Hidden fees - deter customers and attract short sellers

Companies who tease out extra profit through hidden fees risk the wrath of their customers. There was a letter in Sunday’s New York Times complaining about the hidden extras being charged by Priceline.com (NASDAQ:PCLN) and Hertz Global Holdings Inc (NYSE:HTZ). We will also look at other firms with a reputation for hidden charges such as Ryanair Holdings Plc (ISE:RYA), as well as look at car insurance company Admiral Plc (LON:ADM), whose shares fell last week on news of changes towards one of their less well known revenue streams.

Price comparison websites are a great time saving tool for the bargain hunter, but it all seems a little bit of a waste of time when you then encounter a long list of not-so competitive extra fees. This is what prompted the letter to the New York Times when 37% of the cost of a Boston airport hire car was “hidden.” Hertz Global Holdings Inc., the car rental firm, has seen its share price collapse to annual lows over the third quarter. Short sellers have been active as short interest jumped to 6% of the total shares in August, but recent profit taking has lowered this to 4.5%. Institutional investors who lend have been less fickle, continuously increasing holdings over the year. Hertz are one of the car rental companies which have launched a new service that allows members to reserve cars via phone or internet and unlock them using RFID cards - all in a bid to compete against successful car sharing clubs such as Zipcar. Will there be room for hidden fees in this business model too?

Priceline.com advertises itself as “the inside track to the best travel deals and discounts around,” but note that they do alert their customers of the possibility of extra fees charged by their suppliers, such as hotel resort fees. In any case, this was their defense to the person who complained to the New York Times. Discount sites are always popular when consumer confidence is low, and the shares of Priceline.com reflects this as they trade close to the annual high. Institutional investors who lend now hold a third of the market cap. Short interest stands at 5% of total shares outstanding, but has been following the movement of the share price indicating convertible arbitrage as a result of the convertible bond in issue. Back in 2009, short interest reached 16%. Fortunately, short sellers closed their positions as the price more than doubled.

There seems to be a trend forming towards companies offering products and services to the traveller and even Forbes recently wrote on last minute travel savings, linking to an article titled “5 hidden fees to watch out for on Vacation” (http://www.forbes.com/sites/investopedia/2011/09/08/seven-ways-to-save-o...). Travel operator Expedia (NASDAQ:EXPE) prides itself on offering customers no hidden charges to differentiate their offering. The shares price of Expedia trades at levels close to the annual highs recorded in August but short interest has been on the increase, reaching a new annual peak of 5.7% of total shares. This stock does have convertible bonds in issue which could also result in inflated stock on loan as a result of arbitrage.

UK car insurer Admiral saw their shares slide recently on news that personal injury referral fees (the practice of earning fees from solicitors for passing them work) were subject to a proposed ban. Two hedge funds, Odey and Steadfast Capital, disclosed short positions in August and may have been anticipating this move. Mak Capital One disclosed a short of 0.45% in February. Overall, demand to borrow is around 3% of all shares.

Along with most budget airlines, Ryanair Holdings, are not shy of opting clients into paying for extras. Short selling has recently leapt higher in their Irish listing but remains low in absolute terms at 1% of all shares.