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Expedia earnings fly past expectations

Blowing past analyst expectations, as well as its main competitor, Expedia posts a better-than-expected quarter to take over the top spot among online travel agencies.

Blowing past analyst expectations, as well as its main competitor, Expedia posted a better-than-expected quarter Monday to take over the top spot among online travel agencies.

Expedia reported a net income of $5.2 million, or 8 cents per diluted share, compared with a loss of $25.3 million, or 53 cents a share, in the same quarter last year.

Locked in a tug-of-war for control of the thriving online travel sector, Expedia outpaced main rival Travelocity.com in gross bookings. Bellevue, Wash.-based Expedia reported gross bookings of $704 million, compared with Travelocity's $630 million over the past quarter.

Monday was a good day generally for online travel companies, which all saw sharp rises in stock in the morning after discount-travel operator Hotel Reservations Network reported strong bookings--another sign that the travel sector is recovering from the Sept. 11 terrorist attacks. Expedia shares closed up $3.76, or 8 percent, to finish the day at $50.76; while Travelocity jumped $3.86, or 17 percent, to close at $26.60.

Analysts had expected Expedia to earn 7 cents to 15 cents, with a consensus of 10 cents a share on a net basis that excluded charges, such as merger costs, according to tracking firm First Call. Using that accounting, Expedia actually reported net earnings of $19 million, or 31 cents a share, compared with a loss of $2.6 million, or 6 cents a share, a year earlier.

A large part of the strong performance is due to Expedia's success at morphing into something more than just a travel agency, analysts said.

Instead of just selling tickets for the airlines and hotels in exchange for commissions, Expedia has aggressively cut a slew of deals with travel suppliers, such as Northwest Airlines, to buy larger supplies of travel inventory in exchange for cut-rate prices. For instance, Expedia often buys the right to book large numbers of rooms from a hotel in exchange for discount rates. The company then has the opportunity to offer the room to the public at a price it sets and at the markup it wants.

"They really push those specially negotiated fares aggressively," Forrester Research analyst Henry Harteveldt said. "The risk is that while all their inventory is available at good prices, Expedia doesn't always show the rooms that it didn't get a special rate on, and which may be cheaper."

Becoming its own ticket broker has helped Expedia escape the storm caused when airlines began cutting commissions on fares sold by online travel sites. Last April, Northwest Airlines stopped paying commissions to Web travel sites. Travelocity countered by charging a $10 fee on Northwest fares. Expedia quietly struck a deal with Northwest that allowed it to buy certain fares at cut rates.

Expedia has really zeroed in on booking hotel rooms while some of its competitors have focused on selling vacation packages. Most online travel companies, including Expedia, try to bundle airfare, hotel rooms and rental cars in vacation packages; hotels have proven to be the most lucrative area of the business for some Web travel companies, Harteveldt said.

Forrester estimates that $370 million in vacation packages were bought online in 2001 and that the figure will increase to $594 million this year. In contrast, $2.7 billion was spent last year over the Web on lodging. This year, Forrester expects that number to rise 40 percent to $3.8 billion.

For the quarter just ended, agency revenues, mostly booking fees from airlines, were $42 million, up from $24 million a year earlier. Merchant revenues, largely made up of custom travel packages, tripled to $34 million.

Chief Financial Officer Greg Stanger said that the company is very interested in selling packages but acknowledged that with the relationships it has built with 4,000 hotel operators and the way the market is growing, hotels are a ripe part of Expedia's business. While airfare is controlled by a small band of airlines, there are thousands of hotel managers in which Expedia can negotiate for bulk discounts.

"The hotels are a much better market economically," Stanger said. "We win, the customer wins, and the hotel operator wins."

The company, which is being acquired by USA Networks, said it will change to a calendar fiscal year when that deal closes in early February. USA Networks plans to buy up to 75 percent of Expedia.

Reuters contributed to this report.