Challenges Ahead for Online Travel Firms

BOSTON (05/20/2000) - Wall Street breathed a sigh of relief last week when the Federal Reserve's decision last Tuesday to raise interest rates by half a percentage point failed to spook investors.

There has been enough concern about the Nasdaq stocks, including concern from online travel firms, which have taken a big hit during the past few months. The stock prices of two industry leaders - Inc. [Nasdaq:TVLY] in Fort Worth, Texas, and Inc. [Nasdaq:PCLN] in Norwalk, Connecticut - have dipped by approximately 50% since March.

Though the stocks' performance is in part due to a general Nasdaq Stock Market Inc. slide, it also reflects investors' increasing concern over the long-term viability of online travel firms' business models, says Rob Milmore, an analyst at Arnhold & S. Bleichroeder Inc. in New York.

And two recent analyst reports indicate that there are more challenges ahead for the online travel industry. Jupiter Communications Inc. [Nasdaq: JPTR] in New York says it expects that online travel will slow from triple-digit growth to between 10% and 20% by 2003. And a recent report from New York-based Bear, Stearns & Co. [NYSE:BSC] predicted that 80% of the approximately 1,000 online travel Web sites will disappear by 2005.

Though analysts agreed that Travelocity and Priceline won't be among the victims of the shakeout, they anticipated further spending on acquisitions and branding campaigns by players interested in fueling their user base.

"Wall Street gave these companies breathing room to build brand and volume," said Philip Wolf, an analyst at PhoCusWright Inc. in Sherman, Connecticut.

"That period is coming to an end."

Competition is also heating up from the bricks-and-mortar world. Honolulu-based consolidator Cheap Tickets Inc. [Nasdaq:CTIX], which derives most of its business in the off-line world, reported a profit of 10 cents per share for the first quarter.

Also, online travel firms will feel more heat this summer, when major airlines plan to launch their own travel Web site, T2. (The Senate has scheduled antitrust hearings for next month regarding the venture.)One way online travel sites are fighting back is by diversifying. Priceline, for instance, recently unveiled a name-your-own-price gasoline card.

And online sites such as Travelocity, which makes money through commissions, will probably rely more on tour packages, said Milmore. "The commissions on most airline tickets will most likely go to zero," he said.

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