Breaking Down Booking Holdings🛫🌍
$BKNG the world’s travel agent
Author’s Note
I am a regular customer of Booking.com. I’ve booked stays, flights and taxis. Since 2018 I’ve booked almost 50 stays or flights and use it as my go-to platform over AirBnB or Expedia.
BKNG 0.00%↑ Metrics (at time of publication)
Market Cap - $122.14B
EV = $123.61B
FCF = $6.99B
EBIT =$6.378B
Summary Ratios
P/S = 5.84
EV/EBIT = 19.38
FCF Yield = 5.7%
Return on Equity = BKNG's liabilities exceed its assets
5 Year CAGR = 7.24%
Introduction
Booking Holdings (Booking) is the parent company of several online travel platforms. The family of brands includes Priceline, Booking.com and Kayak, all of which provide online travel or leisure services. The company was originally founded as Priceline by Jay S. Walker in 1996.
Booking Holdings is made up of several stand alone businesses, including;
Booking.com
Price Line
Kayak
Agoda
Rentalcars.com
Open Table
The sites allow consumers to compare prices, book accommodation or explore different deals without using a travel agent.
Booking.com is the world's largest online platform for travel reservations, based on room nights booked (almost 300M in the first quarter of 2024).
Booking is focused on increasing customer use of the app and expanding the Connected Trip experience to provide customers with a diversified offering of flights, car rental, activities and more.
Booking.com is the lynchpin and driving force behind Booking Holdings.
Priceline originally purchase European based Booking.com for $135 million in cash back in 2005. The parent company integrated an earlier purchase, ActiveHotels.com (acquired for $165 million), into the Booking.com's subsidiary.
Business Model
Trips and vacations have undoubtedly returned to normal, with lockdowns a distant memory. In 2023, Booking achieved record revenue over $21.4B, which was 25% higher than 2022. Room nights increased by over 150M YoY, 17%, driven primarily by the continued recovery.
The company achieved gross bookings of $151B in 2023, an increase of 24% versus 2022. Total revenues as a percentage of gross bookings were 14.2% in 2023, up from 14.1%. Globally, alternative accommodations represented about 33%, versus approximately 30% in 2022, directly competing with Air BnB’s offering.
Booking’s software and platforms are generally stand alone, with some levels of integration.
Throughout most of Booking’s history, payments were not accepted on the platform and customers paid upon arriving at the hotel. Booking.com now facilitates payments online for a proportion of accommodation, short-term rental stay and flights.
Booking now offers insurance, attractions and taxi options for customers as part of the Connected Trip strategy.
Rental car days reserved through the platform increased by 10.7% YoY, in Q1 2024. Airline tickets reserved through the platform increased 33.1% in the same period, driven by the expansion of Booking.com's flight offering and ongoing recovery.
The mix of room nights booked on the mobile app in the first quarter of 2024 was 51%, up from 46% in the same period in 2023.
The majority of room nights booked by the app are direct, and provide repeat custom. The apps offer more opportunities to engage directly with consumers. However, accommodation reservations made on the app are typically for shorter stays and have lower daily rates (prices).
Connected Trip Experience
Booking’s mission is to “give customers the ultimate travel experience” and move beyond accommodation.
The company is creating the Connected Trip Experience which allows customers to book accommodation, insurance, flights, car rentals, airport taxis and attractions on the same platform.
This full-stack service provides customers with a credible one-stop option to book their entire trip. This makes travelling easier through a less fragmented experience.
The percentage of connected trip transactions is currently in the high single digits, offering opportunity for growth (around 10% of Room Night revenue in Q1 24). These connected transactions have increased by over 50% year-over-year.
Booking intends to integrate Generative AI into the Connected Trip to provide customers and hosts with a smoother experience.
Initiatives include a “connected trip” vision, with artificial intelligence (AI) capabilities and enhanced Genius loyalty program.
- CEO Glenn Fogel, during the company’s Q1 24 earnings call.
Genius loyalty programme
Booking offers 3 levels of the Genius loyalty programme. Customers who use the platform can unlock further rewards to achieve increased automatic discounts.
Genius Levels 2 and 3 require five and fifteen bookings in a two-year period, respectively, to be unlocked. The value of the future discount is recognised as a reduction of revenue at the time achieved.
The genius programme helps to improve traveller loyalty, trip frequency and direct transactions over time. Once a customer is in the Booking ecosystem, it ensures the company no longer has to pay to re-acquire them.
Business Segments
Booking.com classifies revenue streams as “agency” revenues, “merchant”, and “advertising and other”. Merchant gross bookings increased over agency gross bookings due to the ongoing strategy.
Booking is in the process of shifting from a classic ‘agency’ model to a ‘merchant’. As of the most recent quarter, merchant revenues made up over 59% of total gross bookings, an increase of 29.8% YoY.
The agency model historically supported Booking’s growth. However, Booking’s size makes it harder to sustain the trajectory. The most recently quarterly numbers highlight that growth in the merchant model is cannibalising agency revenue.
With the Merchant model, hotels can use Booking.com’s online payment to receive prepayment on their bookings (refundable or non-refundable) and generate some upfront cash.
Using this method Booking will, perhaps a bit underhandedly, cuts its margin to offer more attractive rates than the hotel or accommodation’s direct channel. Booking knows that direct sales are competition and wants to keep tight control over the supply.
As an example, the Preferred Plus programme promises a 74% increase in visibility over Preferred and up to 30% more bookings, but takes an additional 5% commission (on the RRP including taxes).
Merchant model - Booking.com is moving to the merchant model, purchasing the booking themselves, and gaining the capacity to undercut prices. The client pays Booking the full price. After the check in date, Booking pays the net price (the final price, minus commission) to the hotel.
Merchant revenues include travel reservation commissions and transaction net revenues (the amount charged to travellers less the amount owed to travel service providers), credit card processing rebates, customer processing fees, including travel-related insurance revenues.
The majority of merchant revenue is from Booking.com's accommodation reservations. The Merchant segment is expected to be the single-biggest revenue driver with $13B in revenues (50% of Total Revenues) over FY2024.
Agency model - Booking acts as the agent for a third party travel services, but is not directly involved in the transaction. The customer pays the final price to the hotel (either at the time of the booking or check in). Typically, after the check out, the hotel pays commission to the Booking.
Agency revenues consist almost entirely of travel reservation commissions from Booking.com’s accommodation, rental car, and airline reservation services.
Advertising and Media - Advertising revenue is generated through adverts sites such as Priceline and Kayak.
In addition to generating revenues from traditional advertising, Booking generates revenue through referrals to online travel companies. These are primarily generated by Kayak referrals and by OpenTable for reservation services and subscription fees for restaurant management services.
Advertising and other revenues increased for the three months ended March 31, 2024 by 8.19% YoY.
Brands
Booking Holdings does not breakout revenue by brand, but it’s anticipated that the largest proportion of revenue is generated by Booking.com.
Booking.com
Booking.com remained the number one downloaded travel app in 2023. The brand and app are the company’s flagship product.
According to the most recent earnings report, Booking.com had approximately 3.5 million properties on the website as of March 31, 2024, consisting of 450,000 hotels, and 3 million alternative accommodation properties (including homes and apartments). This number was up from the 2.8 million a year earlier.
Booking.com works on a commission based business model. Hosts pay a set percentage of each reservation. The commission percentage varies per country and depends on the property type or location.
In 2023, Booking.com offered flights in 55 markets plus tours and activities in 1,300 cities around the world. Air tickets booked on the platform increased 58% year-over-year.
Booking.com offers online rental car reservation services in approximately 42,000 locations and taxi transportation form 1,900 airports, with customer support in over 40 languages.
Agoda
Agoda is a leading online accommodation service in the Asia-Pacific region, with headquarters in Singapore and operations in Thailand. Agoda provides flights, ground transportation, and activity reservation services.
Agoda offers a global network of over 2.5 million properties in more than 200 countries and territories worldwide, providing travellers with access to luxury and budget hotels, apartments, homes and villas.
The brand recently partnered with fintech company Sunrate, a Singapore based fintech company, to streamline the payment process.
KAYAK
Founded in 2004, Kayak claims to be the original “metasearch site for travel.” Booking Holdings acquired Kayak for $2 billion in 2013. Kayak allows consumers to search and compare prices from hundreds of online travel platforms
Kayak has since acquired a portfolio of other travel brands, including SWOODOO, checkfelix, momondo, Cheapflights, HotelsCombined and Mundi.
Kayak is available in over 60 countries, with the largest market in the United States.
Kayak generates revenues by sending referrals to travel companies and by advertising placements on its platforms.
OpenTable
OpenTable is a leading brand for booking online restaurant reservations. OpenTable is used in more than 55,000 restaurants, bars, wineries and other venues.
The platform seats over one billion diners every year, with users leaving more than one million reviews every month.
OpenTable provides online restaurant reservation services to restaurants, primarily in the United States.
Revenues are generated through restaurant reservation services, fees paid by restaurants for diners seated plus subscription income for restaurant management software.
PriceLine
Priceline is a leader in the discount travel reservation business, offering online travel reservation services primarily in North America, with headquarters in Norwalk, Connecticut.
Priceline provides travellers with discounts on hotel rooms, airline tickets, rental cars, vacation packages and cruises.
Rental Cars
Rentalcars.com claims to offer more car rental suppliers in more locations than anyone else. Car hire is available in over 155 countries, across 48,000+ locations.
Founded in 2004 and formerly known as "TravelJigsaw", Rentalcars was acquired by the Priceline Group in 2010 and then renamed "Rentalcars."
As of 2018, Rentalcars.com was integrated with Booking.com, whilst maintaining the consumer-facing Rentalcars website.
Marketing
The marketing strategy of Booking relies on driving traffic to acquire and retain customers.
As of the Q1 2024 results, marketing expenses were around $1.61B, approximately 36.6% of revenue and 3.7% of gross bookings.
Marketing efforts are related to advertising on search engines (primarily Google), plus affiliate marketing and meta-search services. The majority of spend is reportedly on Google Ads and Google’s travel listings. Booking targets customers who are searching for travel services.
Outside of Search spend, Booking has invested in establishing and maintain the brands through customer awareness campaigns.
Tina Fey’s campaign debuted during Super Bowl LVIII in February 24
Booking anticipates that paid marketing channels will gradually shrink over time, but aims to remain proactive in order to attract new customers whilst defending its market share.
In comparison, Expedia’s marketing spend was 47.6% of 2023 revenue. Airbnb implements a different strategy, with 90% of its customers going directly to the website or app. Airbnb focuses on limiting paid search and spent only 18% of revenue on marketing in 2023.
Financials
Booking generated a 17.57% net income margin in most recent quarter. Booking’s operating income increased by 14% in 2023. This was around 50 basis points higher that pre-pandemic levels.
Over the past five years, the company has reduced shares outstanding by 25%, repurchasing over $10 billion of shares in 2023, reducing the year-end share count by 9% versus 2022 and by 16% in 2021.
Booking offers a dividend with a yield of around 1%, around $8.75 per share. Long term debt for 2023 was $12.738B, a 0.33% increase from 2022.
Booking effectively holds customers pre-payments, which is not recognised as revenue until the customer checks in. As of the most recent quarter these deferred merchant booking totalled $5.33B.
Although it is not published, customer cancellation rate is estimated to be between 30-40%. The company can effectively use the historic data to ring-fence funds which are at risk of cancellation whilst using the remainder as a source of working capital.
Most recent quarter - Q1 2024
Booking reported the most recent quarterly earnings on 2nd of May, 2024.
The increase in the average daily rate meant that gross bookings grew faster than room nights in the first quarter, largely due to increased accommodation pricing.
Revenue: $4.4B, up 17% year-over-year, surpassing estimates of $4.25B.
Net Income: $776 million, an increase of 192% from the prior-year, exceeding estimates of $489.96 million.
Earnings Per Share (EPS): $22.37, up 220% year-over-year, surpassing estimates of $14.22.
Adjusted EBITDA: $898 million, increased by 53% from the prior-year.
Gross Travel Bookings: $43.5B, a 10% increase from the prior-year.
Room Nights Booked: Increased by 9% compared to the prior-year.
Bull Case 🐂
Customer Loyalty
Genius Program customers are awarded loyalty points on transactions that can be redeemed against future purchases.
Genius is primarily funded by accommodation partners. As Booking delivers more value to customers, this increases loyalty, with users moving to higher levels of genius. This creates more repeat transactions and a positive flywheel effect.
Expansion Into Horizontal Offerings
With the implementation of the Connected Trip strategy, Booking not only becomes the one-stop-shop for vacations and trips, but builds an ecosystem which locks customers in through the convenience and loyalty perks, retailing multiple products.
Booking is tapping into markets that were previously separate. As an example, the Airline ticket offering launched in 2019 was up more than 400% by 2023.
The development of a payment system furthers the company’s Connected Trip strategy, which gives Booking more control whilst minimising friction for customers.
Shift to Merchant Model
In prior decades, Booking relied on 3 levers to drive revenue; Annual Daily Rate (room cost per night), occupancy rate and the number of properties listed on the site, none of which it had direct control over.
As per the shift to the merchant model, Booking increasingly processes transactions, facilitates payments and purchases the booking. This allows the website to take payments for accommodation and ultimately take control of the process and supply chain.
With this ownership, Booking can compete directly with accommodation suppliers or other competitors, similarly to how Amazon can sell a supplier products cheaper via Amazon Vendor.
Market Leader
Booking’s 2023 EBITDA margin was 30.1% compared with 15.6% for Airbnb, and 14% for Expedia.
Booking is almost 7 times larger than Expedia and over 2X the size of AirBnB. The group it the market leader in room nights. On a like-for-like comparison with competitors, Booking remains significantly ahead.
$BKNG vs EXPE 0.00%↑ Q1 24:
Gross travel bookings up by 10% to $43.5B vs 3% to $30.2B.
Room nights up by 9% to 297M vs 7% to 101.2M.
Airline tickets up by 33% to 11M vs 1% to 14.2M.
Revenues of $4.4B, up by 17% vs $2.9B, up by 8%.
Operating income up by 76%, reaching a margin of 17.9% vs an operating loss.
Booking achieves a classic network effect, attracting more properties and thus more customers, with power accruing to the incumbent.
Booking’s dominance has been reflected in the share price growth over the past 5 years, with BKNG 0.00%↑ up 86%, ABNB 0.00%↑ up 26.4% and EXPE 0.00%↑ down 14.3%.
Move to Alternative Accommodation
Booking now hosts 3 million alternative accommodation (AA) properties which compete with AirBnB’s model.
In the most recent quarter, AA room nights grew 11% faster than the traditional hotel category. AA represented 34% of total room nights, up 2% on the previous year.
Booking.com charges an average commission rate of 15% to accommodation providers. This is approximately the same rate as the Host-Only Fee on Airbnb, meaning that it will cost around the same to list on Booking.com as on Airbnb.
Booking anticipates lower profit margins related to alternative accommodation, due to increased customer service or partner related costs as customers don’t receive the same levels of support as they would in a regular hotel with a reception. As AA has grown, different characteristics have negatively impacted profit margins.
Anecdotally, on a recent trip I made through Booking.com, the same location was available on AirBnB for an identical price.
Mobile App Strength
Over 50% of customer transactions are now through the app. Booking has highlighted favourable repeat behaviour from consumers who use the software.
However, the company has to be considerate of the quality of customer using the app. Typically, reservations made on the app are for shorter lengths of stay with lower nightly rates.
With over half of the company's room nights booked through mobile apps, there is opportunity to increase direct bookings, reducing reliance on marketing spend and lock customers into the ecosystem.
Bear Case🐻
Marketing Spend
Booking’s total marketing expenses, which include performance and brand marketing, was $6.8 billion in 2023, up 13% versus 2022. This equated to 28.5% of revenue.
The company highlighted that market ROIs improved YoY, helped through improvements in efficiency. While this strategy has been effective, it makes the company vulnerable to changes in search engine algorithms, which could impact future customer acquisition and increase costs.
Strong-Arming Suppliers
In the shift to the merchant model, Booking is effectively taking control of the supply chain of accommodation. The site emphasises that this model will increase average occupancy rates and customer loyalty. To participate, hosts are burdened with larger commission and are at the mercy of Booking’s price setting. Booking will aggressively compete with the suppliers direct channels to ensure customers only shop through Booking.com.
Speaking from personal experience, this offering only improves the customer loyalty to Booking.com, not to the accommodation.
If the increased occupancy level suits the commercial needs of the accommodation, both parties stand to benefit. However, if the increased commission puts strain on smaller suppliers, it could damage the company’s reputation and limit new accommodation listings in the future.
Increased Competition
In some cases, Booking’s competitors are willing to make little or no profit on a transaction or offer services at a loss in order to gain market share. Expedia is the prime example with a larger marketing spend as a percentage of revenue.
As a result, Booking has to offer services at a competitive price, whether through discounts, loyalty programs or other incentives.
These initiatives result in lower ADRs and revenues as a percentage of gross bookings. Customers are only loyal to Booking when they secure the best deals and most diverse offering.
Regulation
The company faces ongoing regulatory scrutiny, particularly in the European Union, where investigations into competitive practices could result in fines and restrictions on business operations.
The Spanish Competition Authority has issued a draft decision alleging infringement by Booking.com of Spanish competition law and intends to issue a fine of $530 million.
The potential fine by the CNMC in Spain exemplifies the financial and repetitional risks associated with such investigations. These challenges could constrain Booking's ability to operate freely in key markets in the future.
Conclusion
Booking is diversifying into flights, taxis, experiences and insurance. The company aims to be the one-stop-shop for a customer’s trip. Competitors such as Air BnB and Expedia cannot compete with the full stack service that Booking is implementing.
The company is aggressively flexing it’s scale to move into the merchant model, taking ownership of the supply of accommodation and increased commission from hosts. As the market incumbent, hosts have little choice but to shoulder the additional costs, but the strategy may ultimately come back to hurt the business, damaging relationships with suppliers.
Customers remain willing to shop around to find the best deals. It’s clear, based on the annual cost of marketing, the company is still having to purchase and re-attract customers. With an effective 100% gross margin, this has clearly been factored into the strategy.
Marketing expenses are a third of revenue or 2X net income! The Genius Programme and Connected Trip strategy are transitioning customers to the app, locking them into the ecosystem and ultimately reducing marketing expenditures.
It’s hard to take an accurate snap shot of the company with the accelerated growth coming out of the pandemic. However, it does appear that Booking has weathered lockdowns to emerge stronger, shrugging off the current challenging economic environment. The most recent quarterly results demonstrate that customers remain willing to spend on travel, a service that Booking dominates.
Sources and Further Reading
https://www.bookingholdings.com/about/factsheet/
https://www.trefis.com/data/companies/BKNG/no-login-required/EGKRetyl/Booking-Holdings-Revenues-How-Does-BKNG-Make-Money-#:~:text=Booking%20Holdings'%20Merchant%20segment%20will,growth%20over%20the%20coming%20years
https://d18rn0p25nwr6d.cloudfront.net/CIK-0001075531/31c876e5-f44f-4645-8757-e2b828c23357.pdf
file:///C:/Users/sc123/Downloads/6fb2af21-a84b-47b6-b347-b0ca9db63598.pdf.pdf
https://d18rn0p25nwr6d.cloudfront.net/CIK-0001075531/c3458164-9a7e-4c59-b888-256cf923eea3.pdf
https://finance.yahoo.com/news/booking-very-expensive-marketing-piece-215300942.html
https://skift.com/2023/03/08/booking-holdings-explainer/
https://www.investopedia.com/articles/markets/080715/how-priceline-group-makes-money.asp
https://www.phocuswire.com/how-booking-gained-market-share-mirai-opinion
https://uk.finance.yahoo.com/news/decoding-booking-holdings-inc-bkng-050440332.html
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Good write up on a great business. I bought during the pandemic and sold way too early!
Great work 👏🏻 Thanks for mentioning our article as well!