand, revenue derived from air bookings accounted for just 8% of Expedia's revenue mix.

In fact, Expedia noted that its air tickets saw 9% year-over-year growth in 2013. Expedia is able to take advantage of larger air sales as an opportunity to cross-sell higher-margin hotel spaces.

With a higher exposure to unfavorable air bookings, smaller companies like Orbitz are at a disadvantage against larger companies like Expedia, which enjoys a larger network of hotels.

Too large of a battle to fight?
In August 2013, Expedia and Travelocity announced a long-term strategic marketing agreement in which Expedia offered to handle Travelocity's Canadian and U.S. portfolio of websites. The agreement also provides Travelocity access to Expedia's product supply while Travelocity handled internally its marketing and brand promotion.

Expedia and Travelocity's agreement calls for granting Expedia the opportunity to better negotiate supply terms with its partners, which will then be passed on to Travelocity at favorable terms.

The agreement between the two companies best demonstrates the scale advantage in the space. Over the long term, it is reasonable to assume a deal like this (or any future deal) would increase the size of the gap between Expedia and other large players like Priceline Group at one end, and Ortbitz at the other end, as suppliers naturally prefer working with stronger brands with traffic.

Meta-search a threat
Over the past few years, meta search engines that enable a user to enter search criteria and access several search engines simultaneously pose a threat to the online travel agencies, especially the ones with smaller scales.

Sites like TripAdvisor continue to gain relevance as consumers demand access to a price comparison engine and user-generated review content and tourism advice.

While a site like TripAdvisor does not directly compete with Expedia or Ortbitz, it does compete directly for organic consumer traffic and advertising dollars. Hotels are likely to shift a larger part of their marketing spend toward meta search engine sites likes TripAdvisor to the detriment of a smaller travel agency, like Ortbitz.

Finally, one major advantage TripAdvisor holds in its ability to generate traffic is the fact that the site acts as a middle-man and presents the consumer with multiple options. There is very little keeping customers from shopping around for the best deal; in fact, TripAdvisor makes it easier than ever.

Tripadvisor

Source: TripAdvisor.ca.

Foolish take
As Travelocity joins Priceline Group's Booking.com (and other players), who are currently investing in marketing spend across many channels, Ortbitz may find it necessary to increase its own marketing spend. Naturally, such a move will continue to pose a risk to its EBITDA numbers. Ortbitz is in the unfortunate position of being one of the smallest players in a space where size and scale matter most.

Expedia's scale and higher degree of exposure to higher margin hotels allow the company more freedom to rely on heavy marketing spend as part of its strategy.

TripAdvisor will continue to benefit as it captures a larger piece of the industry's economics as hotels, online travel agencies, restaurants, and other tourist-related industries are all battling for prime advertising real estate space as TripAdvisor successfully builds its site membership to over 250 million average monthly unique visitors as of the end of the first quarter, an improvement of 27% from a year ago.

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Jayson Derrick has no position in any stocks mentioned. The Motley Fool recommends TripAdvisor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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