Expedia-Travelocity pact called 'affiliate deal of the year'

By Danny King

While Travelocity appears to have become excess baggage for Sabre, it will become a means for Expedia Inc. to gain a majority control of the online travel agency sector in the U.S.

At the end of 2012, Expedia accounted for about 45% of online travel agency bookings by Americans, according to research firm PhoCusWright. With its agreement to provide technology, content and customer support for Travelocity's U.S. and Canadian sites, Expedia will add another 16% to its share in a $40 billion market.

Orbitz has about 21% of the U.S. market, and Priceline has about 11%, according to PhoCusWright.

“Expedia has won the affiliate deal of the year,” commented PhoCusWright principal analyst Douglas Quinby.

In a note to clients on Friday, Lazard Capital Markets analyst Jake Fuller wrote,“Expedia preserves capital, keeps Travelocity out of a competitor’s hands and will add a potentially significant revenue stream.”

Fuller estimated that the agreement may add more than $300 million in annual revenue for Expedia.

Expedia also gains a little more leverage against Priceline, which has been aggressively trying to chip away at Expedia’s business in the U.S. and in international markets. Priceline overtook Expedia in annual revenue three years ago by way of overseas expansion.

How the hotel industry responds to Expedia’s virtual takeover of Travelocity bears watching. Hotels have long sounded the alarm about OTAs being their most expensive sales channel, and have been pushing to drive more of their online sales onto their own websites.

However, investors are suggesting that the Expedia-Travelocity deal has given OTAs more leverage across the board. Expedia’s stock rose 5.1% Friday, Orbitz’s advanced 3.6% and Priceline’s rose 2.1%.

Both Expedia and Travelocity insist that the agreement, which is scheduled to go into effect next year, is a partnership, and that the Travelocity brand isn’t going anywhere.

Carl SparksIn Thursday’s statement announcing the partnership, Expedia CEO Dara Khosrowshahi said the agreement “will enable Travelocity to focus on further building its brand while at the same time providing consumers with an enhanced suite of travel products and services.” Travelocity CEO Carl Sparks said the partnership allows the company “to focus increased resources on building our competitive strengths in marketing and retailing.”

That said, Travelocity has been paring down its operations, selling its corporate travel unit in June and hotel distribution network Travelguru in 2012.

As for why Expedia didn’t buy Travelocity outright, Hudson Crossing analyst Henry Harteveldt offered the term “DOJ roadkill” as the reason, implying that the U.S. Department of Justice’s recent challenge of the American Airlines-US Airways merger may have made both OTAs gun-shy.

Regardless, there was a clear winner in this agreement, according to Quinby.

“Travelocity insists they’re still in the fight and plan to compete as fiercely as ever. However, with Expedia powering the platform, it seems a risky proposition to put your core product in the hands of one of your top competitors,” said Quinby.

PhoCusWright and Travel Weekly are both owned by Northstar Travel Media. 

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