Priceline 2010 Annual Report Download - page 103

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Our business is exposed to risks associated with credit card fraud and chargebacks.
Our results have been negatively impacted by purchases made using fraudulent credit cards. Because we
act as the merchant-of-record in a majority of our priceline.com transactions as well as those of Agoda and
TravelJigsaw, we may be held liable for accepting fraudulent credit cards on our websites as well as other payment
disputes with our customers. Additionally, we are held liable for accepting fraudulent credit cards in certain retail
transactions when we do not act as merchant of record. Accordingly, we calculate and record an allowance for the
resulting credit card chargebacks. If we are unable to combat the use of fraudulent credit cards on our websites, our
business, results of operations and financial condition could be materially adversely affected.
In addition, in the event that one of our major suppliers voluntarily or involuntarily declares bankruptcy, we
could experience an increase in credit card chargebacks from customers with travel reservations with such supplier.
For example, airlines that participate in our system and declare bankruptcy or cease operations may be unable or
unwilling to honor tickets sold for their flights. Our policy in such event is to direct customers seeking a refund or
exchange to the airline, and not to provide a remedy ourselves. Because we are the merchant-of-record on sales of
Name Your Own Price® airline tickets to our customers, however, we could experience a significant increase in
demands for refunds or credit card chargebacks from customers, which could materially adversely affect our
operations and financial results. For example, in April 2008, Aloha Airlines and ATA Airlines each ceased
operations and we experienced an increase in credit card chargebacks from customers with tickets on those airlines.
The unit profitability of certain of our businesses has declined and could continue to decline, as we may be
subject to, among other things, competitive pressure and loss or reduction of global distribution system fees.
In recent years, the amount of profit we make per airline ticket sold has declined and could continue to
decline as we, among other things, experience pressure from suppliers to reduce our profit, strive to remain
competitive with other online travel agencies and continue to be subject to reduction of global distribution system,
or GDS, fees paid to us. Historically, we have relied on fees paid to us by GDSs for travel bookings made through
GDSs for a portion of our gross profit and a substantial portion of our operating income. We rebate certain GDS
costs to certain suppliers (e.g., airlines, hotels, etc.) in exchange for contractual considerations such as those relating
to pricing and availability, and expect to continue to do so in the future. Suppliers put pressure on us to reduce our
aggregate compensation and book through lower cost channels to receive full content and avoid penalties. We have
agreements with a number of suppliers to obtain access to content, and are in continuing discussions with others to
obtain similar access. If we were denied access to full content or had to impose service fees on our services, it could
have a material adverse effect on our business, results of operations and financial condition.
Additionally, some travel suppliers are encouraging third-party travel intermediaries, such as us, to develop
technology to bypass the traditional GDSs, such as enabling direct connections to the travel suppliers or using
alternative global distribution methods. For example, in December 2010, American Airlines terminated its
participation in the Orbitz service and withdrew its fares from the Orbitz website. This is consistent with an effort
on the part of American Airlines, and the airline industry in general, to reduce distribution costs. American Airlines’
termination of its distribution arrangement with Orbitz could be indicative of the airlines in general becoming more
aggressive toward requiring online travel agents to implement direct connections. In addition, in December 2010,
Expedia preemptively removed American Airlines flights from its site as its contract with American was set to
expire on December 31, 2010. It is feasible that a dispute between an airline and a GDS could lead to an airline
removing its fares from the GDS. Despite the fact that such a dispute may not involve us, our business could be
adversely affected if we are denied access to airfares in a major GDS. During 2010, we implemented a direct
connection with American Airlines. Development and implementation of the technology to enable additional direct
connections to travel suppliers could cause us to incur additional operating expenses, increase the
frequency/duration of system problems and delay other projects. In addition, any additional migration toward direct
connections would reduce the compensation we receive from GDSs.
We are party to legal proceedings which, if adversely decided, could materially adversely affect us.
We are a party to the legal proceedings described in Item 3 and Note 16 to the Consolidated Financial
Statements. The defense of the actions described in Item 3 and Note 16 may increase our expenses and an adverse
outcome in any of such actions could have a material adverse effect on our business and results of operations.