Orbitz Worldwide, Inc. (OWW), Priceline.com Inc (PCLN), Expedia Inc (EXPE): Can This Travel Agency Crack the Top Tier?

It has been a tough five year period for online travel agent Orbitz Worldwide, Inc. (NYSE:OWW), as it has continually lost ground to competitors Priceline.com Inc (NASDAQ:PCLN) and Expedia Inc (NASDAQ:EXPE).  The company’s sales remain below the level in 2008 and its profit margin is far below those of its chief competitors.  However, Orbitz’s stock price has been moving sharply higher recently, as investors bet on its potential as a strong #3 player in the online travel agent business.  So, can Orbitz deliver on its promise?

What’s the value?

Founded by five of the major domestic airlines back in 2000, Ortibz offers discounted flights, hotel accommodations, and vacation packages primarily through its namesake website.  The company has been hurt by a greater reliance on flight sales, a category that has been limited by carrier consolidation and a decline in the aggregate number of flights.  In response, Orbitz Worldwide, Inc. (NYSE:OWW) has moved into the vacation package arena, including a new partnership to offer packages to customers of American Express Company (NYSE:AXP)’ Travel Network.

In FY2012, Orbitz posted relatively weak results, with increases in revenue and adjusted operating income of 1.6% and 10.9%, respectively, versus the prior year.  While sales of flights were down during the period, Orbitz generated increases in the hotel and vacation package categories.  In addition, the company’s operating margin benefited from higher average prices for both flights and hotel accommodations.  Operating cash flow was also demonstrably higher in the current year, a positive development that should allow Orbitz to pay down its hefty debt load that was incurred during a previous leveraged buyout.

An uphill battle

Unfortunately, Orbitz Worldwide, Inc. (NYSE:OWW) has much work to do, as both Priceline.com Inc (NASDAQ:PCLN) and Expedia Inc (NASDAQ:EXPE) are currently growing at high, double-digit rates.  The hotel accommodation segment has been achieving much faster growth than other travel segments, a trend that plays into the strengths of both competitors.  In particular, Priceline’s hotel bookings were up 40% in 2012 and the company’s properties include booking.com, the world’s largest online travel agent for hotel accommodations.

In FY2012, Priceline.com Inc (NASDAQ:PCLN) reported another year of solid financial results, with increases in revenue and operating income of 20.8% and 30.8%, respectively, compared to the prior year.  While the company’s trademark, name-your-own-price segment had lackluster sales growth, its traditional agent segment enjoyed strong gains across air, hotel, and car rental categories.  In addition, its operating margin hit a five-year high as Priceline leveraged its global infrastructure, with international sales accounting for 82% of the company’s total business.

Meanwhile, Expedia Inc (NASDAQ:EXPE) also had a solid year in 2012, with increases in revenue and adjusted operating income of 16.9% and 9.6%, respectively, versus the prior year.  The company has a strong offering in all segments and geographies of the travel business, including its leading hotels.com unit in the accommodations segment.  Expedia’s financial performance in 2012 was paced by a 27% increase in hotel bookings, as well as strong results in its Egencia corporate travel unit.