Expedia Plans To Acquire Orbitz: How Will The Various Stakeholders Be Impacted?

On February 12, Expedia (NASDAQ: EXPE) announced its intention to acquire Orbitz Worldwide, the Chicago-based online travel agency (OTA) responsible for brands like Orbitz.com and Cheaptickets.com.  Expedia is to pay $12 per share in cash, generating an enterprise value fo rthe transaction of $1.6 billion. The companies, having received the go-ahead from their respective boards of directors, are still awaiting regulatory approvals. Given Expedia’s recent spate of acquisitions, the antitrust authorities may express concern over the deal. Expedia expects the deal to close by the second half of 2015, once the approvals are achieved. ^[1] On January 23, Expedia acquired Travelocity for $280 million, from its parent company Sabre Corp. (Read more about the deal here). In this article, we will discuss how the Orbitz acquisition will impact various stakeholders related to Expedia.

Our $90 price estimate for Expedia is marginally below with the current market price.

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Orbitz: A Brief Background

Orbitz Worldwide, was founded in 2000 as a shared booking platform by a number of airlines, including Continental Airlines, Delta Air Lines, Northwest Airlines, United Airlines, and American Airlines. Since its launch, the company has undergone several ownership changes, which acted as a hindrance to its whole scale development. The company also suffered due to a lack of direction, even as the OTA industry grew around it. Additionally, internal conflicts and poor strategic decisions further stunted the growth process for the company.

Though its main brand Orbitz.com, is the third largest player in the domestic U.S. market,  it is nowhere close to its rivals on a comparative basis. To add some color, for Q3 2014, Priceline (NASDAQ: PCLN) experienced a 27% room night growth and Expedia experienced a 24% growth. Orbitz experienced a 19% growth rate and, notably, from a much smaller base. Orbitz derives 74% of its revenues from the U.S. Markets. ^{[2] [3]}

Implications For Expedia

The deal might benefit Expedia in the following ways:

• Orbitz currently has $12 million in gross bookings. Also, the Orbitz partner network and Orbucks loyalty programme would be beneficial for Expedia’s growth. This would propel an increased number of hotel partners on the Expedia platform and eventually a bigger scale for its operation.
• Orbitz strong technology team will aid in Expedia’s best practice sharing. ^[1]
• Orbitz’s airfare search technology is one of the most advanced for combining fares across different airlines.
• Orbitz is more adept than Expedia at displaying results in line with consumer preferences as against those with the best payout to the booking engine. ^[4]

The travel market is valued at $1.3 trillion currently, and Expedia commands almost 5% of the market. ^[5] If we look into the past couple of years, the forerunners in the online travel space have been growing through acquisition. The rule in the OTA space seems to be: the bigger the scale and the more diversified the offerings, the higher  the chances are of generating profitability. Expedia’s management believes that the consolidation in the online travel space will continue this year as well. (Read about Expedia’s major deals in 2014 here).

Expedia might own up to 75% of the U.S. online travel market as a result of this acquisition, according to the 2013 market shares provided by PhoCusWright. However, online travel agencies (OTAs) together account for 16% of total gross travel bookings from the U.S. ^[6]

Implications For The Hoteliers

The partnering hotels might witness a rise of commissions which they pay to Expedia, with fewer OTAs available in the market place.  Wotif, after being acquired by Expedia in 2014, is already increasing the commissions it charges to accommodation operators from 12% to 15%. The hotels would also need to put in greater effort to attract customers to directly book from their own websites. The clout of a consolidated OTA entity will be significantly greater.

Implications For The Customers

Even though the acquisition might lead to Expedia gaining a significant percentage of the American online travel market,  users need not be worried. Euromonitor estimates that Expedia has 6.3% share in the global travel market, while Priceline enjoys a 4.9% market share. Expedia’s CFO Mark Okerstrom suggested that Expedia’s share would remain in single digits even post the acquisition. ^[6] The travel market is flooded with smaller players, and the travel related bookings have high price elasticity of demand. This implies that if Expedia tries increasing booking prices then consumers are likely to switch to other brands. Under these circumstances, it would be difficult for Expedia to establish a conventional monopoly.

Besides, Expedia has strong competitors. TripAdvisor is gearing up with its instant booking platform. Priceline is equipped with its globally largest hotel booking platform, Booking.com, to pose substantial threat to Expedia. Also, newer entrants such as Skyscanner are posting strong growth in the U.S. online travel market.

In its Q4 earnings call, Priceline’s management did point out that Priceline and Expedia jointly occupy a mere 10% of the $1.3 million global travel market. This again implies Expedia’s consolidation strategy wouldn’t give it a pricing advantage given the significant scope for growth for new entrants in the market.

Finally, if we consider Porter’s rules of competitive advantage, the online travel agents don’t have much of a scope of product differentiation and cost reduction is only possible to a certain extent. So, the only means of differentiation is through improved customer experience. Consequently, customers don’t lose out on any advantage by a consolidation strategy, at present. ^[7]

However, with this rapid momentum of consolidation, there will be fewer unique OTAs for users to choose from in the future. Additionally, the rebates on bookings might significantly decline with fewer OTA competitors remaining, to drive up rebates in cash and miles.

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1. Expedia to buy Orbitz in cash deal worth $1.6 billion, tnooz, February 12, 2015 [↩] [↩]
2. Orbitz Up For Sale? Expedia to Move on Travelocity? More Deals Tipped for the Online Travel Space, Travel Trends, January 21, 2015 [↩]
3. Orbitz Gives In, Hires Bankers to Find a Buyer, Skift, January 20, 2015 [↩]
4. You’re About to Lose Choices in How You Book Travel. What the Expedia/Orbitz deals Means For You, View From The Wing, February 12, 2015 [↩]
5. Expedia (EXPE) CEO Dara Khosrowshahi on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, February 6, 2015 [↩]
6. Expedia Will Pay Orbitz $115 Million if Antitrust Complications Scuttle Acquisition, Skift, February 13, 2015 [↩] [↩]
7. Orbitz to net $115 million from Expedia if deal falls through due to anti-trust, tnooz, February 13, 2015 [↩]