Expedia (EXPE) recently announced a deal with AirAsia to operate in Southeast Asia, a market that we expect to grow between 30% to 40% in coming years. We take a look below at what each party might gain from this partnership.
The joint venture entails forming a new company by merging Expedia's businesses in Japan, Singapore, India, Malaysia and Thailand with AirAsia's online booking businesses -- AirAsiaGo and Gorooms. The partnership will give Expedia exclusive distribution rights to sell tickets on AirAsia and its long-haul associate, AirAsia X, which until now could only be booked on AirAsia's own websites.
What the Joint Venture Means for Expedia
- Expedia gets exclusive distribution rights for AirAsia air tickets, apart from the airline's own websites. The exclusivity clause ensures high traffic, which will translate into higher sales of hotel stays and holiday packages.
- Expedia stands to benefit from AirAsia's distribution network both online and offline (retail outlets), as well as its expertise in the local markets.
- Shrinking profit margins make scale crucial for an online travel agency's sustainability. The merged regional entity will give Expedia a footprint in the region comparable with Priceline's. Expedia's Asia-Pacific revenues of around $40 million plus AirAsia's sales of $30 million mean revenues of around $70 million for the combined entity. Priceline's Agoda's Southeast Asian revenues for 2010 were $72 million.
What the Joint Venture Means for AirAsia
- AirAsia gets access to Expedia's inventory of over 130,000 hotels across the globe. Partnering with the leading online travel agency gives AirAsia a competitive edge over low-cost upstart carriers in the region such as Tiger Air.
- AirAsia's long haul operations into the U.S., Europe and Australia need global distribution, and Expedia's strong presence in these markets can provide that. AirAsia is largely unknown in the U.S. and Europe, and needed a partner for selling air seats in these markets.
- The joint venture helps AirAsia sell its inventory of tickets while bypassing the Global Distribution System.
The joint venture between Expedia and AirAsia may be a harbinger of things to come: Partnerships between online travel agencies and airlines are the natural next step in the evolution of online travel industry.
Expedia competes with other leading online travel agencies across the globe such as Priceline (PCLN), Orbitz (OWW) and Travelocity. We value Expedia's stock with a $30.60 Trefis price estimate, which is roughly a 23% premium to its current market price.
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