Priceline profits from wider downturn

This morning dot-com watchers became all excited about priceline.com's Q2 results. The company, which sells-off unsold airline seats, car rentals and hotel rooms, has become profitable.

Earlier this year, the company's founder, Jay Walker sold the last of his share in the company while its highly respected CFO jumped ship and returned to the offline business world. It also suffered flagging revenues late last year and was forced to lay off staff and close one of its reverse auction sites. Consequently its share price plummeted. It was a pretty ugly picture.

Cue the turnaround to profitability. In tandem, things have also been looking up for fellow online travel sites, ebookers and expedia. Both have managed to stem their losses and push up sales.

So what's going on? Well, for a start it's holiday season. On top of that, there is a notable change in the way consumers approach buying online. They have now been web-literate long enough to have developed a reasonable level of maturity in their buying habits.

Certain internet companies, including priceline, have also become fairly trusted brands. Daniel O'Boyle Kelly, a senior research analyst at IDC, said: "Companies that lack the trust element are forming alliances with offline companies that already have the trust card."

In Priceline's favour, consumers see it as working very snugly with some of the world's best-known and established airlines. And trust breeds trust.

The entry of online ventures such as orbitz, the airline consortium booking site, also brings some validity to the market. And the more consumers associate the online travel options with these kinds of established players, the more sites like ebookers and priceline seem viable options to travel buyers.

That's not to say Priceline shouldn't be given some credit for reducing costs and keeping its marketing spend under control. But the company has also done pretty well out of the US economic downturn - something that it can take no credit for. The tightening of purse strings has meant more travel products are going unsold - finding their way to priceline.com and increasing flexibility and convenience for buyers.

Mark Riseley, analyst at GartnerG2, explained that while priceline has become quite big, quite quickly, there is a limited market for consumers that are willing to put up with the inconvenience of fitting travel arrangements around what is available from priceline. He described it as selling into a "rapidly saturating market".

GartnerG2 research shows that in the US convenience comes first - well ahead of competitive pricing. There are only a certain number of people that want to buy products forcing them to go out of their way.

Riseley added: "There is a future for Priceline, but the size to which the company will grow is questionable."

Alan Lawson, a research analyst at Butler Group, agreed: He said: "You get what you're given and there's a limited choice. There is a real risk that this sort of model could run out of customers - it's not a sustainable customer base."

As a customer, while you might well be able to 'name your own price', it still comes at a cost and one that not everyone will put up with.