Introduction and Brief History Expedite, owned by Expedite INC, is one of the world’s leading online travel companies. Starting in Redmond, Washington, the company headquarters are now in Bellevue. In 2012, Rich Barton, the founder and CEO, stated on the company website that, “in 15 years one company literally has changed the travel industry forever and has become the most important player in it”. In its 18 years of existence, Expedite, INC has changed its structure by being acquired and subsequently acquiring other companies, and has become the largest travel agency in the world.
Beginning a brief history, Expedite was first munched in October of 1996, debuting on the web as “Microsoft Expedite Travel Services”. In November 1999, Expedite announced their PIP and by January 2001 saw their first profitable quarter. A huge milestone for Expedite in Q of 2001 was when the company surpassed Traceability as the #1 Online Travel Company. IAC (an commerce giant) acquired Hotels. Com in June 2003, Expedite in August 2003, Hotelier in November 2003, and in March 2004 IAC acquired Agencies and refrained it as Expedite Corporate Travel. In January 2005, Expedite took a controlling stake in along, a China-focused travel agency.
And in August 2005, IAC merged its online travel businesses into Expedite, INC. Expedite, INC reached yet another milestone in 2007, when it was added to the 500. Today, the Expedite, INC website offers information on the 12 different companies that they own. These companies are: Expedite, Expedite Affiliate Network, Hotels. Com, Agencies, Hotelier, along, trivial, Veneer, Carpenters. Com, Classic Vacations, Expedite Cruises Centers, and Expedite Local Experts. With a mission of, “Revolutionize Travel through the Power of Technology” the Expedite website blatantly declares statements such as ‘We Love Travel” and “We’re Everywhere”.
Expedite hopes to help provide travelers with an easy travel planning experience. The company hopes to, “provide personalized service, the latest technology and the widest selection Of vacation packages, flights, hotels, and rental cars”. Expedite also States that they “help everyone, everywhere, plan and purchase everything in travel” Industry Economic Characteristics and Competitive Dynamics Expedite is part of the very competitive online travel industry within the more broad lodging industry. The industry seems to grow as fast as the internet itself does.
Back in 1999, the Travel Industry Association of America reported hat 15. 1 million consumers booked their travel online. 2 10 years later that number had jumped to 70 million. Consumers are transitioning from using the traditional travel agent to booking online. The online travel industry is causing traditional travel agencies to modify and update their business models to compete and stay relevant. According to a Forbes article, Competitive Landscape Of The U. S. Online Travel Market Is Transforming, Expedite, Principle, Orbits Worldwide and Traceability own 95% of the U.
S. Online travel market (as of April 2014). While Expedite dominates the U. S. With bout 40% of the market share, Principle has 35% in Europe. A benefit to the internet is being able to easily penetrate worldwide markets-3 While domestic U. S. Travel bookings could satisfy the market, if another company is able to meet more demand for global travel and create more business, the industry leader could shift. The leaders and laggards will depend on whether you’re examining the online travel industry on a national or international level.
And even then, if a company is able to surpass the competition financially despite only reaching a national level, they will control the industry. Dynamic pricing s a popular pricing strategy and competitive dynamic within the travel, lodging and hospitality industries. Specifically pertaining to the online travel industry is the dynamic pricing of airline industries. Airlines will often change prices based on the day, time of day, and number of days before the flight. Different factors such as number of remaining seats, departure time, and number of cancellations will also affect the dynamic pricing.
Online travel agencies bank on being able to provide consumers with the lowest prices for travel. So, they have to work in accordance with the airline prices-4 Porters 5 . Competition in the industry The online travel industry is highly competitive. The graph below depicts the direct competitors of Expedite within the industry. These competitors are Orbits Worldwide Inc, The Principle Group Inc, and Traceability. Com l_p. While Traceability. Com LAP is a big competitor, they are a privately held company thus their industry data is unavailable in this table.
According to this data, Principle leads the group with 8. 14 billion in revenues and 2. 35 billion in Net Income. Principle also has the highest earnings per share at 44. 27 Table and data from: http://finance. Yahoo. Com/q/in? =EXPEL+laundry. As of November 26th, 2014. The online travel industry is in the mature stage, and is thus highly competitive. Existing firms compete for market share and acquire other companies to keep their relevance. There are low switching costs for consumers, so there’s a bigger struggle for the companies to keep their customers.
A new technological innovation could push a company farther ahead of the other competitors. Just as the traditional travel industry does, the online travel agency has to stay flexible to changes in the external environment. Innovation is important to sustain competitiveness. Any first- movers who are able to create the “next big thing” will instantly reap the benefits. They will be able to earn above-average returns until the competitors are able to catch up and respond. Second movers in this industry in specific would benefit in seeing how consumers respond to and use new technology.
Second movers benefit in being able to wait and watch. They gain time for research and development to create a more superior product in response. The online travel agency has only been in existence for approximately 20 years. So to be able to develop in such a short amount of mime, competitors would have had to develop and respond to innovations in technology (and thus the industry). 2. Potential of new entrants into industry Based on the heavy reliance of technological power and support, it would be very difficult for a newcomer to enter this industry.
A new entrant would need significant capital and either the technological know-how, or even more capital to pay someone with the technological know-how to compete with the industry giants like Expedite and Principle. On top of that, Expedite is a huge company with revenues of $4. 7 billion in 2013 with 14,570 full-time and part- time employees. Expedite 10-K 201 3) 1 These barriers to entry especially involving economies of scale will prevent any small start-up companies from entering if their technology isn’t as advanced as the companies already in the industry.
Expedite has been an innovator since inception. The company gained a head start by being created through Microsoft. More recently, Expedite features a service called “Travelers a sponsored search product for hotel advertisers. 7 In 2011, Expedite expanded travel ads to Europe. The product was described as easy to use, flexible and a high return-on-investment to Expedite hotel partners worldwide. A new entrant would have to create a relationship with hotels and airlines to even be considered a competitor and this would be extremely difficult to do when just starting out.
If a new entrant could offer lower prices on travel and other online services, they may be able to compete. The basis of this industry involves the best deals on travel and easy to use online services. The new company’s product would have to feature a superior website that is quick and easy to use for consumers. For Expedite to continue to see success, consumers have to return to their site and buy their services while new consumers join. Another barrier to entry a new entrant would face involves patents.
Principle filed a lawsuit against Expedite in 1 999 regarding patent infringement related to technology for connecting an anonymous seller to a block of potential buyers. 5 As far as patented technology goes, a new entrant would have to make sure their processes aren’t infringing any already used. In essence, Expedite and the already existing companies in the industry have a leg up on any new entrants due to intangible resources such as information, reputation and knowledge that the newcomers wouldn’t have access to. 3. Power of suppliers
The Online travel industry relies on the suppliers’ services. For example, Expedite provides hotels, cars, flights, cruises and vacation packages. All of those products and services depend on the actual hotels, car rental agencies, airlines, cruise agencies that actually provide the services. Expedite and the other online travel agencies act as the middleman between the ultimate buyer and the hotel or car (etc. ) service. With that said, the suppliers do have a large amount of power over online travel agencies’ success. But, there is a balance between the buyer and supplier relationship.
Expedite and other online travel agencies can only work if their supplier has services and products the middleman can sell at cheaper rates. For example, if a hotel has UN-booked rooms or periods of time with slower occupancy, the hotel can sell those rooms to Expedite at a lower rate. Expedite will then resell that hotel room on their website at a retail-based cost by adding more to the cost they paid to create a profit. So, the hotels need Expedite to book those unsold rooms, but Expedite ultimately needs those hotels to make any sort of profit.
To further demonstrate the idea that although suppliers have he power, they do still need Expedite, is the fact that Expedite is the one bringing customers to the hotels or car (etc. ) services. If hotels have UN- booked rooms, they obviously aren’t reaching their target market. The beauty of the online travel agency industry is the ability to reach billions of potential consumers through the web that the hotel or car (etc. ) services wouldn’t have been able to reach on their own. Consumers traveling through Washington from Oregon may not know which hotel in the area to stay in.
So, they use Expedite to try and find a hotel. That Washington hotel may not have had the original resources to reach consumers a State away in Oregon thus Expedite helped them reach a bigger market. Hotels are a competitive industry within themselves. There are large quantities of different types, sizes, and qualities of hotels. There are low switching costs for the consumer to book one hotel over another. While some hotels aim for low-cost models such as Motel g’s who aim to offer cheaper yet quality services (even though the “quality” is debatable in comparison to others).
In contrast, high-end hotels like the Plaza in New York City offers a luxury experience that only few can afford. Despite what hotel experience the nonuser is looking for, they will find many different options. Substitutes and switching costs can easily hinder a hotels performance, so sometimes they need the help of a middleman like Expedite to help them. The supplier would just need to outweigh the costs/benefits of using a middleman and losing profit on the room in that sense, versus potentially not selling the room at all. 4. Rower of Buyers The entire platform of the online travel agency industry is about providing the traveler with the best deal on whatever travel service they hope to purchase. Buyers have high power in this industry due to the fact that if the rye doesn’t buy the service, there is no profit. Then, the middleman purchased a room or car (etc. ) from the ultimate service and was unable to resell it. The buyers make the industry competitive. Competitors try to price cut their products to beat out other companies offering similar things.
The target market in relation to the number of total consumers in the world is small. Companies can only offer services and goods to someone traveling and in need of the service. The average consumer with no need for travel has no use for the service. That concept alone increases buyer power. In addition, switching costs for buyers are low. It’s very easy for a consumer to compare prices of Expedite and Principle and then just choose whichever is lowest. There is no sanction for deviating from a company you’ve previously purchased from, there is no loyalty.
Beyond that, consumers don’t even need to use the middleman – they can go directly to the hotel and book a room directly from the source. That cuts Expedite directly out of the entire equation. Online travel agencies just hope that consumers choose to use their company and not go straight to the source. The industry relies on offering lower prices or better deals than their competitors and the source. But ultimately, the online travel agent middleman isn’t necessary to get the buyer to the ultimate supplier of the service which Expedite has to overcome. 5.
Threat of substitute products The threat of substitutes essentially combines all of the four previous Porter forces into one culminating force. As discussed with buyer power, ultimately, the online travel agent middleman isn’t necessary to get the buyer to the ultimate supplier of the service. The online travel agency industry is almost like a branch off numerous other industries such as the hotel industry and the lodging industry. Consumers can literally bypass the online travel industry and go straight to the other industries. There are low switching costs for consumers, so it’s easy for them to switch to a competitor with similar services.
Also, the substitute product offers very similar services with equal or superior quality sometimes even at a cheaper cost. This makes the threat of substitutes even higher in an industry based on offering the cheapest service/ good. Expedite in particular would have to focus on offering higher quality services at cheaper costs to keep consumers from switching. Expedites Current Strategy Nature of Service and Overall Strategy Expedite, Inc. Is an online travel services company that offers individuals and businesses the opportunity to book their travel and compare prices for entire vacations packages on line.
Currently, Expedite employs an online shopping mall and merchant strategy (Chin, Lee, & Barnes 104). This strategy’s goal is to put the consumer in charge of comparing prices so they can satisfy all of their travel needs, including airfare, hotel, car rental, and excursions, in one place by booking their entire vacation on line. In this way, not only do customers enjoy ease and convenience of an on line service, but they are also blew to view reviews and ratings of various travel and tourism enterprises when making decisions, or in other words, they can get instant feedback.
Expedite operates in a very competitive marketplace with competition from similar services such as Traceability and Orbits, ticket discounters such as Principle. Com and Legitimate. Com, traditional travel agencies, and, increasingly, air- lines and hotels themselves. Expedite harnesses the power Of Web services to distinguish itself in this market. The company’s competitive strategy is driven by nearly every traveler’s need to receive up-to-the-second, diverse information at any time and any place. Expedite actively supplies travelers with real-time personalized information, such as flight status.
In order to compete, the company used the push and pull strategy: information is pushed to travelers (sent to them from Expedite) as well as pulled from the company’s portal (accessed by the travelers through specific inquiries). This multinational provision of timely travel information is the key for attracting new customers and for keeping existing customers. To make this happen Expedite needs to connect to many service providers (airlines, hotels, car rental companies) as well as airports, news services, map services, and more.
Expedite earns profits through mark-ups, as the company purchases seats on airplanes or hotel rooms in bulk and then sells them to customers at a premium (McCarty). Also according to McCarty, currently, “selling hotel rooms has been a more lucrative business” for Expedite, for the company can “negotiate special deals with hotels and sometimes even buy up inventory from hotels that they resell at whatever price they can get’. For this reason, customers that purchase a hotel room together with their airline ticket or car rental are more valuable to Expedite. In addition, the company brings in additional revenue from advertising.
Integration within value chain For Expedite, the value chain integration in services comes in the form of low prices, convenience, and access to special time-sensitive deals and travel packages. Through this model, the company is able to provide diversified travel services as well as bargain prices, mostly to attract individual travelers. These services are penetrating to the corporate travel area, which has historically been the domain of travel agents’ business. Much of the Expedites success is due to the expanse of its operations, and the competitive advantage due to its many subsidiaries strategic partnerships.
Such attributes give the company the ability to negotiate, offer lower prices to its customers, and reach various market segments. Because Expedite was an early entrant to the online travel services market, it has solidified its position and gained valuable expertise. The key to manage all these tiers of service is information. Expedite manages information to make these value chains more efficient and create value for their customers, and it uses information networks provided by third-party information technology integrators to coordinate their value chains. Expedite can create complete packages from the different options.
Local or Internet-based travel agencies help customers to select the package that is right for them. Moreover, consumers are searching the globe for new travel experiences and destinations. The Internet enables even the most remote holiday destinations to be presented to an international clientele. Expedite markets their services alone or teams up with partners across the world to reach a bigger audience, and, consequently, more customers. Examples of the company’s key partners are international hotel chains such as Hilton and Sheraton, and local tour operators. Geographical and Industry diversification
Not only is Expedite based and present in the United States, they also have a very strong presence in United Kingdom, Canada, Germany, and many other countries. It offers travel products and services via its supply portfolio which includes more than 260,000 hotels in 200 countries, 400 airlines, packages, rental cars, cruises, as well as destination services and activities. The online travel giant said approximately 60 million unique visitors visit its sites on a monthly basis and through December 31 , 201 3, there were over 90 million global downloads Of its mobile applications across its numerous brands.
Brand Expedite also has a joint venture with low-cost airline Eurasia (AIBO) in Asia Pacific that allows Expedite sites to be the only official third party online distribution channel for Eurasia content. As part of an exclusive, long-term strategic marketing agreement with Traceability signed during the third quarter of 201 3, Brand Expedite launched hotel and air products on the Traceability-branded websites for the U. S. And expects to complete the majority of the migration of the remaining products and the Canada website during the first half of 2014.
It used to be that sites like Orbits, Traceability, ND Expedite charged customers anywhere between $6. 99-$11. 99 per airline ticket booked because they were providing a service; however, in March 2009, Expedite got rid of booking fees on airline tickets amidst the tough competition of the online travel services market (McCarty). The others soon followed. This is just a small example of how much the industry as a whole has had to differentiate and evolve in order to stay competitive and up to date with new technologies.
Financial Statement Quality Assessment Note: The results Of the following adjustment are shown on the adjusted financial statement in the Appendix: The appropriate adjustments are essential for financial statement analysis before analysis of profitability and risk and forecasting financial statement. Meanwhile, the adjustments also increase the comparability of the financial statement of similar firms in the same industry. Therefore, we made two necessary adjustments to financial statement of Expedite, the company our group has chosen to analyze.
The adjustments include capitalizing operating leases and converting property and equipment from straight line to accelerated basis. Additionally, we selected Principle as the competitor of Expedite and made similar adjustments of Principle Of financial statements for 201 3 since both companies are in the same industry. Capitalizing operating leases: Lessees prefer to treat lease as operating lease rather than capital lease because capital lease appear as assets and liabilities on the balance sheet and make the company more riskier. Based on the reason, managers will avoid using capital lease and will use operating lease instead.
The problem is that using the operating lease can cause the analyst to understate the short-term liquidity or long-term solvency risk of the firm (Whalen, Basins & Bradshaw, IPPP). After converting operation lease to capital lease, the adjusted financial statement will help the analyst to get the appropriate and reasonable analysis. Based on the rational idea, we decided to restate the financial statements of Expedite and Principle to convert all operating leases into capital lease, which will better reflect economic situation for both firms and also keep a more conservative measure of total liabilities from the view of accounting.
Managers of Expedite disclosed the related information on the financial statement d note 16 and 15 of lease commitment for 2013 and 2012. Principle disclosure the 2013 lease commitment on the financial statement note 16. We started the adjustment of converting operation lease to capital lease on the balance sheet. The first step of converting operating lease to capital lease is to calculate the lease commitments in the present values terms. We used the lessee’s incremental borrowing rate for secured debt with similar to that of the leasing arrangement.
Expedites borrowing rates, based on interest expense as a percentage of average short and long-term borrowing for 201 3 and 2012, are 6. 99% and 7% respectively. Prickliness borrowing rate is 4. % for 2013 using the same calculation method. The present value of each cash flow equals the cash flow times a present value factor. The present values of all of Expedites operating lease payments are $21 1,029 thousands and $179,590 thousands for 2013 and 2012 respectively, and the present value of Prickliness operating lease payment is $265,517 thousands for 2013.
Since We capitalized operating lease, We will add the $21 1,029 thousands and $179,590 thousands into Expedites property, plant, and equipment net of 2013 and 201 2, and add $265,517 thousands for Prickliness PEP in 2013. Relatively to liability account, Expedites current debt of 01 3 and 2012 will increase by $43,744 thousands and $31 , 1 75 thousands respectively, and long-term debt will increase by $167,285 thousands and $148,415 thousands. Prickliness current debt and long-term debt of 2013 will also need to adjust by $37,743 thousands and $227,773 thousands.
To some extent, adjusting the balance sheet with capitalizing operation lease could certainly and substantially or slightly affect some ratios by different amounts added (Whalen, Basins & Bradshaw, IPPP). For example, Expedites unadjusted long-term debt to shareholders’ equity in 2013 was 55% based on $1 ,249,412/ $2,258,985. After adding the long-term portion of the capital lease liability, the ratio will increased to 63% based on ($1 ,249,41 2+$1 67,285)/ $2,258,985. Compare with that of Expedite, Prickliness long-term ratio also increase substantially due to the adding big portion of long-term debt in 2013.
Consistent with changes on the balance sheet, income statement also needs to be adjusted because rent expenses will be eliminated and depreciation and interest expenses will be added due to the capitalized asset and lease obligation recognized on the balance sheet. For Expedite, both years’ lease expenses are greater than combining depreciation and interest expenses, which increase equity after net of tax by $28,150 thousands and $27,474 thousands for 201 3 and 2012 respectively. In comparison, Prickliness equity in 201 3 decreases by $1 , 705 thousands due to the rent expenses are less than the combining deprecation and interest expenses.
After all the adjustments were made, comparability of Expedite and Principle financial statements will be improved. Converting UP&E to Accelerated basis Calculation of depreciation is based on the historical cost of a long-loved asset less than salvage life to the periods of its use in a rational manner. Salvage life may vary from time to time. For example, technology upgrade changes so fast that its life will be obsolescence shortly (Whalen, Basins & Bradshaw, IPPP). Asset’s life estimation is very subjective since mangers determine the assets’ useful life based on their own needs.
Due to the subjective of assets’ useful life, managers often chose to extend assets life to a longer period to get a lower depreciation expenses in order to get higher earnings on the income statement. GAP allows firms in the United States to utilize two depreciation methods. Firms can use straight-line depreciation for preparing financial reporting and accelerated depreciation for tax purpose. Based on the requirements of the assignment, we converted the straight-line basis of Expedite and Principle to accelerated basis to analyze the financial statement.