Orbitz 2009 Annual Report Download - page 40

Beginning in September 2008, fundamentals in the U.S. hotel industry also began to weaken. Hotel
occupancy rates and ADRs declined in September for the first time in several years and continued to decline
during the remainder of 2008. We believe that hotel suppliers will continue to lower ADRs into 2009 in order
to improve hotel occupancy rates during a time of weakening demand. Fundamentals in the European and
Asia Pacific hotel industries have also begun to deteriorate. A deterioration of ADRs would negatively impact
the net revenue that OTCs earn per hotel booking.
We believe that our gross bookings and net revenue for the year ended December 31, 2008, particularly
for the fourth quarter of 2008, were significantly impacted by the economic and industry conditions described
above. We expect this trend to continue into 2009. As a result, we have taken steps to reduce our cost structure
to better manage through this challenging environment. In the fourth quarter of 2008 and the first quarter of
2009, we reduced our global workforce, our use of outside contractors and other operating expenses. We
expect to realize approximately $40 to $45 million of annualized cash savings from these actions.
Despite the macroeconomic environment, Internet usage and online travel bookings continue to increase
worldwide. Online travel booking rates are highest in the U.S. and have grown on a year-over-year basis.
Suppliers, including airlines, hotels and car rental companies, have continued to focus their efforts on direct
sale of their products through their own websites, further promoting the migration of customers to online
booking. In the current environment, suppliers’ websites are believed to be taking domestic and international
market share from both OTCs and traditional offline travel companies.
We believe that the rate of growth of online travel bookings in the domestic market has slowed as this
market has matured. Much of the initial rapid growth experienced in the online travel industry was driven by
consumers shifting from purchasing travel through traditional offline channels to purchasing travel through
online channels. Accordingly, we believe that growth rates in the domestic online travel market may more
closely follow the growth rates of the overall travel industry.
Internationally, the online travel industry continues to benefit from rapidly increasing Internet usage and
growing acceptance of online booking. We expect international growth rates for the online travel industry to
continue to outpace growth rates of the overall travel industry. As a result, we believe OTCs will increasingly
generate a larger percentage of their growth from outside of the U.S. The hotel-only business models have had
particular success in delivering high growth rates in international markets. Our international brands, including
ebookers, HotelClub and RatesToGo, provide us with growth opportunities outside of the U.S. However,
competitive pressures combined with a weakening global economy have and may continue to negatively
impact the growth of our international brands.
The booking of air travel has become increasingly driven by price. As a result, we believe that OTCs will
continue to focus on differentiating themselves from supplier websites by offering customers the ability to
selectively combine travel products such as air, car, hotel and destination services into dynamic vacation
packages. Through dynamic vacation packages, we are able to make certain products available to our
customers at prices that are generally lower than booking each travel product separately. We foresee significant
growth potential for OTCs for these types of services, particularly given that travelers are increasingly price-
sensitive and suppliers are more dependent on alternative distribution channels in the current economic
environment. Our net revenue per transaction is generally higher for dynamic vacation packages than for
stand-alone travel products.
Some OTCs charge a booking fee in connection with the booking of airline tickets and certain other
travel products. We charge a service fee on many of our websites, and in exchange, provide our customers the
ability to book their travel reservation and access to various services, including our OrbitzTLC customer care
platform and Orbitz Price Assurance. Certain OTCs have reduced or eliminated booking fees on retail airline
tickets and hotel rooms, which has created uncertainty around the sustainability of booking fees. We will
continue to monitor the competitive environment and regularly evaluate our fee structure.
OTCs make significant investments in marketing through both online and traditional offline channels. Key
areas of online marketing include search engine marketing, display advertising, affiliate programs and email
marketing. Online marketing costs have been rising in the U.S. over time, and competition for search-engine
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