BELLEVUE, Wash. --
Dara Khosrowshahi, CEO of the freshly spun-off and newly minted
Expedia Inc., has a modestly decorated fourth-floor office here in
Building 4 on the Expedia campus. There are a couple of paintings
tacked to the walls, a desk covered with neatly stacked paperwork,
a copy of Fortune tucked into a magazine rack and a view across a
parking lot toward Seattle a few miles away.
who is settling into his new digs and role, has his sights set well
beyond the Northwest.
"We have a great
product to sell," he proclaimed in a recent interview. "We have
incredible technology. We are a leader in the field. We can become
the biggest travel company in the world. It's a great, great spot
to be in."
But his passion for
Expedia Inc. is inspired by something even more basic. "It's a fun
business," Khosrowshahi said. "I am not selling widgets
On a recent Friday
morning, dressed in jeans and an Oxford shirt, Khosrowshahi sat
down with Travel Weekly for a no-holds-barred interview that
touched on all the hot-button issues -- distribution, the merchant
model, the competition, working with Barry Diller, the spin-off,
Wall Street's reaction and operational challenges. He confidently
laid out a blueprint for how Expedia Inc. would conquer the
Of course, Dara, as
everyone seems to call him, certainly wouldn't describe his
strategy that way. But, Expedia Inc., with $100 million in cash and
a $1 billion credit line, is thinking Europe, then Asia-Pacific.
Internationally, the up-side is enormous long-term, while the
stateside market dynamics are tough.
The new and
expanded Expedia Inc. estimates that it accounts for 4% to 5% of
all gross travel bookings -- online and offline -- in North
America. And some analysts say it has a better than 50% share of
online travel in the U.S. and Canada.
But if that kind of
market position seems like cause for celebration here, consider how
the company portrayed market conditions in its second-quarter
financial results: "Expedia Inc.'s domestic air and merchant hotel
businesses operate in a challenging competitive environment, due
primarily to increased competition from third-party distributors,
increased promotion by suppliers of their own Web sites and higher
overall occupancy rates and load factors. This environment is
generally expected to continue."
For the quarter,
revenue per airline ticket dipped 11% and hotel "raw margins" were
down as well.
Even so, Expedia
Inc.'s domestic business grew 6% in the quarter, and that result
was eclipsed by the company's international business, which saw
revenue increases of 58%.
Expedia Inc. -- like Cendant with its eBookers and
Gullivers Travel Associates acquisitions and Sabre with its Lastminute.com
purchase -- is focusing on international expansion.
"One way of looking
at the company is waves of growth," Khosrowshahi said. "Right now,
the big wave of growth that we have is Europe. That is a wave that
is going to continue for some years. We are building the Expedia
Corporate Travel (ECT) business, which right now is fairly small,
but we are patient, and we're going to build it."
"And, as Europe
gets larger and the law of large numbers kind of takes over in
Europe, we are going to have ECT come in as far as growth goes. We
are setting up Asia-Pacific to be the wave of growth after
While it was still
operating as IAC Travel, Expedia Inc. engineered some relatively
small acquisitions and ventures abroad. In October 2003, for
example, it bought Anyway.com, an online agency in France, and it has a
joint venture with SNCF in the state-owned railway line's Voyages-SNCF.com.
Expedia Inc. holds a majority stake in eLong, the Beijing-based
travel company that has relationships with 2,600 hotels in China
and sells vacation packages and other inventory largely through its
contrasts Expedia Inc.'s modus operandi in Europe with his rivals'
and, not surprisingly, he thinks his company has an
"We grew the European
business largely organically, the vast majority of it," he said.
"We have a team there that's been in place five or six years. We
have great leadership, and we are executing very, very well in
"Sabre and Cendant
had to buy in," Khosrowshahi said. "I expect a lot of their
activities are going to be focused on integration, whereas we are
going to be executing."
about whether he might be spinning Expedia Inc.'s alleged
advantages a little too favorably, Khosrowshahi shot back:
"Integration is real. I've been through it. It's very
"Both Sabre and
Cendant have been acquirers before," Khosrowshahi said. "They are
experienced at integration, but certainly my experience is that it
is a challenge."
Inc. faces some integration challenges of its own, as evidenced by
a wall in the fifth-floor reception area plastered with logo after
logo of companies in the Expedia fold.
That might surprise
those who equate Expedia Inc. with Expedia.com. In fact, that Web site is but one
part of a much larger company that now includes Hotels.com, Hotwire, Activity
World, Condosaver.com, Anyway.com, Classic Custom Vacations, TripAdvisor, TravelNow.com,
HotelDiscount.com, AllLuxuryHotels.com, eLong and Expedia Corporate
Most brands have
been under one roof -- that of the now-defunct IAC Travel -- for at
least two years. And today, the company boasts, all Expedia.com and Hotels.com points
of sale around the world operate through one inventory database and
recently purchased a home in the Seattle area, spends his days
contemplating things like supplier and international strategy. The
global stuff is easy to focus on when wandering the hallways here
(painted the blue and golden-yellow colors of the Expedia.com logo)
because each conference room is named for an exotic destination.
Like the others, the Casablanca room has a mural right outside
depicting the local scene.
This morning, the
talk is not of Casablanca but of "globalizing like there is no
"The big three
countries we are pushing are the U.K., Germany and France," he
said. "We just launched in Italy, and we are looking into other
markets as far as entry."
The U.K. business
has scale and strength in the "city-break markets" (London, Paris
and other large cities) but isn't strong in traditional tour
operator "summer-sun destinations" like Majorca and the Spanish
coast, Khosrowshahi said. "It's traditional summer getaways, and
that is an area that we are certainly going to focus on going
He also sees
opportunity in Germany.
"The German market
is trailing a lot of Europe as far as online adoption goes," he
said, "and we need to get the German consumer much more comfortable
with the idea of using an online travel agent and what an online
travel agent represents."
transforming Expedia.de into more of a travel site than an
e-commerce site, Khosrowshahi said.
"We brand Expedia
as not just an online travel player," he said. "If you need to call
us, we'll have customer service ops waiting for you to help you.
It's creating a softer face for Expedia."
with its majority control of eLong, Expedia Inc. has a presence in
China, which Khosrowshahi terms "an extraordinarily promising
market." The company, he said, is also gauging its prospects in
Japan, where Western travel companies are weak and JTB Corp.,
Japan's largest agency group, is a force.
"We are going in
with our eyes wide open," Khosrowshahi said. "I certainly don't
think that the going in Japan will be easy. But in looking at the
market, we certainly think there is a terrific consumer value
To a large degree,
the freedom to pursue an aggressive global strategy is a direct
result of having spun off the various companies and businesses that
now comprise Expedia Inc.
That decision was
made last year when Khosrowshahi and Barry Diller, the chairman,
senior executive and controlling shareholder of Expedia Inc., were
evaluating the corporate prospects of IAC/InterActiveCorp. The goal
was to enable IAC, with its Home Shopping Network and other retail
businesses, and IAC Travel "to be aggressive in both sides of the
businesses," Khosrowshahi said.
"I think from a
Wall Street perspective there was clearly confusion in what IAC
represented," Khosrowshahi recalls. "It was a diversified business,
but more than half of the profitability was from travel. So we were
neither here nor there."
IAC completed the
spin-off in July, and EXPE began trading on Nasdaq on Aug. 9 at
$23.50 per share.
"The spin-off isn't
going to make any difference in the way you operate, in the way you
execute," Khosrowshahi said. "But, there is a strategic benefit to
the spin-off in that we are now a pure-play travel company with
real focus in the sector."
In addition, he
said, the spin-off enabled the company "to use our stock as
currency ... to make strategic acquisitions."
Given some of the
business challenges at home, and with EXPE trading in early
September at about a dollar lower than its opening price at
spin-off, Expedia Inc. might have something to prove to Wall
challenge of leadership change
joined IAC in 1998 when he was in his late 20s and the company was
still known as USA Networks. Given all the changes he and Diller
have choreographed in the ensuing years, he doesn't seem to be
losing sleep over Expedia Inc.'s current strategic
"The history of
spin-offs is that it takes time for a new investor base to get
interested in the company, to get comfortable with the track record
and then to go from there," he said. "We're pretty comfortable that
if we execute on business basics, the rest will take care of
As for the
structural and management issues, Khosrowshahi said the biggest
challenge is that there has been "a lot of ... leadership
changeover in the company -- and that includes me."
IAC's chief financial officer until he became acting CEO of IAC
Travel in December with the departure of Erik Blachford.
"We have recently
restructured the company in a way that I think makes a lot of sense
on a go-forward basis," said Khosrowshahi, whose DNA is all over
the new Partner Services Group. "But that comes with operational
and executional risk, which is natural in any business."
Services Group, which has been in existence since the spin-off, is
designed to streamline supplier relationships and contacts
worldwide for all Expedia Inc. properties.
The division is
headed by its president, Paul Brown, who came from Hotels.com and
Expedia North America. Brown had worked at InterContinental Hotels
Group from 1998 to 2000.
suppliers want one point of contact at Expedia Inc., as opposed to
dealing with the multitude of brands individually.
"The only person
before who could speak for the whole company was Dara, which is not
necessarily ideal in a company our size," Brown said. "Now the
senior person [in a supplier company] has one person to talk to,
which is me."
acknowledged that in the past, suppliers "weren't given enough
attention." What little dialogue there was typically revolved
around contract negotiations every few years.
"The size and
acceleration of the business could certainly be intimidating from a
supplier perspective because we never really took the time to
explain ourselves," Khosrowshahi said. "But the fact is we are
spending a ton of capital on technology and making our services
better. We are going to get bigger, and we are going to get more
global, and I think that will only make us a better partner for our
One major wrinkle
in supplier relations came last year when InterContinental Hotels
Group, the world's largest hotel company, pulled its merchant hotel
inventory off of Expedia.com and Hotels.com in a dispute over
contract terms, trademarks, technology and consumer issues. With
Brown having formerly worked at InterContinental, Khosrowshahi is
now eager to do a deal.
"We are having a
dialogue with them," Khosrowshahi said. "We would love to do
business with them. It's just an issue of coming to
strategy with the boss
Strategy -- from
minor tactics to corporate vision -- are refined in frequent
discussions between Khosrowshahi and Diller, the chairman and CEO
of IAC and the controlling shareholder of IAC and Expedia Inc.
Khosrowshahi said Diller remains heavily involved in operations and
has no intention of cashing in and getting out of the travel
"I talk to him
pretty much every day," Khosrowshahi said. "He is very involved on
a strategic level with overall direction and organizationally ...
and he'll give me tips, he'll give me thoughts."
The two men face a
number of gnarly issues, not the least of which are Sabre and
Cendant. There's growing competition in the North American market,
where merchant hotel margins have slipped. Lawsuits filed by the
cities of Los Angeles and Philadelphia accuse Expedia and other
major online players of pocketing hotel taxes.
the merchant hotel business doesn't keep him awake at
pretty hedged. That's because the raw margins are coming down as
the ADRs (average daily rates) are going up. So, if you look at the
actual revenue we make per room-night sale, it's pretty much flat
year over year. In a downswing, you would expected to see ADRs
contract, but I would expect to see our raw margins actually
increase as hotels need us more as a selling tool."
The hotel tax issue
arose when municipalities alleged that online companies charge
consumers taxes at the retail rate but remit taxes on the merchant
"I don't think the
issue on occupancy taxes is an issue," said Khosrowshahi, whose
company nevertheless is holding millions of dollars in reserve in
case the litigation doesn't go its way. "We have been very
conservative in our accounting, and I think our position is very
the competition as solid. He says his counterpart at Travelocity,
Michelle Peluso, has "built a good business" since taking
"The good news
about Travelocity," he said, "is that they are building the
business in a very rationale way. Last year a lot of us, and a lot
of suppliers, over-spent in marketing to try to get share. I think
all of us now are really optimizing our business model and
optimizing market spend."
describes Cendant as "a pretty good competitor," too.
Cendant is doing with Orbitz and Cheap Tickets, it's more difficult
for me to get a sense of how they're doing," he said. "They have a
good executive, Mitch Truwitt. But, I think they are probably
dealing with a bit of integration pain."
question, though, is whether or not Expedia Inc. will be able to
avoid integration pains of its own. With a fat bankroll at its
disposal, the company seems poised for a giant acquisition. But
Khosrowshahi said he "wouldn't expect much acquisition activity in
the next six months."
"We are pretty
happy with the plethora of companies that we have in-house right
now," he said. "But the billion dollars gives us flexibility, and
that's what's important."
In which case, it
remains to be seen how far a $1 billion war chest will take a
company that aspires to make the travel world spin around its
ambitious global strategy?
"We are a $7
billion company," Khosrowshahi said. "Having a billion dollars of
liquidity out there is, I think, appropriate."
reporter Dennis Schaal, send e-mail to [email protected]com.
details on this article, see "Expedia wants flexibility on distribution