By law, Germans get at least 20 days of vacation annually. In France and Spain, it's 30 days. All this excess European idle time means that the European travel market is much larger than in the U.S., about $325 billion a year there, compared with about $225 billion here. Yet, only 10% of continental travelers book their trips online, says Christopher Gutek, a Morgan Stanley analyst. He expects that figure to triple over the next five years.
Online travel agencies such as Expedia, Sabre and Priceline.com have aggressively expanded their European operations to seize more market share. But Priceline, the smallest of the large online travel agencies, is the dominant player, Gutek says. Priceline has distinguished itself from the pack in Europe with lower commissions and better payment arrangements for customers and hotels, he says. It claims commissions of 10% to 15%, allows customers to pay for hotel stays at check-out and lets hotels pay the company after the client has left. Competitors, on the other hand, claim commissions of up to 40%, charge customers for hotel stays upfront and pay hotels well after their clients have checked out, Gutek says.
Strength in Europe was evident in Priceline's first-quarter performance. Travel bookings in the U.S. were up 10%, but up 100% in Europe. The Norwalk, Conn., company expects profits from Europe to make up more than half of this year's earnings. Analysts expect Priceline (symbol PCLN) to earn $1.65 a share this year, according to Thomson First Call.
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Priceline is known for its name-your-price approach to selling airline tickets, hotel rooms, car rentals, vacation packages and cruises. Under this system, customers enter prices they are willing to pay into Priceline's Web site. Customers don't know the details of their travel arrangements until the price is accepted. If the price bid by customers is not accepted, they must enter a new price. Such blind bargaining does lead to discounts, but the company has seen more rapid revenue growth from its traditional online travel agency. The shift makes the name-your-own-price business "less and less relevant," Gutek says. He thinks Wall Street analysts have underestimated the worth of Priceline's traditional online travel agency because of its name-your-own-price reputation.
Gutek assumed coverage of Priceline from Mary Meeker, Morgan Stanley's well-known Internet analyst. He raised Morgan Stanley's rating from "equal-weight" to "overweight" and set a target price of $38 on Monday. His timing was unfortunate, however. The shares dropped 7%, to $29.31, in a broad market sell-off. Despite the fall, the stock is up 28% year to date. In 1999, Priceline shares sold for $990.
--Thomas M. Anderson
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