Travel sites hope for seasonal boost

Internet travel stocks, which have turned stone cold during the past few months, may be taxiing for takeoff as vacation travel picks up during the summer, analysts say.

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For online travel sites, it's Christmas in summer.

Internet travel stocks, which have turned stone cold during the past few months, may be taxiing for takeoff as vacation travel picks up during the summer, analysts said.

"The summer season is for the online travel companies what the Christmas season is to the online retailers," said Robert LaFleur, an analyst at investment bank Bear Stearns. "I think that to the extent that the online travel companies are able to prove themselves during this very busy time, it will prove positive for the stocks."

Investment bank Donaldson Lufkin & Jenrette today initiated coverage of the sector with "buy" ratings on industry leaders Expedia.com and Travelocity.com.

Online sales of leisure and unmanaged business travel are expected to reach $28 billion in 2005, according to Web research firm Jupiter Communications. In 1999, online travel sales hit $6.5 billion--almost triple the $2.2 billion in 1998--and marked 4.5 percent of total U.S. sales, the research firm found. Forrester Research said it expects online travel to grow even faster, reaching $29 billion by 2003.

Despite the positive outlook for the sector, most online travel stocks have had their wings clipped as the market has soured toward e-tailers. Investors also have fled from the industry after several airlines teamed to create a site, dubbed "T2," to counter online travel sites' prominence.

The sector has also experienced greater pressure on commissions as the airlines look for ways to lower commission costs and capture the online travel agents' distribution.

T2, however, poses little threat to the leaders in the online travel sector, analysts noted.

"Consortiums are very hard to pull off," said Steve Weinstein, an equities analyst at Pacific Crest Securities. "You have some very intense competitors that have to work together--that's not easy."

The weak link in T2, analysts agreed, is that airlines would have to bring potential customers to a site where they could compare the fares of the different airline rivals--hardly a wise marketing strategy.

The consortium is also undergoing regulatory scrutiny. The Justice Department is investigating whether such an alliance raises antitrust concerns.

Because most summer travelers have already bought their tickets ahead of time, now the question is: Will only the late bookers turn to Internet travel sites hoping for a decent deal?

"What online travel agencies can do at this point is to encourage quick weekend getaways," said Fiona Swerdlow, a research analyst at Jupiter Communications. "These short vacations are becoming much more common as people find it difficult to leave work for one or two weeks."

Swerdlow estimates that Americans take two or three short leisure trips a year.

Online travel sites also offer research material to assist consumers in planning their entire trip--from airlines to car rentals to hotels--even if they do not ultimately book with sites.

"That is why hotels and car rental companies and others want to advertise on these sites," Swerdlow said.

Other analysts discount the effect that seasonality may have on stocks in the sector.

"What is evident to me is that online travel is the best-performing segment in e-tailing," said George Sutton, an equities analyst at Dain Rauscher Wessels.

Web travel agents do not have the same issues that burden other online retailers. Net travel sites do not have to build distribution networks or warehouses or buy products that they have to resell, analysts said.

"With the growing acceptance of e-ticketing, it's just a matter of sending an email," LaFleur said.

Nonetheless, most analysts do see the summer as a windfall for the industry.

"I think the positive momentum will help," LaFleur said.