Travelocity.com

Flying through stormy skies on the Internet.

Symbol (Nasdaq): TVLY
52-Week Range: $51.88-$8.75
Price on January 3: $12.69
Market Capitalization: $207.4 million

Which of these things is not like the others: a twenty-pound bag of dog food, a dining room set, or an airline ticket? If you’re in the e-commerce business, the answer to this Sesame Street quiz is easy: an airline ticket, because, unlike pet food and furniture, it weighs very little relative to its price. Why should that matter? Just ask now-defunct e-tailers Pets.com, which sold pet products, and living.com, which sold home furnishings. They both got bogged down with huge storage and shipping costs, which made making money difficult. Meanwhile, with $11 billion in sales, online travel is the most shopped category on the Internet today. Fully 10 percent of all airline tickets were sold online last year, and the market is expected to expand at a brisk 25 percent a year.

You would think all that would be wonderful news for Travelocity.com, the Fort Worth company that is the leading online travel site in the world. But here too there is bad news. In the past year investors have watched in horror as Travelocity’s stock took a dizzying dive of more than 80 percent. Despite its apparently Web-friendly niche, Travelocity’s shares—as well as the stocks of other independent online travel services, including Microsoft-owned Expedia, Cheap Tickets, and priceline.com—have taken a terrible beating.

Why the crash landing? In a word: competition, especially from the airlines, who know a good thing when they see it. The trouble began last year, when the airlines capped commissions at $10 per ticket for all airline tickets, including those purchased online. Further cuts—or even the elimination of commissions—could occur, cutting into Travelocity’s revenue growth. Then came a direct competitive threat from the airlines themselves, in the form of airline-backed ticketing Web sites. Newly launched Hotwire.com and Orbitz.com (scheduled for takeoff this June) are owned by different consortia of the major airlines. If the airlines restrict their best fares to the sites they own, the future of even giant independent sites like Travelocity and Expedia could be threatened.

Oh, yes, and there’s also the little problem of profits, or the lack thereof. Like so many of its online brethren, Travelocity has yet to turn a profit, although its losses are narrowing. In October it reported a cash loss from operations of $7 million in the third quarter (which ended September 30) versus a loss of $11 million in the previous quarter.

Still, the stock has fallen so far that a number of analysts now think it’s a good buy. Thomas S. Underwood of Legg Mason Wood Walker lowered his 2000 and 2001 losses per share estimates to $0.89 from $1.10 and to $0.21 from $0.42, respectively. Of the eight analysts who follow Travelocity, three have “strong buy” ratings and five have “moderate buy” ratings on its shares, reports Zacks Investment Research. Bottom fishers may find Travelocity’s shares more airworthy than many Internet stocks, but it may be a long time before they take off.

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