As the recession-pressured market for leisure travel shrinks, the competition for online travel customers is heating up.

Expedia (EXPE) today unveiled an aggressive new promotion, which it calls “Free Nights and No Fee Flights,” offering to pick up the tab for one night in a hotel for stays of three, four or five days at a group of more than 700 participating hotels, and also waiving booking fees for flights booked before the end of May. The hotel promotion currently is for bookings made by April 9 for travel through May 15; the company said additional deals will be posted for bookings beginning April 9 for travel through the end of May.

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Orbitz (OWW) shares are coming under pressure this morning after Goldman Sachs analyst Jennifer Watson cut her rating on the stock to Sell from Neutral. She slashed her price target on the online travel services company to $2.70, from $6.80. “Orbitz has grown gross bookings more slowly than both Expedia and Priceline, and we do not anticipate a reversal in a more challenging economic environment,” she writes. Watson also notes that leverage is high, with net debt 4x EBITDA, reducing flexibility. She points out that 50 percent of excess cash flow must be used to repay debt.

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Citigroup analyst Mark Mahaney this morning cut his rating on Amazon.com (AMZN) to Hold from Buy on a combination of valuation and macroeconomic concerns.

Mahaney notes that AMZN shares have surged “as much as 36 percent” since it reported Q3 results, “primarily due to growth rates that are surprisingly strong in a severe recession, but also due in part to increased enthusiasm for its Kindle product.” But he notes that consumer spending data points from other e-commerce companies, like recent cautious comments form Expedia and Blue Nile, have become consistently negative.

Mahaney did not change estimates, but sees increasing risk to the Street consensus. For Q4, he sees EPS of 40 cents, below the Street at 44 cents. For 2009, he sees $1.50, below the Street at $1.59.

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The online travel booking business is not going to survive an economic downturn unscathed. That’s not a surprising statement, but confirmation of those sentiments yesterday from Expedia (EXPE) has the Street scurrying to revalue the online travel stocks.

As I noted in a post yesterday, Expedia observed on its post-earnings conference call that the softness the company had been seeing in the U.S. and the U.K. earlier in the year has now extended to “nearly all” geographies and all key product areas, including air, hotels and car rentals. The company indicated that transactions dropped off during the week Lehman went bankrupt, and have not rebounded much since.

This morning, several analysts cut ratings on the stock.

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If the economy is going to slow (which it is) and the jobless rate is going rise (which it is), you can safely conclude that people will be traveling less. That’s the core idea behind the call on the online travel sites by Bank of America’s Brian Pitz and Brian Fitzgerald, who today chopped their estimates and price targets on Orbitz (OWW), Expedia (EXPE) and Priceline (PCLN).

• Orbitz: Target to $5, from $8. EPS estimate for 2008 to loss of 17 cents from loss of 15 cents; 2009 to loss of seven cents from positive 19 cents.
• Expedia: Target to $19, from $30; 2008 to $1.38 from $1.40; 2009 to $1.42, from $1.59.
• Priceline: Target to $90, from $154; 2008 to $5.43, from $5.75; 2009 to $5.80, from $7.15.

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The rumor mills are turning at a feverish pace. Various sources are predicting that Google (GOOG) is about to hook up with eBay’s (EBAY) Skype. And Google’s M&A appetite may not stop there. Shares of Expedia (EXPE) soared 10% yesterday, after an analyst with Susquehanna alluded to rumors that Big G was readying a bid for the travel portal. So bolt yourself to the floor, because a cash-rich Google may be coming for you next.

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Just in time for the busiest travel days of the year, Stifel Nicolaus analyst George Askew today turned cautious on the online travel sector. He cut his ratings on Priceline, Expedia and Orbitz to hold from buy.

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