Orbitz 2008 Annual Report Download - page 64

Under the merchant model, we provide customers the ability to book the travel reservations, and we contract with various suppliers that provide the travel
products needed to fulfill the reservation. We generate net revenue for our services based on the difference between the total amount the customer pays for the
travel product and the negotiated net rate as well as estimated taxes that the supplier charges for that travel product. We also charge our customers a service fee
for booking the travel reservation. Customers generally pay for reservations in advance, at the time of booking. Initially, we record these advance payments as
deferred net revenue and accrued merchant payables. In this model, we do not take on credit risk with travelers, however we are subject to fraud risk; we have
some pricing flexibility; we are not responsible for the actual delivery of the flight, hotel room, or car rental; we take no inventory risk; we have no ability to
determine or change the products or services delivered; and we have no discretion in the selection of the service supplier.
We recognize net revenue under the merchant model when customers use the reservations. For air transactions, this is the departure date. We recognize net
revenue for car transactions at the pick-up date. For hotel transactions, net revenue is recognized at the check-in date. We accrue for the cost of merchant hotel
transactions based on amounts we expect to be invoiced by suppliers. If we do not receive an invoice within a certain period of time, generally within six months,
or the invoice received is less than the accrued amount, we may reverse a portion of the accrued cost when we determine it is not probable that we will be
required to pay the supplier, based on our historical experience and contract terms. This would result in an increase in net revenue.
When customers assemble a dynamic vacation package, we may offer them the ability to book a mix of travel products that use both the retail and merchant
model. For example, travel products booked in a dynamic vacation package may include a combination of air, hotel and car reservations. We recognize net
revenue for each portion of the package in accordance with the relevant service provided for air, hotel and car reservations.
Under both the retail and merchant models, we recognize revenue for service fees charged to customers for booking travel reservations. This revenue is
recognized at the time we recognize the net revenue for the corresponding travel product. We also may receive override commissions from travel suppliers if we
meet certain contractual volume thresholds. These commissions are recognized upon notification by the respective airline.
We utilize GDS services provided by Galileo, Worldspan and Amadeus. Under GDS service agreements, we earn revenue in the form of an incentive
payment for each segment that is processed through a GDS. Revenue is recognized for these incentive payments at the time the travel reservation is processed
through the GDS, which is generally at the time of booking.
We also generate other revenue, which is primarily comprised of revenue from advertising, including sponsoring links on our websites, and travel insurance.
Advertising revenue is derived primarily from the delivery of advertisements on our websites and is recognized either at the time of display of each individual
advertisement, or ratably over the advertising delivery period, depending on the terms of the advertising contract. Revenues generated from sponsoring links and
travel insurance revenue are both recognized upon notification from the alliance partner that a transaction has occurred.
If our judgments regarding net revenue are inaccurate, actual net revenue could differ from the amount we recognize, directly impacting our results of
operations.
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Source: Orbitz Worldwide, In, 10-K/A, August 28, 2008