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Budgethotels' Online Travel Business A Perfect Fit For Economy-Minded Travelers

By Marc Davis, Managing Editor
March, 2003

One of the few success stories to rise out of the ashes of the so-called Internet Revolution of the late 90's has been the remarkable growth of the online travel business. Tens of millions of North Americans are now making all their travel arrangements at the touch of a button from personal computers. And one of the companies that is benefiting from this boom is the Budgethotels Network Inc. (NASD OTCBB-BUDH).

Already, this small enterprising company has established itself as the top-ranked budget hotel booking site on the Internet. And as of March 2003, the company announced the signing of a joint marketing agreement with priceline.com (Nasdaq: PCLN) - the self-proclaimed "king of e-commerce," particularly in the travel industry. And with over U.S. $1 billion in revenues in 2002, priceline.com continues to assert itself as a dominant player in the burgeoning online travel industry. This is especially good news for Budgethotels. Under this new agreement, Budgethotels will create a special link from its online reservation site www.budgethotels.com to three co-branded Web sites where customers can use priceline.com's Name Your Own Price services for hotel rooms, airline tickets and rental cars.

"We are building a significant relationship with priceline.com," said William Marshall, Chairman and CEO of Budgethotels. "This agreement gives our customers the choice of using our own standard fixed price booking option or using priceline.com's Name Your Own Price model."

"It also raises Budgethotels' profile and stature in the online travel segment. Most importantly, we believe it will increase our traffic and commissions. By adding the proven and successful business model perfected by priceline.com, we can capture a whole new segment of the growing online travel market."

The key to the success of Budgethotels' business model is its simplicity and its effectiveness in catering to an ever-growing budget travel market. Specifically, Budgethotels provides online services for the "budget" traveler. The events of September 11, combined with conflict in Iraq, means travelers are increasingly opting for travel by car, bus and train, whenever possible. At the same time, the ongoing economic downturn has precipitated a dramatic drop in the demand for high-end accommodations. Companies like Budgethotels that provide affordable travel solutions are profiting from this trend.

The increasing use of the Internet for making cost-efficient travel arrangements is continuously expanding Budgethotel's marketplace. For instance a recent article dated October 20, 2002 in the New York Times included the following remarks:

"More than 61 million households in the United States will book travel online this coming year according to Forrester Research. Forrester expects online hotel bookings to double over the next four years to $7.7 billion from $3.8 billion. Already travel is by far the No.1 activity among Internet consumers In some weeks, more travel is purchased online than every other category combined."

Accordingly, Budgethotels is continuously increasing its revenue streams via two key networks -- Reservation Centers and its recently re-engineered, state-of-the-art online travel reservations system. Here's how these highly effective, cross-promotional revenue streams actually work, beginning with the more compelling of the two.

Online travel reservations are the most lucrative segment of the e-commerce industry and Budgethotels is a great example. The company's web site, www.budgethotels.com features more than 45,000 hotels, motels, youth hostels and bed & breakfast locations with which the company has online booking agreements. Budget travelers book accommodation via this travel portal and, in turn, Budgethotels earns a commission averaging 10 to 20 per cent for each booking. The site is already attracting considerable traffic, which is growing exponentially as a result of Budgethotels' recent implementation of strategic marketing and site branding programs. But more importantly is the impact of the site's dynamic search engine which facilitates a new "one-stop" bookings solution. In fact, it is so efficient that it stands to increase revenues five to ten-fold, according to Budgethotels' management.

The company's other main business model is referred to as its Reservations Centers. This is supported by a very effective advertising model. Specifically, advertising is sold by the company on its illuminated Reservation Center boards to travel industry suppliers, primarily hotels. These boards are presently located in 86 major North American transportation terminals belonging to such household names as Greyhound, Amtrak, Canada's Via Rail and the New York Port Authority. Over 75 million travelers pass through these terminals yearly. And over 600,000 room nights were booked through the Reservation Centers last year. Telephones that are located on these electronic billboards allow travelers to make reservations directly with the hotel or via call center booking agents. Budgethotels has entered into exclusive long-term contracts with several of these high profile organizations. In due course, this will lead to the installation of Reservations Centers in an increasing number of travel hubs across the continent.

Such enterprising and relatively cost-efficient business ventures are now beginning to positively impact Budgethotels' bottom line. The company is expected to achieve profitability for the first quarter of 2003. This is due primarily due to steadily increasing revenues, as well as the end of expenditures related to the development of the recently-launched search engine on Budgethotels' web site. Now that this easy-to-navigate search engine is fully operational, it will further leverage the company's ability to increase revenues from its online reservations business platform. Prior to its installation, travelers were required to make accommodation reservations via the company's telephone booking representatives after having used the company's web site to identify their preferred rental choices. The advent of the company's search engine will allow reservations to be made online in "real time" without requiring the involvement of phone representatives. This efficient "one stop" booking solution will benefit both the budget traveler and Budgethotels in terms of streamlining the whole booking process, while substantially increasing booking capacity and lowering per-booking overheads. That translates into significant long-term cost savings for Budgethotels by reducing call center labor costs and by facilitating an efficient system for clearing credit card transactions online. Furthermore, this new technological innovation now allows Budgethotels to provide the budget traveler with the same quality of service as the major online travel firms like Expedia.com, Hotels.com, and MSN.com. And that's music to the ears of the company's CEO William Marshall.

"Our new site allows our customers to complete their online booking effortlessly from start to finish with the knowledge that they are getting the best in affordable accommodations at the lowest price available anywhere." he says.

"Our timing couldn't have been better for this launch. Before our upgrade we were already the number-one-rated budget hotel site on top-rated search engines on the Internet. Now we have the functionality and level of service to aggressively capture a significant share of those online travelers as we focus on executing our aggressive marketing and expansion plans."

In January 2003, Budgethotels also began to implement a "hotel partnership program." The program, which targets hotels across the United States and Canada, is designed to multiply the revenues that the company currently derives from its online hotel partners. In essence, Budgethotels has adapted a proven and highly profitable business model that was developed by the search engine industry to charge for premium placement on sites like Goggle or AltaVista. For every city in the Budgethotels network, the company's hotel partners will now be able to ensure top placement on the company's search engine for a relatively small annual fee. In addition, each booking through Budgethotels will earn the company a commission that is several times higher than was the case prior to the implementation of this new program. That is a significant improvement in revenue potential over the pure advertising model that the company was using until this year. Indeed, from its very onset, this new program is already meeting with success. Budgethotels is aiming to implement 2,000 or more of these new hotel partnerships during 2003 via the efforts of a new sales force that is targeting nearly two dozen key hotel markets across North America.

Meanwhile, there remains considerable scope for accelerating revenues from the company's Reservations Centers. To date, approximately 25 per cent of the potential advertising revenues are being realized from third party travel industry advertising on these boards. This percentage is steadily growing with increasing utilization by hotel advertisers and industry partners like Hotels.com (ROOM:NASDAQ), as well as by increasing the visibility of Budgethotels through its just-launched brand awareness campaign. It is worth reiterating, however, that these illuminated travel beacons are already generating more than 600,000 room-night bookings annually. Budgethotels is also test marketing additional strategies to increase its revenues from this advertising source, which could lead to around 2.5 million annual bookings based on maximum market penetration.

As an ancillary venture, Budgethotels has also acquired a number of budget travel-related domain names that the company may sell to other travel industry companies. The appeal of such high-profile URLs has already been demonstrated by the sale of one such domain name for U.S. $50,000 earlier this year. Among the remaining domain names are the following:

In terms of Budgethotels' immediate future, it would seem that there is considerable "blue sky" potential for the expansion of its two key business models. This is illustrated by the following remarks from a new report published by the market research firm, PhoCusWright Inc., which is entitled Distribution Strategies And Market Forecasts for Hotel & Lodging Commerce between 2002 and 2005:

"Online hotel sales have been soaring as discount sites attract millions of buyers with their special, "merchant" rates. Within three years, online hotel bookings will increase from nine per cent of total gross bookings to one in five."

"With occupancy rates the lowest they've been in years, hoteliers continue to work with leading online retailers to move inventory. Online travel agencies now represent nearly half (49 per cent) of the $6.3 billion in online hotel sales (2002), with the remainder coming from hotel Web sites."

PhoCusWright projects that roughly three-quarters of online agency hotel sales are via the merchant model, where the agency often takes a 15-30 per cent "margin" on the net rate offered by the hotel (as opposed to the customary 10 per cent commission).

"This business model has boosted profits at Expedia and Hotels.com, which represent roughly 60 per cent of online agency hotel sales," the report also states.

Now Budgethotels is primed to follow in the footsteps of these highly successful major players, namely Expedia.com and Hotels.com. And that stands to benefit the company's shareholders in a major way. Indeed, the compelling industry trends in online travel, matched with Budgethotels' strategic shift towards emphasizing commission-based revenue streams, will surely raise the company's profile in the investment community. And that, in turn, should translate into an improved share price. At approximately U.S. $0.10 a share, Budgethotels is still suffering from the stigma of the late 90s Dot Com debacle. Accordingly, SmallCapMedia views the company as considerably undervalued at this time.

With a negligible downside, Budgethotels' share price stands to improve in the near-term from any positive corporate developments - the likelihood of which seems to be a "given." Fortunately, the technical dynamics are also already in place for a resurgence in Budgethotels' share price. The company has a tight share structure of around 16 million shares outstanding, of which half of that is restricted. And the company insiders own about 45 per cent of all the outstanding shares - therefore incentivising them to continue to improve the company's bottom line. Furthermore, the advent of a short, swift military action in the Persian Gulf will likely precipitate an across-the-board rebound in the stock market. And that will offer performance-oriented equities like Budgethotels further significant upside potential during 2003.