alarm:clock

- Thursday, September 25, 2008

Sidestep Orbitz For Many Reasons

We had to turn of the television. The staff at tech:stocker has watched enough silliness from our politicians to last us for the rest of the year. Asking Secretary Treasury Henry Paulson to respond "point-to-point" about a blog that questioned his plan is ridiculous. Considering the man is developing a plan to allocate $700 billion to ailing financial institutions, we seriously doubt that he is spending much time reading anything but spreadsheets from our major financial institutions and reports from leading economists. The only saving grace is that we are reading reports that a majority of lawmakers have realized that this is an enormous crisis and have agreed on a plan. We're going to sleep easier tonight even though unemployment is up and new house sales are down. The country is not out of the woods, but at least it will have a flashlight to find its way.

With the latest economic numbers, we decided to take a look at a business who could be impacted by them, Orbitz (OWW:NYSE).

As the travel site war raged a few years ago, the wife and I pledged our allegiance to Orbitz. My wife enjoyed the different ways you could find cheaper flights while I liked the games they offered on their pop-up ads whenever I visited ESPN.com. My wife felt satisfied that she was receiving the best possible price whenever she booked a trip with Orbitz while I forgot about the work I was procrastinating when I originally decided to see how the Red Sox were doing. A win for everyone involved.

And when Orbitz went public in 2007, we expected big things from them. New site features that improved the way it offered the best deal would have been nice but all we've seen is more games. A lot more games.

Instead of working on the consumer experience in the U.S., Orbitz seems focused on international expansion. While translation isn't cheap and developing relationships with non U.S.-based airlines takes time and resources, they couldn't have picked a worse time to embark on this endeavor. With the global economy slipping into the same recession as the U.S., this business initiative will add additional expenses in the near future instead of profits. And because Orbitz hasn't been able to make their domestic operations profitable, we can't see why the profits would start flowing with an expanded international presence.

Even more troubling is a statement made by CEO Steven Barnhart in the second quarter earnings release. Mr. Barnhart believes the company has "set the stage for strong growth over the remainder of the year." Even if we were in a booming economy, we would still have a hard time believing that Orbitz is poised to grow. In an uncertain economy, Orbitz could be hit even harder than other businesses as people cut back on their traveling, especially airlines flights which represent almost 41% of their revenues.

And why isn't Orbitz profitable? Considering they are a purchasing agent, you would believe that Mr. Barnhart should be able to control costs internally to keep the company in the black. But with the number of pop-up ads we see from the company on a daily basis, we're not surprised that the company had $46 million in revenue expenses last quarter, up $4 million from the previous quarter.

An equally concerning trend is that we've seen the travel industry transforming once again on Internet. Sites like Nile Guide are focusing on the "experience" versus buying the plane ticket but the most interesting development is from a company called Sidestep that searches over 200 travel sites to find the best deal. While NileGuide correctly wants you to believe that the trip is ultimately about what you do when you get there versus buying a plane ticket, the price of getting on the plane is still going to be the controlling factor of where most people go and what they can afford to do once they get there. That's why we like Sidestep. Looking for the best deal? SideStep looks at over 200 sites to find you the best possible price. The days of toggling between Orbitz, Expedia (EXPE:NASDAQ), and Travelocity could become a distant memory. How Orbitz responds to these trends will definitely influence future revenues.

Since discovering SideStep, my wife has forgotten about Orbitz and I've stopped playing shuffleboard on Orbitz Games. We have more money in our bank account and I've ended my obsession with the Red Sox. As far as purchasing Orbitz stock, we can't recommend buying it until they control their costs and start showing a profit. Eliminating the games and focusing on the U.S. market would be a good start.