MENU

Hotel and booking companies go head-to-head in tight market

Holiday and travel reservation booking companies, some partly online and some pure online, are all trying to cope with more competition in a maturing market by expanding their footprint as well as increasing their coverage of the different aspects of travel and accommodation. Being completely online doesn’t automatically win the game, and having the most storefronts and agents won’t guarantee success over the long term either.

Wotif.com (ASX: WTF) is well known for discount, last-minute accommodation booking, but it is seeing the need to expand more into flight and travel packaging to stay competitive. At the annual general meeting this month, Chairman Dick McIlwain admitted to the audience that the past double-digit growth the company achieved in accommodation bookings was not expected to go on into the future.

At the same time, the company is implementing its new strategy of dynamic packaging that combines flights, travel packages and accommodation both domestically and internationally. It is expecting growth from the new system to translate to higher total transaction values, but recent sales data is not showing any jump up in overall business.

Jetset Travelworld (ASX: JET) is expanding its new brand system, called helloworld, to also handle business flight packaging. This is similar to Flight Centre’s (ASX: FLT) FCm that caters to business customers. Average sales per customer and profit margins are higher with corporate fliers, yet that attracts competition from companies like Corporate Travel Management (ASX: CTD) as well.

In 2013, it earned $16.5 million after tax on revenue of $332 million for a net profit margin of 4.95%. The share price is $0.40, and has been the $0.40-$0.50 range since July 2012. Its price-to-earnings (PE) ratio is 10. It controls about 27% of the flight and tour reservation industry.

Online only service provider Webjet (ASX: WEB) acquired the Zuji flight reservations platform in 2013 for $25 million to expand into Asia, and launched its own hotel accommodation booking service called Lots of Hotels, replicating the all-in-one style of bookings that its rivals are creating.

Revenue was up 29.5% to $74.8 million from $57.7 million, but due to the acquisition costs, net profit for the year was from $13.6 million to $6.5 million. Average net profit margin is about 25-28%. The share price is down from its April high of $5.30, when there was talk that the Zuji acquisition may be too hard for the company to merge with since Zuji’s organisation is much larger than Webjet’s. Its current price is $3.35 a share, and PE is 38, but forecast earnings per share (EPS) for 2014 is 24.4 cents per share, so forward PE is 14.3.

The industry share leader, controlling 40.3%, is Flight Centre (ASX: FLT), and since May 2012 its share price has flown from about $18 to $51, up 183%. It is expanding its Escape Travel franchise, inviting agencies under other brands to join it. This is going head-to-head with Jetset Travelworld’s expansion plans, pitting the number one and number two businesses against each other.

It has also introduced 24-hour booking with expanded staff to total about 130 by December. Last week, Credit Suisse reaffirmed its “outperform” rating on the company.

Foolish takeaway

The industry is getting crowded and faster in pace just to stay up. Even with Flight Centre’s dominance and $5.1 billion market cap, it still only has net profit margins of 12.8%, so it must work hard to keep earnings up. The smaller competitors, the online-only businesses, have lower cost bases, but they have to build up a strong brand or their service will become commoditised.

As an investor, you have to look over these players, and project where each one of the may be in five or 10 years’ time. The ones with lasting durable competitive advantage will grow in value. You also need to know how customers want to interact with the companies and use their services. The successful ones will have the ability to grow in that respect, too.

Not interested in travel stocks? Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

Motley Fool contributor Darryl Daté-Shappard does not own any of the companies mentioned here.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.