Exhibit A: Priceline.com, the name-your-own-price pioneer. Priceline used to be a high-flier. Lately, though, it’s been struggling to pull out of a steep dive brought on by heavy losses in the gasoline and grocery businesses. Two years ago Priceline was $165 a share and was valued at more than all the airlines combined. Now it’s about $2. Too bad for loyal investors–but airlines have made a fortune.
Here’s how. The airlines gave Priceline discounted seats to sell. As part of the deal, Priceline gave them stock and stock-purchase warrants. Most of the airlines hit the silk and sold, making a total of almost $1 billion (before taxes) on their Priceline holdings. By my count, six carriers–Delta, American, Northwest, TWA, Continental and America West–sold some or all of their holdings when Priceline was a hot item. The company says it never expected them to be long-term holders. “These guys are not in the business of playing in the stock market, they’re in the business of cashing in their warrants to make money to buy more planes,” says Priceline spokesman Brian Ek.
They’re certainly not in the gratitude business. All these airlines except Delta helped start Hotwire.com, a Priceline competitor that opened for business in October. (United and US Airways, which also got Priceline warrants but unfortunately haven’t sold them, are also part of Hotwire.) Hotwire, founded by megabucks investor David Bonderman, says the airlines wrote checks to cover part of Hotwire’s $75 million start-up cost. But no one will say how much the airlines paid (probably not much) or how big their Hotwire stake is (probably quite large). The carriers’ goal is not only to sell seats, but to make money by having Hotwire go public at a fancy price. “Airlines were just starting to realize they could make money in e-commerce and on e-commerce stocks” in May of 1999, when Hotwire began approaching them, says Karl Peterson, Hotwire’s chief executive.
At the time the airline industry had a severe case of Delta Envy. Delta, the first huge airline to hook up with Priceline–TWA and America West were earlier–has made almost $800 million from its Priceline holdings and still owns a 15 percent stake. Peterson says Delta may yet join Hotwire. I can’t give you Delta’s side, because the company wouldn’t talk to me.
The $1 billion the airlines made off Priceline may not seem like much in the overall scheme of things. But airlines have historically been remarkably unprofitable, the last few black-ink years notwithstanding. According to the Air Transport Association, the scheduled-airline industry has made a total of about $19 billion in 63 years of flying. So $1 billion is about 5 percent of everything airlines have ever earned.
Several billion dollars of those profits come from airlines’ peddling pieces of their computerized reservations systems. You know, things with names like Sabre, Worldspan, Galileo and Amadeus. They’ve also made major bucks from Equant N.V., originally an airline operation. Last year, in a telling example, American Airlines’ parent company distributed its controlling piece of Sabre to its shareholders. At the time the stock market valued Sabre at more than American Airlines.
So the next time you’re treated like dirt by an airline and find yourself trapped for hours on the tarmac in a seat that only a short contortionist could love, show some respect. Don’t call the airlines stupid. They’re not very good at keeping their customers and workers happy. But when you call the chairman to complain, try hitting him up for an investment tip instead of a refund.
Now, for the market: When will the pain end? I wish I knew. But remember that markets tend to be irrational in the short term–they go from being too high to too low, then back again. A year ago, when the broad indexes were at all-time highs, “value stocks” with unfashionable things like profits were in the dumper. Since then value’s done great, tech’s been trashed. I wouldn’t run out and buy on dips. But it’s time to do what we value types did 18 months ago, and start looking for bargains amid the rubble.
