Orbitz 2008 Annual Report Download - page 97

ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Unfavorable Contracts (Continued)
rates. The terms of the new agreement are described in further detail in Note 16—Related Party Transactions.
We recognized revenue under this unfavorable contract in the amount of $4 million, $2 million, $6 million and $9 million for the year ended December 31,
2007 and for the periods August 23, 2006 to December 31, 2006 and January 1, 2006 to August 22, 2006 and for the year ended December 31, 2005,
respectively.
Charter Associate Agreements
In December 2003, we entered into amended and restated airline charter associate agreements, or "Charter Associate Agreements," with the Founding
Airlines as well as US Airways ("Charter Associate Airlines"). These agreements pertain to our Orbitz business, which was owned by the Founding Airlines at
the time we entered into the agreements. The Charter Associate Agreements set forth the terms under which Orbitz can offer air travel on behalf of the Charter
Associate Airlines to consumers and require the Charter Associate Airlines to provide us with agreed upon transaction payments when consumers book this
travel. The transaction payments that we receive are based on the value of the ticket and gradually decrease over time. The agreements also provide Orbitz with
nondiscriminatory access to seat availability for published fares as well as marketing and promotional support. The agreements expire on December 31, 2013.
Under the Charter Associate Agreements, we must pay a portion of the GDS incentive payments earned from Worldspan back to the Charter Associate
Airlines in the form of a rebate. The rebate payments are required when airline tickets for travel on a Charter Associate Airline are booked through the
Orbitz.com website utilizing a GDS provider. The rebate payments are made in part for in-kind marketing and promotional support we receive. However, a
portion of the rebate payments are deemed to be unfavorable because we receive no benefit for these payments. The rebate structure continues to apply to the
incentive payments earned under the new contract that we entered into with Travelport in July 2007 (see Note 16—Related Party Transactions).
The rebate structure under the Charter Associate Agreements was considered unfavorable when compared to market conditions at the time of Cendant's
acquisition of Orbitz in 2004 and the Blackstone Acquisition in 2006. As a result, an unfavorable contract liability was recorded at its fair value at each
acquisition date. The fair value of the unfavorable contract liability was determined using the discounted cash flows of the expected rebates, net of the expected
fair value of in-kind marketing support.
At December 31, 2007 and December 31, 2006, the net present value of the unfavorable contract liability was $20 million and $23 million, respectively. The
current portion of the liability of $3 million and $3 million is included in accrued expenses in the consolidated balance sheets at December 31, 2007 and
December 31, 2006, respectively. The long term portion of the liability of $17 million and $20 million is included in unfavorable contracts in the consolidated
balance sheets at December 31, 2007 and December 31, 2006, respectively.
This liability is being amortized to revenue in the consolidated statements of operations on a straight-line basis over the remaining contractual term. We
recognized revenue for the unfavorable portion of the Charter Associate Agreements in the amount of $3 million, $1 million, $1 million and $2 million for the
year ended December 31, 2007 and for the periods August 23, 2006 to December 31, 2006 and January 1, 2006 to August 22, 2006 and for the year ended
December 31, 2005, respectively.
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Source: Orbitz Worldwide, In, 10-K/A, August 28, 2008