Why Did American Airlines Expand Its Partnership With Expedia?

Expedia (NASDAQ:EXPE) recently renewed its agreement with American Airlines (NASDAQ:AAL) Group for the distribution of flights from US Airways and American Airlines on the Expedia, Travelocity, and Hotwire websites. Along with this, the Expedia Affiliate Network (EAN) and AA Vacations announced a collaboration that will enable EAN to supply hotel content through the www.aa.com website.

Additionally, all the above mentioned Expedia-owned websites would be able to provide paid seating options for American Airlines Group flights to their leisure customers, starting from late 2015. The options include Main Cabin Extra seats that would offer fliers six inches of extra legroom and priority boarding, as well as Preferred Seats with standard legroom in a more favorable cabin location. ^[1]

Expedia had removed the American Airlines’ flights from its websites in January 2011, out of its own economic interest and as a sign of support to Orbitz which was in a dispute with American Airlines. American Airlines had demanded Orbitz create a direct technology connection between the two entities, thereby circumventing Orbitz’s global distribution system (GDS) providers. However, after a financial setback, Expedia went back to reestablish ties with American Airlines in April 2011. ^[2]

Over a year ago, post its merger with US Airways, American Airlines Group announced a distribution agreement with Fareportal. According to the terms of the collaboration, American Airlines and US Airways agreed to sell their seats and ancillary services through Fareportal’s sites, including CheapOair and OneTravel. ^[3]

Our  price estimate of $117 for Expedia’s stock is slightly above the current market price.

See Our Complete Analysis for Expedia Here

Are The OTAs Winning This Round?

In the agreement with American Airlines, Expedia has confirmed that it will access American Airlines’ seat data through global distribution systems and not through a direct-connect with American Airlines Group. What is important to note here is that the previous fall-out between these two entities were over American Airlines trying to avoid the GDS and yet this time around it has agreed to an expanded partnership through the GDS.

Does it give an indication of Expedia’s clout over the travel market currently? 

Currently, Expedia controls around 5% of the $1.3 trillion travel market. ^[4] Between 2012 to 2017, the North American online travel market is forecast to grow at 7% CAGR. With revenues of over $200 billion in 2013, it remains the biggest online travel market in the world and is expected to maintain an important position at least for the next few years. ^[5]

According to the 2013 market shares provided by PhoCusWright , Expedia is expected to own around three-fourths of the U.S. online travel market as a result of its Orbitz acquisition. Online travel agencies (OTAs) together account for 16% of total gross travel bookings from the U.S. ^[6]

In a Power List published by Travel Weekly, Expedia and Priceline ranked 1 and 2 respectively with gross bookings of around $50 billion each in 2014.  The difference between the two companies was only a fraction of a million dollars.

(Image Source: Expedia)

Under these scenarios, it seems like a logical move for American Airlines to strengthen its ties with the North American OTA leader. In 2014, 44% of the 766 million U.S. travelers booked their flight tickets through OTAs, such as Expedia, TripAdvisor, and Orbitz (soon to be a part of Expedia). ((Delta infuriates travelers by withholding data from booking sites, but sites band together to fight back, Road Warrior Voices, May 20, 2015))

In a previous analysis, we showed how some airlines, such as Lufthansa, are trying to avoid the OTAs and hence, the GDS by levying additional charges for bookings through OTAs. Airlines are increasingly trying to bypass the fees they pay to GDS, i.e., software and technology companies like Amadeus, Sabre, and Travelport. Lufthansa’s COO mentioned that even though the percentage of revenues generated from air tickets sales has been on a downhill trend for the airlines, other service and system partners in the value chain keep reaping higher margins. Hence, this step is meant to gain back a part of the revenue. ^[7]

However, the current step by American Airlines points to the fact that OTAs still rule the travel world and it is difficult to generate profitable business without their cooperation. Though we are not sure whether Expedia, too, needed to compromise something in order to arrive at an agreement with American Airlines, what is clear from here, is that OTAs are increasingly becoming the most popular travel booking medium. The convenience, the range of options they offer to consumers, most of whom are always connected online through their devices, suggest that it might not be easy for airlines to carry on successfully without the OTAs’ support.

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1. Expedia, Inc. And American Airlines Group Expand Partnership Bringing More Choices To Travelers, Expedia Press Release, September 2, 2015 [↩]
2. Expedia and American Airlines Break Through Four Years of Dysfunction, Skift, September 3, 2015 [↩]
3. American Airlines Signs First Post-Merger Booking Site Pact With CheapOair, Skift, June 4, 2014 [↩]
4. Expedia (EXPE) CEO Dara Khosrowshahi on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, February 6, 2015 [↩]
5. The New Online Travel Consumer, Euromonitor, February 2014 [↩]
6. Expedia Will Pay Orbitz $115 Million if Antitrust Complications Scuttle Acquisition, Skift, February 13, 2015 [↩]
7. Lufthansa will charge extra if you don’t buy your tickets through its website. Is this becoming a trend?, Road Warrior Voices, June 4, 2015 [↩]