WSJ: Priceline.com's Finances Suffer As Attack Limits Air Travel
September 20, 2001
Business Fare
By JULIA ANGWIN
Staff Reporter of THE WALL STREET JOURNAL
Priceline.com Inc. had just eked out its first profitable quarter, coming back from the dot-com collapse, when the terrorist strikes paralyzed the travel market last week. Now, all bets are off for the Norwalk, Conn., online travel retailer.
Many Wall Street analysts are becoming less optimistic about the company's future. And Priceline executives are hinting that they may not be able to fulfill their promise of continuing to turn a profit in future quarters, though they remain optimistic about the company's prospects. The company's shares have plunged to $2.03 as of 4 p.m. Wednesday in Nasdaq Stock Market trading from a high of about $9 during the August days after the company's report of its first profitable quarter.
Although many in the travel market are suffering, too, Priceline's situation is unique for several reasons. First, the company's customers are almost all leisure travelers -- a segment some industry analysts feel will be hit hardest. Second, Priceline sells seats the airlines can't fill themselves -- something that could become more scarce if the airlines drastically cut back on flights. Third, Priceline's name-your-own-price system requires customers to purchase a ticket before finding out which airline or sometimes airports they will be using -- a practice that could become less attractive if consumers start getting picky about which airline they want to fly following the hijackings.
Those factors have led some to conclude that Priceline could suffer more than rival online retailers Expedia Inc., and Travelocity.com Inc., both of which offer a broader range of services and simpler buying models than Priceline. USA Networks Inc. is in the process of buying a majority stake in Expedia, Bellevue, Wash., from Microsoft Corp. Travelocity, Fort Worth, Texas, is majority-owned by Sabre Holdings Corp.
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"Expedia and Travelocity at this point have evolved into portals of all things travel. You can go to Expedia and rent a vacation home," said Henry Hardeveldt, an analyst with Forrester Research. "Because of the nature of the product of Priceline, I wouldn't expect them to recover at quite the same rate."
Wall Street analyst Thomas Underwood at Legg Mason also has concluded that Priceline could be hit harder than Expedia and Travelocity. "Whimsical trips such as the ones Priceline has been soliciting over the last year are out of fashion," he wrote in a report this week.
Priceline Chief Executive Richard S. Braddock vehemently disagrees with such a dire prognosis of his business. "In my opinion, the markets are crazily overreacting to this," he says. "It's not cataclysmic. It's a heart palpitation, but no body organs stopped functioning here. We just have to tough it out."
As evidence, he pointed to the fact that Priceline's travel bookings on Monday and Tuesday of this week were down only by 40% and 35%, respectively, from the Monday prior to the attacks -- a slide that is comparable with its rivals. "Our business has already effectively doubled from the level it was at the day the strike took place," Mr. Braddock said. "It's basically improved every day since then. The route back is under way. It's a far longer journey than one week."
Mr. Braddock also says even if fewer people fly, they still will want to save money. "People's desire to save money is, if anything, higher," he said. Those who are scared to fly, he maintains, will be scared regardless of the price. With airline traffic limited, most of Priceline's new bookings during the past week have been for hotel rooms and rental cars, followed by airline tickets.
Priceline is somewhat helped by the fact that it has no debt and has a cash stockpile, which amounted to about $166 million at the end of the second quarter. The company also plans to announce Thursday that its largest investors, Hutchison Whampoa Ltd. and Cheung Kong Ltd., have withdrawn their joint registration to sell part of their combined 30% stake in Priceline. Moreover, Priceline's board agreed this week to allow the Hong Kong conglomerates to increase their stake to 37.5%.
At the same time, the company has been hit with hundreds of refund requests and reservations cancellations -- not all of which it can transfer back to the airlines and hotels. As a result of those costs and the slowdown in new bookings, Priceline on Monday lowered its revenue forecast for the third quarter to between $280 million and $300 million. Priceline had been expected to post revenue of $345.5 million for the period, according to a consensus of four analysts surveyed by Thomson Financial/First Call.
Priceline wouldn't comment about its expected earnings for the third quarter. Goldman Sachs analyst Anthony Noto still expects Priceline to post profit of a penny a share, smaller than the five cents a share he had been expecting before the attacks. He projects the company will post a loss for the fourth quarter. Priceline's biggest problem, Mr. Noto said, is its reliance on the leisure traveler, who may be skittish in the wake of the attacks.
"But over time, we believe that customer demand will come back," Mr. Noto said. "In the long term, I remain very positive about the viability of the business."
Some even say that Priceline's history as a crashed-to-earth highflier will help it weather the current storm. Last year, the dot-com fallout dragged the online travel retailer's shares from more than $90 in March to just above $1 in December. Since then, the company has turned itself around by cutting its staff to about 330 from more than 500 employees and by exiting from business ventures it realized wouldn't soon be profitable.
"They already have an organization that is poised to deal with a roller coaster," said Philip Wolf, president and CEO of PhoCusWright, a travel-industry research firm. "I wouldn't write their epitaph yet."
-- Melanie Trottman contributed to this article.
Write to Julia Angwin at julia.angwin@wsj.com3
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