Page 33 - Sphere No.7 (Oct 2002)

man Leon Wu, travels frequently to
Shanghai. “I booked a hotel room
through Priceline because I was tired of
hopping from one website to the next to
compare prices,” he says. “The site was
straightforward and understandable – just
three stages. And Priceline was very fast
to accept an offer – just five or 10 min-
utes. Convenience was also a big extra,
with Priceline staying open 24 hours a
day, seven days a week. I like to shop
around, but that is time-consuming.
Priceline did all that for me.”
WINNING FORMULA
Such experiences are refreshingly new in
Asia but Priceline is something of an e-
institution in the US, where annual
turnover has topped HK$8 billion after
just four years in business. As such, it’s
among top Internet brands like e-Bay,
Amazon and Yahoo! – and is one of
the few e-businesses that are genuinely
profitable.
“They have a formidable reputa-
tion,” says Hutchison-Priceline CEO,
Alfredo Gangotena. It was against this
background of proven success that
Hutchison and Cheung Kong
(Holdings) together became both the
biggest shareholder in the US operation,
with a stake now worth nearly 35%, and
also entered into a 65-35 alliance to
extend the concept to Asia.
Priceline launched in Hong Kong in
April 2002 and in Singapore soon after
with Taiwan the next port of call. But
these are just the start.The operation has
rights to extend from Japan to New
Zealand, China to India, covering a
population of more than three billion
people.
As one business magazine recently
put it: “Hong Kong’s pre-eminent deal-
maker is at it again. As most investors
write off e-businesses as dot-bombs…
Hutchison Whampoa is shopping for
bargains in the wreckage, betting that
once the shakeout in those industries
ends, Hutchison will be positioned to
reap the rewards.”
But it is Priceline’s business model,
not the attractive share price, which
holds the most appeal for Hutchison.
“The fundamentals haven’t
changed,” noted Hutchison Group
Managing Director Canning Fok. “We
believe in this model. If other people
don't like it, so much the better for us.”
One of the more interesting of these
fundamentals is that online travel today
accounts for 35-40% of e-business in the
United States.Another, that Priceline is a
global market leader.
Conceived by visionary inventor and
entrepreneur JayWalker, and now matur-
ing into an international network,
Priceline is certainly a unique and revo-
lutionary idea.
“Once you realise how it works, the
model is blindingly obvious,” says
Gangotena. “For decades the travel
industry has been trying to solve an
endemic problem: what to do with
empty airline seats and hotel rooms?
“Lower pr ices
introduce new
customers who
would otherwise
remain outside
the market.”
Planes and hotels have a fixed size, but
demand varies and there are days and
even times of day when these are
sometimes full, and other times not.
But once the plane takes off, or the
night is over, the potential revenue is
lost forever.”
The facts bear this out. Both air-
line load factors and hotel occupancies
generally average around 70-75%.
The law of supply and demand
rationalises that these empty seats and
rooms could be sold at a lower price.
But of course such price-cutting
would compromise the initial 70-75%
of sales at the market price.“The pric-
ing and branding would collapse,”
notes Gangotena.
So instead the industry has satisfied
itself with “yield management” –
maintaining load factors and room
occupancy at the highest possible rate,
making the maximum possible profit
in the inevitable circumstances.
“But the challenge has always con-
tinued – to sell those empty seats and
rooms,” Gangotena adds, “and the
dilemma was finally resolved by
Priceline.”
Since buyers aren’t told the name
of the airline or hotel selling surplus
airline seats or hotel rooms until their
offer is accepted, neither individual
brands nor respective pricing policies
are compromised. Only the Priceline
customers ever know the airlines they
fly aboard, the hotel where they stay, or
the prices they pay.
In the meantime, airlines and
hotels fill empty spaces, because the
prospect of lower prices introduces a
new group of potential customers
who would otherwise remain outside
the market. Research indicates that
two-thirds of Priceline customers
would not otherwise have travelled.
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