Web Travel Stocks Tumble on Threat to Commissions

Continental Airlines (NYSE: CAL) said Wednesday it will no longer pay commissions on travel booked over the Internet, sending shares of online travel companies lower amid speculation that other airlines will follow suit.

At Prudential Securities, analyst Mark Rowen on Wednesday downgraded Expedia (Nasdaq: EXPE) and Travelocity (Nasdaq: TVLY), citing the likelihood that the three largest airlines -- United, American and Delta -- will also eliminate commissions for Web-booked travel.

In trading Wednesday, Travelocity stock fell 29.3 percent to US$14.07 and Expedia dropped 10.6 percent to $28.46. Name-your-own-price e-tailer Priceline (Nasdaq: PCLN) remained steady, however, losing 2 cents to $3.97.

"Since [Continental] is the second major airline to cut commissions to zero, we believe the risk is heightened" and that the three largest airlines will follow, Rowen wrote in a research note announcing the downgrades to hold from buy.

Northwest Airlines, in concert with the Netherlands' KLM Royal Dutch Airlines, stopped paying Internet-travel commissions in March.

Priceline's Spread

Goldman Sachs analyst Anthony Noto, however, said that while the online travel companies' shares could remain under pressure as a result of the loss of revenue, the industry will be able to adapt to a changing structure.

Priceline, Noto pointed out in a Thursday research note, has no exposure to air travel commissions, since its revenue is based on the spread between the wholesale price it pays for airline tickets and the price at which the tickets sell.

In contrast, Travelocity, Noto wrote, would be hit the hardest, because it depends on airline commissions for 34 to 36 percent of its revenue.

In morning trading Thursday, Expedia was down $1.69 to $26.77, Travelocity was down 72 cents to $13.35, and Priceline was down 15 cents at $3.82.

Diversification Key

Noto, who maintains a market outperform rating on the three big travel e-tailers, said Continental's announcement illustrates the "key themes for online travel: a combination of merchant and agency models with diversified revenue streams."

Expedia, with 26 percent of revenue coming from commissions, "could easily switch to a 100 percent merchant model," or an agency that buys tickets wholesale and sells them at retail prices, Noto wrote.

The company, he said, is already acting as a merchant in some ways, having acquired online wholesaler Travelscape.

'Domino Effect'

If Continental stands alone in eliminating commissions, according to Noto, Expedia and Travelocity could stop selling its tickets, which would cut the travel companies' annual revenue by less than 3 percent.

On the other hand, if other airlines follow Continental's lead, Noto said, the e-tail travel companies could either tack on a fee of about $10 per ticket, recovering the lost revenue from consumers, or move to act as wholesale merchants.

If the larger airlines decide to end online commissions, "we would expect to see a domino effect in the industry, leading to a zero-commission environment," Noto wrote.

However, Noto added, Expedia and Travelocity could still compete against traditional travel agencies because of their lower costs and "increasing penetration into the overall leisure travel market."