The travel market in Asia has been heating up over the past few years due to low-cost airlines, credit card availability, an expanding middle class and outsourcing activities, especially in fast-growing economies, such as China and India. According to a recent report (eTurboNews), business travel alone in China and India is expected to grow 35% this year.
Growth Prospects Abound
Preliminary figures from the Pacific Asia Travel Association (PATA) reveals that the Asia/Pacific region saw an 11% increase in arrivals in 2010, with 2011 growth rates expected to double that of the average growth rates across the world. Countries other than China and India that posted record growth rates in 2010 include Vietnam, Singapore, and the Philippines.
While South East Asian countries will see most of the growth in the next few years, other Asian countries will also benefit. Industry analyst PhoCusWright expects the total travel market in the Asia/Pacific to reach $212 billion this year, or a 5% increase from 2010.
Online travel booking penetration is also very low. PhoCusWright says that the online travel market in Asia is 21%, well below the 38% penetration rate in the U.S. and 34% in Europe. Therefore, with increased connectivity through computing devices (both mobile and otherwise), as well as smartphones, online penetration rates are likely to accelerate.
The potential in these markets is not lost on online travel companies such as Expedia Inc (EXPE) and Priceline.com (PCLN), as well as a host of other smaller players, including some new Chinese companies.
Among the big multinational players, Expedia appears to be best positioned. The company has for long had a presence in the region and has now announced major expansion plans. These include the launching of local sites in Malaysia and Thailand by the end of April and in another five countries soon after.
Expedia already offers a number of services in Japan, including a 24/7 telephone service in Japanese and a “Dynamic Tour” (online search services to 70,000 hotels across 30,000 cities, combination flight/hotel bookings through which fetches significantly discounted rates).
Effect of the Japan Crisis
Asian travellers have traditionally tended to head to Asian destinations. Japanese travellers had the thickest wallets and were also the most frequent travellers. According to the latest available data from the United Nations World Tourism Organisation as recently quoted in the media, in 2009, Japanese nationals spent $25 billion in the tourist destinations of Thailand, Taiwan, Vietnam, Malaysia and South Korea, compared to $44 billion spent by Chinese nationals.
The PATA has stated that Japanese spending has been on a decline over the last few years (although 2010 was stronger). It expects the recent Tsunami and earthquake in Japan to significantly impact this spending. Taiwan is likely to be one of the worst affected, since Japanese tourists comprised nearly a fifth of total tourists to the country in 2010. South Korea, which sees nearly a third of its tourism traffic coming from Japan, will also be affected. Japanese travel to Hawaii will also be hit.
It is expected that the overall travel market in Asia will remain robust despite the Japan crisis, as spending by Chinese and Indian nationals is likely to remain strong.
Dealing With the Crisis
For Expedia, the crisis in Japan comes as a big blow. The company’s efforts in Japan were just beginning to pay off and a company official recently stated in a Japanese daily that revenue from Japan had grown 50% from 2009 to 2010. Expedia had big plans for Japan, especially on the mobile platform, but it looks like some of these plans will now be put on the back burner.
Expedia appears to be pushing sales in other attractive Asia/Pacific destinations, particularly, Australia and New Zealand. Australia was voted most desired among Americans, Britons and Japanese nationals in a survey commissioned by the PATA last year. Expedia recently started an advertising campaign in Australia and New Zealand, promoting its booking fee waiver (which it actually waived in late 2009).
Recommendation
Given the conditions in Japan and its impact on Expedia, we expect some more presure on the company’s earnings profile. Estimates for 2011 as well as 2012 have come down in the last two months, which triggered our short-term Strong Sell recommendation (Zacks Rank #5) on Expedia shares. Our long-term recommendation, however, remains Neutral.
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