Priceline Is Really Going Places

The online travel site's shares have soared. It's moving overseas and streaking ahead of rivals, which still tack on a booking fee

Online travel site (PCLN) runs a lot of zany commercials starring actor William Shatner zapping a customer with a Taser, dispatching a lemur to find bargains, and threatening a car rental agent with a falcon. Despite the wacky ads—or maybe thanks to them—travelers are getting the message. With the U.S. economy hurting, consumers are flocking to the discount Web site in droves, helping Priceline run rings around its rivals.

Shares of Priceline have more than doubled in the past year, to close on May 28 at 134.13, exceeding the previous split-adjusted all-time high of 104 reached back before the Internet bubble burst. It's quite a turnaround from the end of 2000, when the shares languished at less than $2 (the company did a 1-for-6 reverse stock split in 2003). The bargain-hunting image, reinforced by the Shatner commercials, has helped Priceline rise above its two main online competitors: Shares of Expedia (EXPE) are down 14% in the past year, and Orbitz Worldwide's (OWW) stock is off 53%.

Analysts credit CEO Jeffery Boyd for emphasizing Priceline's low-cost fares while expanding into new markets like Eastern Europe and Asia. In the first quarter ended Mar. 31, revenue jumped 41%, to $403 million, as the gross value of travel booked on the site—representing the entire cost of travel that customers buy on the site, not just Priceline's cut—increased 76%. Net income, excluding noncash depreciation and amortization expenses, was 76¢ a share, far exceeding analysts expectations of 60¢ a share and up from 43¢ a year ago.

No Booking Fee

Boyd's best move may have been his decision to eliminate the $5 to $11 that Priceline had charged—and its competitors mostly still do—as a booking fees on airline ticket purchases. The elimination of the fee became the focal point of Priceline ads, and the company even created a sidekick character, "Nofee," to spar with Shatner. After dropping the fee in June, 2007, third-quarter airline ticket sales jumped 23%, then 34% in the fourth quarter, and 83% in the first quarter of 2008.

"We demonstrated to consumers that Priceline has the absolute lowest fares," Boyd says. For people comparison shopping on the Internet, "that $5 or $10 can make the difference." Boyd, 51, who joined the company in January, 2000, as general counsel, took over the top spot in 2002 after the board fired then-CEO Dan Schulman. A graduate of Cornell Law School, Boyd previously worked as general counsel at Oxford Health Plans.

After cutting costs to get Priceline back on track, Boyd engineered several major acquisitions to expand the company's position beyond air travel. In 2004, he bought TravelWeb, a U.S. hotel reservation service, and a similar European service called Active Hotels. Boyd added another European hotels service, called Bookings, in 2005.

"People don't appreciate what they've got going on internationally," says Greg Dunn, an analyst with the $3 billion Thornburg Core Growth Fund (THCGX), which added 221,000 shares of Priceline in the first quarter. Priceline's European additions should continue to feed its growth rate and keep the company ahead of rivals like Expedia, Dunn says. "The shift in Europe away from booking travel with traditional agents and using online still has quite a ways to go, and Priceline has the lead in that market."

Strong in a Weak Economy

So far, the slowing U.S. economy and chaos in the airline industry have helped rather than hurt Priceline. Consumers are looking for more bargains. At the same time, airlines and hotels have more unsold inventory that can be unloaded in Priceline's blind bargain offerings that let consumers offer a price without selecting a brand. Competing sites largely book travel the old-fashioned way, giving customers more choice but at higher prices, though Expedia's Hotwire unit apes the Priceline strategy. "It appears that the underlying drivers of our business are overshadowing the impact of the weakening economy," Boyd says.

Stay-at-home mom Mandy Maple in Chatham, Ill., says she's a big fan of Priceline, which she relies on for hotel reservations. On a recent trip to Kansas City, Mo., she saved two-thirds off the cost of hotel rooms by bidding on the site. "We have had great luck using and recommend it often," she says.

The strong first quarter prompted analysts up and down Wall Street to increase their estimates for Priceline's performance this year. JPMorgan analyst Imran Khan says the company could have pro forma earnings this year of $5.65 per share, 54¢ more than he thought before seeing the first-quarter results. "We now believe that domestic growth will be higher than previously expected and that we underestimated operating efficiencies," Khan wrote in a May 8 report.

With 60% of revenue coming from outside the U.S., sales in faster-growing countries like South Korea and Poland will bolster Priceline's results in 2008, analysts say. Boyd bought Singapore-based hotel booking site Agoda in November, adding not just $25 million of new bookings in the first quarter but also a top-tier online portal for the rapidly growing Asian travel market. Total revenue from new markets like Asia and Eastern Europe accounted for 20% of Priceline's foreign unit in 2007, up from 13% in 2006, growing at over 200% in both years.

"We've been working on planting seeds in new markets for three years," Boyd says. "It's not something that happened overnight."

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