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Outperforming the outperformers

Expedia leads the online travel industry

By Douglas S. Wood

Expedia leads the online travel industry

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(CNN) -- Travel Web site is at the top of the only growing segment of an industry hit hard by the economic downturn.

Although the rest of the travel industry has been hit hard by economic problems even before the events of September 11, the online travel industry is doing well.

Almost all travel Web sites have done well despite the downturn in travel, said Lorraine Sileo, vice president of information at PhoCusWright, a research firm that tracks the online travel marketplace. Even airlines, which are losing money overall, have seen online revenues increase 31 percent, she said.


"Expedia has outperformed the online travel industry by far. They have outperformed the outperforming industry," Sileo said.

A report by Forrester Research estimates nearly 26 million U.S. households -- 43 percent of Web travel households -- will have booked leisure travel online in 2002, an increase of 12 percent from 2001.

Since the start of 2001, Expedia has doubled its sales and sextupled its profits, its stock price has gone up 180 percent, and it has overtaken its rival in gross travel bookings.

Expedia's success has increased its clout within the travel industry, said Henry Harteveldt, a senior analyst at Forrester Research.

"A few years ago, airlines dealt with Expedia as kind of this bratty little kid, the whiny little kid going 'mister, mister, mister,'" he said. "Now Expedia walks in and there's a mix of reverence and frustration because Expedia sometimes does a better job of selling product than the suppliers themselves."

A 'powerhouse' brand name

Expedia CEO Rich Barton
Expedia CEO Rich Barton

Harteveldt said Expedia has excelled in three ways that made it No. 1: building a "powerhouse" brand name; consigning hotel rooms at a wholesale rate and reselling them to consumers at a retail price; and expanding the packaging of travel-related products, a concept known as "dynamic packaging."

For example, Harteveldt said, users of Expedia's Web site can book airline tickets and hotel rooms, and also book a shuttle to pick them up at the airport and set up prepaid restaurant meals.


"They're really thinking about the total journey, as opposed to just selling an airline tickets or booking you a hotel room," he said.

Expedia's use of dynamic packaging is among the best out there, Sileo said. Other travel Web sites offer similar types of packaging, she said, but they are "still very clunky and just not there yet."

In reselling hotel rooms, Expedia took a concept known as "merchant model hotel inventory" created by two other companies and greatly improved it, Harteveldt said. Expedia bought one of the companies,, in 2000, and integrated it into its services.

"This isn't something Expedia invented, but it is something Expedia has come to dominate," he said.

Merchant-model hotel inventory involves buying unused hotel rooms at a wholesale rate and reselling them to consumers at retail. The key, Harteveldt said, is that the model allows a higher profit margin.

Under the traditional travel agency model, consumers book a hotel using a travel agent and pay the hotel directly, with the travel agency receiving 10 percent of the base price. So if a consumer were to book one night at a hotel for $100, the travel agency would get $10.

Using the merchant model hotel inventory concept, Expedia buys a set amount of hotel rooms at a wholesale price, so in this case, the $100-a-night room would cost Expedia $80.

Expedia would then resell that room to a consumer for $95, $5 less than the $100 it would cost using the traditional travel agency model. This way, Expedia would make $15 instead of $10 on the transaction. Expedia has wholesale contracts with more than 8,000 hotel properties worldwide.

In some cases, Harteveldt said, additional taxes and services fees mean consumers might actually pay more than if they would have booked the room directly from the hotel. But he said consumers like booking via Expedia because it allows for one-stop shopping.

"Expedia has woven a very enticing web that lures in customers with low, upfront price," he said.

A 'wide-open market'

Forrester estimates that by 2007, over 32 million households will spend 39 percent of their travel budgets online, generating $49.7 billion.

"It's a wide-open market," Harteveldt said.

But Expedia faces challenges to remain No. 1, as Forrester's research says consumers are not loyal to companies from which they buy. Harteveldt said a survey of 8,000 U.S. households in August 2002 found that price was more important than brand in purchasing travel.

"The travel industry makes hockey look like a night at the opera," he said. "It's brutal and goes for the jugular."

Intense competition in the travel industry leaves Expedia little room for slip-ups, Harteveldt said. He mentioned the company's focus on its merchant model as a place for competitors to attack.

If Expedia has sold out of its allocation of hotel rooms, it tells the customers that no rooms are available for sale, which Harteveldt said is misleading because rooms might exist outside Expedia's block. It also does not fully disclose the taxes and fees that will be added to the sale price of its merchant hotels, Harteveldt said, even though the technology exists to do so.

Expedia is slowly expanding into the business travel industry. The company recently bought Metropolitan Travel, a Seattle-based corporate travel agency whose clients include Nordstrom and Starbucks.

Sileo said the usability of Expedia's Web site is to the company's advantage. But she said the business travel market requires a different kind of marketing.

"Right now, the company is using the Internet and feeding the Expedia site off of (The Microsoft Network), but to go into a corporate market, you really need to go and start selling, using a sales force and go in and knock on doors," she said. "I think that's why they're tiptoeing into it."

Expedia's success also could lead to resentment. Harteveldt said Expedia has been known to be heavy-handed with suppliers but added the company is aware "that they are only good as their last sale."

Harteveldt said he finds it "fascinating" that Expedia didn't exist less than half a generation ago and now is one of the top 10 travel agencies in the United States.

"The great thing about Expedia is that they came to this without any industry legacy or knowledge or pre-set ways," he said. "None of the 'this is the way it's always been done' kind of mindset that may have dogged other people. So they felt compelled as well as free to rewrite the way travel is sold and bought as opposed to adapting the existing models to the Internet."

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