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Will travel industry see shakeout online?

Following yesterday's Travelocity-Preview Travel merger, industry observers predict more deals to come, as players in the online travel business maneuver to gain market share and clout with suppliers.

Following yesterday's Travelocity-Preview Travel merger, industry observers predict more deals to come, as players in the online travel business maneuver to gain market share and clout with suppliers.

To be sure, the merger between the No. 2 and No. 3 online travel players will create the No. 1 online travel site, topping Microsoft's Expedia with about 17 million registered users and more than $1 billion in gross bookings. Also, distribution deals with most of the major portals--including Yahoo, AOL, and Excite--will give the new company a lead in total users. Because of this, observers say the company should have access to bulk discounted fares from airlines and hotels that other sites will be hard-pressed to match.

Although the current travel leader Expedia, which has filed for an initial public offering, should be able to stand up to the Travelocity challenge, smaller players will find it difficult to keep up, analysts say.

"In order to compete at this level, the smaller niche players will have to consolidate," Krista Pappas, an e-commerce analyst at Gomez Advisors. said.

Thus far, the online travel industry has seen a fair amount of consolidation and partnerships. Last year, United Airlines bought a stake in, formerly the Internet Travel Network; and more recently, the company teamed up with Net retailer to create the upcoming In August, offline travel giant Rosenbluth International bought its way into the online market by acquiring

But despite the movement, the online travel industry seems to already have locked-in leaders that include Expedia and Travelocity, according to a report issued by Forrester Research this summer. In a prescient note, the report urged smaller and midtier travel sites such as Preview Travel to partner with other sites--or risk becoming obsolete.

Jupiter Communications projects that the online consumer and unmanaged business travel market will grow from $4.2 billion, or 3 percent of all travel bookings, this year to $16.6 billion, or 10 percent, in 2003.

Despite the growing market, competition is fierce among existing competitors, and the leaders are even struggling to find profits, International Data Corporation analyst Paul Johnson said. Expedia, for instance, lost $19.6 million in the year ended June 30, on $38.7 million in revenue.

To survive, travel sites need to "ramp up" on their number of users to bring in more revenue and make their sites attractive to advertisers, Johnson said.

As Travelocity dominates the portal market and Expedia spends millions on marketing, the remaining travel players will need to "get large, or get niche-focused" to grab the attention of customers and advertisers, said Jupiter Communications analyst Melissa Shore.

In the future, Shore expects more offline travel players and travel suppliers to team up with existing Internet players to get a piece of the market. By partnering online, companies such as Rosenbluth International can get instant recognition and technology without having to spend the time and money to build and market their own sites, Shore said.

The merger
As part of the company's arrangement, Travelocity's parent company Sabre Holdings said it would contribute all of its Travelocity assets and $50 million to the combined company. Preview Travel shareholders would exchange their shares on a one-for-one basis for shares in the new company.

Observers roundly praised the deal, saying the two sites had complementary assets that will meld well together. Johnson said that while Travelocity had superior technology, Preview Travel brings with it its attractive marketing agreements with AOL, Excite@Home, and Lycos.

"I think this is a very good deal for Preview Travel and it really strengthens what Travelocity can do going forward," Johnson said. "If you look at the alliances this company now has with the top portal sites, it's extremely impressive and it will be difficult for any single online service to compete with that."

Pappas said that consumer also will benefit from the deal because there will be fewer choices and thus less confusion about who to book travel with online. And the combined site's negotiating strength could mean sweet travel deals for consumers.

"In the end, consumers will benefit greatly from this," Pappas said.

Wall Street seemed to like the deal also, boosting both Preview Travel and Sabre Holdings shares up yesterday on the merger news shares. Sabre jumped 6.13 points, or 14 percent yesterday, closing at 49.5, while Preview Travel closed up 6.69, or 38 percent, at 24.31.

Preview Travel was up another 2.98 points at 12:25 p.m. PT today, while Sabre was off 0.13 points.