If Jay Walker was feeling any concern over the future of Priceline.com, he was certainly not letting it show. Sitting in his Connecticut headquarters early in September, the company's founding vice-chairman radiated nothing but the absolute confidence that has become the hallmark of online entrepreneurs.
Walker still believes wholeheartedly in his ticket auction model which has already taken the US market by storm and which he is in the midst of taking further afield. He sweeps aside worries over the online competitors, now challenging for the priceline crown, not to mention the dented image of Internet stocks in general.
Yet Walker has not been entirely immune to these chill winds. After close to three years of exponential growth, Priceline was obliged to issue a market warning in late September that its quarterly revenues were unlikely to meet analyst expectations, owing to weak airline ticket sales. Priceline stock immediately plummeted by over 40% to hit its lowest point in a year.
Analysts had two worries: that growth was finally showing signs of plateauing and also over the potential impact of HotWire, the new auction site backed by six major US airlines. The concern with HotWire is that carriers may start to keep some of their bargain tickets back for this site rather than sell through Priceline.
But Walker dismisses concerns over HotWire and still seems ready to forge ahead full-speed with the expansion of the Priceline auction concept. That includes the launch of airline ticket clones in Europe, Asia, Australia and New Zealand. Meanwhile, in the US market, Priceline has already diversified far beyond the original air market, now selling hotel rooms, cars, insurance, mortgages and telecommunications, although the company's foray into groceries recently failed. All products are sold the same way that Priceline sold its first airline ticket, with a "name-your-own-price" policy for which Walker has obtained a patent.
Without knowing which airline or what time they might fly, would-be travellers - virtually all on leisure journeys - tell Priceline how much they are willing to pay for a ticket. Priceline either rejects or accepts their offer. If the price is accepted, travellers must purchase the ticket. And only then do they learn which airline they will fly, when and by what routing. Priceline's margin comes not from commission but from the difference between the buying and selling price. If it buys a ticket for $200 and sells it for $220, it pockets the $20 difference as its own cut.
US airlines were initially cautious. At the outset Priceline was able to convince only two struggling majors - Trans World Airways and America West - to give it seats. But it eventually won over Delta Air Lines, in a deal that gave the carrier a significant number of stock warrants. The other US majors quickly followed, soon joined by others. Today30-40 airlines participate in Priceline and, of the US majors, only Southwest and Alaska still do not.
Walker argues that the arrangement makes sense for an industry like air transport, which sells a perishable product and practices highly sophisticated revenue management. "An airline can predict 30 days out whether its plane is going to leave 30% empty, and it can take actions to adjust the load curve for that particular flight," he says. Some US carriers got rid of as many as 10% of their empty seats each day over the past summer season, he adds, though declining to give names. Travellers, too, have gained, he argues. "Our research shows we save customers 54% off published fares. They get substantial savings, but also substantial trade-offs, because they don't know the time of day they'll be flying, the routing or the airline," he explains.
So far, the formula has produced explosive growth for Priceline, although, like other Internet start-ups, it has not yet earned a profit. Walker first founded the fledgling technology company in early 1996 and launched the auction web site two years later. Since then, the company's revenues have soared from nothing to $482 million in 1999. In the first half of this year alone it registered sales of $666 million, and a modest $9 million loss. The worries that have clouded this picture came at the end of September as the company warned that revenues for the third quarter, although up at $350 million, would miss analyst estimates by around 5%-10%. The alarm came from apparent signs of a tailingoff in the ever-increasing volumes of airline ticket sales. Priceline blamed a combination of fuel surcharges, flight cancellations and airlines' own promotions for the damage.
Priceline goes international
Walker is still bullish about expansion and since January has announced plans for four new ventures. A company backed by Softbank, a Tokyo-based Internet company, will serve Japan. Most of the rest of the Asia will be handled with backing from Hutchison Whampoa, a Hong Kong-based conglomerate. Start-ups in Australia/New Zealand and Europe complete the expansion plans.
Walker is shy of giving too many specifics on the overseas start-ups - including launch dates and airline participants. However, they are expected to follow, if not entirely replicate the US model. "I think successful US companies that have globalised have recognised that each market is very different. The smartest companies customise their core proposition to the local market so it works well. We'll do the same," he says. But the core message remains identical. "The problems Priceline solves in the US exist in the rest of the world.
The last time I checked, there were many sellers who wanted to sell more products and who would be willing to privately discount if their customers were flexible and they could shield their brand. This is true if you're selling long-distance service, hotel rooms or airline tickets." In fact, Walker believes Priceline could be more successful outside the USA. "When you look at markets like Asia and Europe, you often find pricing options for consumers are fewer than in the US. I expect Priceline could be even more effective in non-US markets."
He dismisses the idea that Priceline is competing with other air ticket outlets, whether online or offline, or at least not those offering published fares. For a start he argues that most customers would simply not fly if they did not have the auction site. "We find most customers, if they don't get a ticket from Priceline, aren't going or they're going to drive," he says. "Consumers obviously have many ways to buy airline tickets, but they're all published fare choices. I wouldn't consider any of those people competitors, because if you want a published fare, you ought to buy it."
However, he does admit that Microsoft's Expedia is a competitor of sorts. Its name-your-own-price concept for airline tickets and hotel rooms generated a law suit by Priceline that charges patent infringement. It remains unsettled. Even so, Walker claims that Expedia's entry into Priceline's specialised niche of travel sales has not hurt his company's growth. He is even more sanguine about prospects for online auction sales when and if the global economy falters. "I would expect Priceline would be the beneficiary of a tighter marketplace," he predicts. "Airlines will have more empty seats and thus be more aggressive in their pricing with us. And consumers will be more concerned about every dollar they save."
Not all the analysts who are tracking Priceline's progress, share Walker's optimism. Henry Harteveldt, a senior analyst with Forrester Research, the Internet consultancy, warns that airline owners of HotWire might eventually pull out of Priceline - a powerful group including American, America West, Continental, Northwest, United Airlines and US Airways. Unlike Priceline, HotWire lets visitors select a discounted fare on a route where they want to fly; but it too conceals the identity of the carrier, the flight times and the routing until ticket purchase. "These airlines have a strong financial interest in HotWire, and I wouldn't be surprised if they do their discounting through HotWire rather than Priceline, once their contracts expire,"says Harteveldt.
However, Harteveldt agrees that the overseas expansion plans hold promise for the aviation programme. "Priceline will certainly be a factor in the marketplace abroad, though the question is whether scheduled airlines will give them access to seats on their flights, or whether Priceline will sell vacation packages."
HotWire competition
Back in the core US market, some majors confirm that they will now be waiting to see how HotWire develops alongside Priceline. "We will want to see who offers the most effective customer proposition, the lowest cost of distribution and the most incremental revenue. Based on that, we will decide if we'll work with one or another or both," says Al Lenza, executive vice-president of distribution planning at Northwest Airlines.
Sara Farley, an analyst at US brokerage PaineWebber, points out that Priceline is no longer alone in the market. "A number of companies are trying to take advantage of off-tariff seats - the airlines themselves, consolidators, HotWire. Priceline faces a lot of competition, from anyone trying to give people a good price," she says. The recent revenue warning has also caused a rethink about future growth opportunities. "We are now assuming Priceline's total travel business has essentially hit maturity, and have modelled 5-10% annual growth for the next several years. While we do not necessarily believe this is the case, it is clear it is acting more and more like a mature business." Other Wall Street analysts also believe that new competitors, targeting the same price-sensitive air travel audience, will now put Priceline to the test. It may also have to start showing profits.
Source: Airline Business
