Partnering With Travelocity Has Juiced-up Expedia’s Operations, But Will Expedia Acquire It?

The North American online travel market is forecast to grow at the slowest pace compared to other economies such as Europe, Latin America and Asia-Pacific. Nevertheless, with estimated revenues of over $200 billion in 2013, it remains the biggest online travel market in the world and is expected to maintain its lead for at least the next few years. ^[1] About three-fourths of the North American online travel sales are generated in the U.S., where Expedia (NASDAQ:EXPE) is the market leader with over 40% share of bookings. Priceline (NASDAQ:PCLN) controls about 16% of the U.S. online travel agency (OTA) market, but has been aggressively trying to pare Expedia’s lead in the country through brand advertising, partnerships to power bookings and acquiring Kayak last year, to increase the visibility of its brands in the domestic market.

To counter rising competition from rival Priceline, Expedia inked a strategic marketing agreement with Travelocity last year. As per the terms of the deal, Expedia provides content, inventory, customer service and technology to Travelocity.  In turn, the latter company focuses on marketing the Travelocity brand as a channel for Expedia, for which it receives a performance-based marketing fees. The deal pertains only to Travelocity’s websites in the U.S. and Canada. Expedia’s technology platform began powering the U.S. website in Q1 this year. The Canadian website was migrated to the new platform earlier this month. To dive into the details of the deal, read our article: Expedia Is Better Positioned For Growth After The Travelocity Deal.

Expedia Is Benefiting From The Partnership

The deal with Travelocity yielded positive results for Expedia in Q1. The company sold approximately 36 million rooms globally, higher by 24% compared to the year-ago quarter and Travelocity accounted for 3% of that growth. The effect on air ticket volume growth was even more pronounced. About 30% more air tickets were sold by Expedia, of which 18% was contributed by Travelocity. We are encouraged by the growth in bookings considering that only Travelocity’s U.S. operations were included in the results. The Canadian operations will add to the growth this quarter onward. ^[2]

Travelocity has 16% share in the U.S. OTA market which Expedia has more or less captured through the partnership. The company is now ramping up media sales on Travelocity sites. Advertising and media is a high-growth, a high-margin and less capital intensive business, compared to the  hotel and airline bookings business. ^[2] We believe that Expedia stands to gain more since it has not only eliminated some competition but also created an additional distribution channel for itself. Further, the increased scale of operations after the deal may help the company to negotiate better terms with inventory suppliers and deliver cost savings at the same time.

Does It Make Sense To Buy Out Travelocity?

Travelocity is merely responsible for marketing its brand and Expedia does not have much visibility into the marketing strategy, according to the latter’s Q1 earnings call. ^[2] Therefore, it might make more sense for Expedia to completely acquire Travelocity and have an integrated ecosystem rather than segregate one unit from the others. Expedia has demonstrated its strength in the U.S. by building a formidable market share. The company could replicate or slightly tweak its successful strategy to grow the Travelocity brand in the country. As per the terms of the agreement, Expedia has the option to acquire assets related to Travelocity’s business in the future.

A few recent developments point towards a possible acquisition of Travelocity by Expedia. First, Sabre, the company that owns Travelocity, has a debt laden balance sheet and it is looking for ways to erase some of that. It sold Travelocity’s business travel arm to BCD Travel last year, and raised $600 million through an IPO (initial public offering) last month to reduce a portion of the $3 billion debt. Second, Travelocity announced two rounds of lay-offs in 2013 and its CEO, Carl Sparks, left the company earlier this month.

Even if Expedia decides to buy out Travelocity the companies will have to tackle the problem of antitrust violations that might get triggered owing to their large market shares in the U.S. Until then, we think that Expedia will be looking to capitalize on the partnership since it is a safer bet. The company has successfully leveraged collaborations in the past, including that with eLong and AirAsia.

See our complete analysis of Expedia here

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1. The New Online Travel Consumer, Euromonitor, February 2014 [↩]
2. Expedia Management Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 2014 [↩] [↩] [↩]