Expedia 2005 Annual Report Download - page 35

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Part II. Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Expedia, Inc. is an online travel company, empowering business and leisure travelers with the tools
and information they need to efficiently research, plan, book and experience travel. We have created a
global travel marketplace used by a broad range of leisure and corporate travelers and offline retail travel
agents. We make available, on a stand-alone and package basis, travel products and services provided by
numerous airlines, lodging properties, car rental companies, destination service providers, cruise lines and
other travel products and services.
We refer to Expedia, Inc. and its subsidiaries collectively as ""Expedia,'' the ""Company,'' ""us,'' ""we''
and ""our'' in this management's discussion and analysis of financial condition and results of operations. For
additional information about our portfolio of brands, see the disclosure set forth in Part I, Item 1,
Business, under the caption ""Management Overview.''
Trends
The travel industry, which includes travel agencies and travel suppliers has been characterized by
rapid and significant change. The U.S. airline sector has experienced significant turmoil in recent years,
with several of the largest airlines seeking the protection of Chapter 11 bankruptcy proceedings. The need
to rationalize high fixed cost structures to better compete with low cost carriers offering no frills flights at
discounted prices, as well as the pressure of high priced jet fuel has caused the airlines to aggressively
pursue cost reductions in every aspect of their operations. These cost reduction efforts include distribution
costs, which the airlines have pursued by seeking to reduce travel agent commissions. The airlines are also
pursuing reduced fees with the GDS intermediaries as their contracts with the GDSs come up for renewal
in 2006. In addition, the US airline industry has experienced increased load factors and ticket prices.
These trends have affected our ability to obtain inventory in our merchant air business as suppliers lower
discounting of merchant air tickets. Although these competitive forces have caused our air revenue per
ticket to decline, our worldwide air revenue has grown year over year, primarily due to increases in the
number of air tickets sold.
The hotel sector has recently been characterized by robust demand and constrained supply, resulting
in increasing occupancy rates and average daily rates. The higher occupancy rates and increasing average
daily rates have had a positive effect on our operations by contributing to growth in our merchant hotel
revenue.
Increased usage and familiarity with the internet has driven rapid growth in online penetration of
travel expenditures. According to PhoCusWright, 29% of U.S. leisure and unmanaged travel expenditures
occurred online in 2005, more than double the 14% rate in 2002. An estimated 14% of European travel
was booked online in 2005, up from just 4% in 2002. In addition to the growth of online travel agencies,
airlines, and lodging companies have aggressively pursued direct online distribution of their products and
services over the last several years, with supplier growth outpacing online growth since 2002.
Differentiation among the various website offerings have narrowed in the past several years, and the travel
landscape has grown extremely competitive, with the need for competitors to generally differentiate their
offerings on a feature other than price.
Strategy
We are in the early stages of leveraging our historic strength as an efficient transaction processor to
become a retailer and merchandiser of travel experiences. Our business strategy to accomplish this is as
follows:
Leverage our portfolio of travel brands. We seek to appeal to the broadest possible range of travelers
and suppliers through our collection of industry-leading brands. We target several different demographics,
from the value-conscious traveler through our Hotwire brand to luxury travelers seeking a high-touch,
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