Orbitz 2011 Annual Report Download - page 62

ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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and a decrease to the accrued merchant payable.
Under the retail model, we pass reservations booked by our customers to the travel supplier for a commission. In the
retail model, we do not take on credit risk with the customer; we are not the primary obligor with the customer; we have no
latitude in determining pricing; we take no inventory risk; we have no ability to determine or change the products or services
delivered; and the customer chooses the supplier.
We recognize net revenue under the retail model when the reservation is made, secured by a customer with a credit card
and we have no further obligations to the customer. For air transactions, this is at the time of booking. For hotel transactions
and car transactions, net revenue is recognized at the time of check-in or customer pick-up, respectively, net of an allowance for
cancelled reservations. The timing of recognition is different for retail hotel and retail car transactions than for retail air travel
because unlike air travel where the reservation is secured by a customer's credit card at booking, car rental bookings and hotel
bookings are not secured by a customer's credit card until the pick-up date and check-in date, respectively. Allowances for
cancelled reservations primarily relate to cancellations that do not occur through our websites, but instead occur directly
through the supplier of the travel product. The amount of the allowance is determined based on our historical experience. The
majority of commissions earned under the retail model are based upon contractual agreements.
Vacation packages offer customers the ability to book a combination of travel products. For example, travel products
booked in a vacation package may include a combination of air travel, hotel and car rental reservations. We recognize net
revenue for the entire package when the customer uses the reservation, which generally occurs on the same day for each travel
product included in the vacation package.
Under both the merchant and retail models, we may, depending upon the brand and the travel product, charge our
customers a service fee for booking their travel reservation. We recognize revenue for service fees at the time we recognize the
net revenue for the corresponding travel product. We also may receive override commissions from suppliers if we meet certain
contractual volume thresholds. These commissions are recognized when the amount of the commissions becomes fixed or
determinable, which is generally upon notification by the respective travel supplier.
We utilize global distribution systems (“GDS”) services provided by Galileo, Worldspan and Amadeus IT Group. Under
our GDS service agreements, we earn revenue in the form of an incentive payment for air, car and hotel segments that are
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 are recognized
upon notification from the alliance partner that a transaction has occurred. Travel insurance revenue is recognized when the
reservation is made, secured by a customer with a credit card and we have no further obligations to the customer, which for
travel insurance is at the time of booking.
Cost of Revenue
Cost of revenue is primarily comprised of direct costs incurred to generate revenue, including costs to operate our
customer service call centers, credit card processing fees and other costs, which include customer refunds and charge-backs,
hosting costs and connectivity and other processing costs. These costs are generally variable in nature and are primarily driven
by transaction volume.
Marketing Expense
Marketing expense is primarily comprised of online marketing costs, such as search and banner advertising and affiliate
commissions, and offline marketing costs, such as television, radio and print advertising. Online advertising expense is
recognized based on the terms of the individual agreements, which are generally over the ratio of the number of impressions
delivered over the total number of contracted impressions, or pay-per-click, or on a straight-line basis over the term of the
contract. Offline marketing expense is recognized in the period in which it is incurred. Our online marketing costs are
significantly greater than our offline marketing costs.