Expedia Inc. (EXPE) has reached household name brand recognition. The travel company has grown from a small travel website to now selling everything from airline tickets and hotel rooms to car rentals and cruises. Expedia was started by Microsoft Inc. (MSFT) in 1996 and quickly spun-off when it grew outside of Microsoft’s areas of expertise. The company was bought out in 2001 and spun-off again in 2005. Since then, Expedia has carved out a large market share in the United States and is inching into international markets.
Expedia makes money from a few sources, the largest of which is hotel reservations with 70% of its revenue coming from hoteliers. The strategy is simple—buy up a large number of hotel rooms at a steep discount and market the site as having the lowest price guaranteed.
Here is an example. Expedia wants to offer seven-night, all-inclusive vacations for two in Jamaica. The travel company contacts a hotel in Jamaica and asks to buy a block of 100 rooms at $50 a piece instead of their best available rate (BAR) of $90. Expedia then contacts airlines and makes 200 seat reservations to Jamaica for $600 (with little or no discount). The package is offered to guests at a cost of $1,700 for two people. People booking on Expedia are happy; they have saved $130 off the list price just by booking with Expedia! Expedia shareholders are happy because they have only paid $1,550 for a package that they have sold to 100 couples for $1,700. Everyone wins.
Another way that Expedia makes money is through commission fees. By offering a best-price guarantee, hoteliers know that customers will be more inclined to visit Expedia than to visit the hotel’s site directly. That, coupled with the fact that smaller hotels do not have the advertising budget that large chains do, means that getting your hotel on Expedia is the key to making a reservation. Users who go to Expedia will have exposure to a hotel that they would otherwise have not known existed. The company also claims that more travelers visit Expedia than any other website, and with deep advertising pockets, Expedia’s page views and site visits are likely to grow in the future.
Expedia’s commission rates range from 20% to 25%—a figure so high that it makes hoteliers wonder if they are in fact operating a franchise under Expedia’s control. Here is an example. A hotel will offer Expedia ten rooms for reservation. These rooms are not sold to Expedia and there is no income guarantee for the hotel. The rate is set at say $100 and, if sold, the guest will pay Expedia $100 and Expedia will pay the hotel $75. The $25 that Expedia withholds is the commission fee which is used to provide customer service, marketing, and seek new business.
Expedia benefits financially from being a leading global player in the travel booking industry. With a market share of 17% in the online travel business in North America and a presence in over 200 countries, the company can command lower prices and monopolize the online reservation industry. Aside from being so well-known, Expedia loves to acquire smaller reservation sites to add to its ever-increasing repertoire of websites (over 130 in various languages as of Q2 2015 under 13 different brands). Often this is not even known to the consumer; for instance, a customer will visit hotwire.com, pay hotwire.com, and receive a bill from hotwire.com, but all while transacting with Expedia.
The Bottom Line
The Q2 2015 results released at the end of July prove that Expedia knows how to make money. The reservation giant posted an 11% increase in revenues, a 19% increase in bookings, and a 25% increase in hotel room nights, compared to Q2 2014. The numbers sent the stock soaring over 8% in after-hours trading, and if the company continues to grow its lucrative hotel revenue at the expense of its marginally profitable airline revenue, the stock will climb higher still.