Online Travel Takes Wing

The giants with cheap fares and hotel rooms are booming

Penny-pinching consumers and fierce price wars are bad news for the travel industry. Bad, that is, for everyone except the booming online travel giants. Consider the sharp rebound of such online players as Travelocity (TVLY ), Expedia (EXPE ), and Orbitz. While they suffered in the wake of the September 11 terrorist attacks, with bookings off as much as 70% in the weeks that followed, business has snapped back. In January, some 200 U.S. online travel sites posted their highest monthly sales ever, at $2.3 billion, with a record 47.5 million visitors, according to comScore Networks Inc., a Web measurement outfit. "The speed with which those businesses bounced back surprised even the people most bullish about the sector," says Mitchell J. Rubin, a money manager at New York-based Baron Capital, an investor in online travel stocks.

The travel industry's pain is often the online industry's gain, as suppliers push more discounted airline seats and hotel rooms to win back customers. And many of those deals are available only online. At the same time, online agencies rely primarily on leisure travelers, where traffic has rebounded more quickly than on the business side.

The two biggest players, Inc. and Expedia Inc., are locked in combat for the top spot. Both sold some $3 billion worth of travel last year, though Expedia topped Travelocity in the fourth quarter in gross bookings. And thanks in part to a greater emphasis on wholesale deals with suppliers, Expedia is more profitable. For the quarter ended in December, Expedia posted its first net profit, $5.2 million, even with noncash and nonrecurring charges, compared with Travelocity's $25 million loss. And not far behind, Orbitz is nipping at their heels. Launched last June by a consortium of major airlines, Orbitz has quickly vaulted into the big leagues, thanks in part to its controversial access to some of the carriers' lowest fares.

The airlines' latest cost-cutting moves may only spur the online stampede. Major carriers are eliminating travel agent commissions in the U.S. That could lead to growing service charges for consumers at traditional agencies, driving still more travelers to the Web. Jupiter Media Metrix is predicting that online travel sales in the U.S. will jump 29%, to $31 billion this year, and to $50 billion by 2005. About half of that is from airlines' and other suppliers' own Web sites, but that still leaves plenty of room for the online agents. Online sales will account for only about 13% of the U.S. travel business this year.

This growing market is drawing plenty of competition and new players. Hotel and car rental franchiser Cendant Corp. (CD ) snapped up Cheap Tickets last October. Barry Diller's USA Networks Inc. (USAI ) bought a controlling stake in Expedia. And a group of hotels, including Hilton Hotels (HLT ) and Hyatt Corp., are launching their own business this summer to market hotel rooms on the Net.

Is the field too crowded? Analysts and online agencies aren't worried, figuring that there's plenty of new business to go around. But, for now, the clear winners are consumers, who can count on finding better service and better deals online.

By Wendy Zellner in Dallas

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