Attention, flight-search startups: Priceline, Expedia say hotels are where it’s at

[Update: added comments from kn0thing — Alexis Ohanian’s Twitter handle — on Y Combinator’s Hacker News website]

Priceline today announced it brought in $1 billion in revenue for its third quarter, up 37 percent from $730 million in the same quarter a year ago, thanks largely to its global hotel bookings business — not those William Shatner-hawked name-your-price flights that won it fame a decade ago.

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Meanwhile, airlines are seeking to cut fees paid to online travel agents further, as seen in American Airlines’ threat to drop its flights from Orbitz starting December 1.

That raises a question: Are today’s flight-focused travel-search startups like Hipmunk trying to solve the wrong problem?

Priceline’s hotel bookings were up 54 percent from the same quarter a year earlier and have continued to see growth, according to its most recent earnings statement. Expedia, another online travel site, reported that 63 percent of its transactions were related to hotels, while only 12 percent were from flights, according to its most recent quarterly filing with the Securities and Exchange Commission.

Hipmunk, a Y Combinator-incubated startup run by Adam Goldstein and Steve Huffman, recently launched promising to make flight searches easier. And while the site is gorgeous and intuitive, it still relies on Orbitz for its flight searches and makes money through commissions when users book flights. Adioso, another Y Combinator-backed startup, helps travelers pick flights in a more open-ended fashion.

These flight-only startups risk getting crushed on one end by the airlines, which see booking fees paid to websites as an easily slashed cost. And on the other, they’re facing Google, which is trying to acquire real-time airline fares-and-seats data provider ITA. Google isn’t as interested in garnering commissions on tickets as it is in quickly answering users’ searches, which means it could well help the airlines bring online ticketing fees down. Expedia and other companies are scared stiff that this will somehow understandably concerned. Travel is a huge part of e-commerce that’s worth around $80 billion a year. ITA’s software handles around 65 percent of all online flight bookings, and travel advertising accounted for about 6 percent of all online advertising revenue, according to a coalition fighting the acquisition. Google’s acquisition is also the subject of an antitrust investigation that began in July. Whatever happens with ITA, it’s surely not a good idea for travel startups to get into the middle of a war between key suppliers and Internet giants.

Investors were certainly pleased with Priceline’s performance. Shares of Priceline were up 5.9 percent to $411.51 in extended trading on Monday after the company released its earnings report.

We’ve asked the Hipmunk team if they have plans to move into hotels, but haven’t heard back. They’d be smart to do so: Priceline has proven that there’s more money to be made in the fragmented world of lodging than in the tightly controlled airline business.

A post by kn0thing, Alexis Ohanian’s Twitter handle, on Y Combinator’s Hacker News site said, “we’ve got plenty more planned for hipmunk – as many in this thread point out, there’s a lot more than flight search that needs agony removed.”

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