Priceline 2010 Annual Report Download - page 88

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We are dependent on certain suppliers.
Our arrangements with the hotel, airline and rental car suppliers that participate in our system – either
Name Your Own Price® or price-disclosed service – generally do not require them to provide any specific quantity
of hotel room reservations, airline tickets or rental cars, or to make room reservations, tickets or cars available for
any particular route, in any geographic area or at any particular price. During the course of our business, we are in
continuous dialogue with our major suppliers about the nature and extent of their participation in our system. The
significant reduction on the part of any of our major suppliers of their participation in our system for a sustained
period of time or their complete withdrawal could have a material adverse effect on our business, results of
operations and financial condition.
During the recent worldwide recession, the hotel industry experienced a significant decrease in occupancy
rates and ADRs, and an increase in reservation cancellation rates. While lower occupancy rates have historically
resulted in hotel suppliers increasing their distribution of hotel room reservations through third-party intermediaries
such as us, our remuneration for hotel transactions changes proportionately with room price, and therefore, lower
ADRs generally have a negative effect on our hotel business and a negative effect on our gross profit.
In addition, certain hotels have begun initiatives to reduce margins received by third party intermediaries
on retail merchant transactions, which is the primary method we employ to distribute retail hotel room reservations
in the United States. Many hotels distribute room reservations through their own websites and therefore might
increase negotiated rates for merchant rate hotel room reservations sold through our merchant price-disclosed hotel
service, decreasing the margin available to us. While our merchant price-disclosed hotel agreements with our
leading hotel suppliers provide for specified discounts, if one or more participating hotels were to require us to limit
our merchant margins, upon contract renewal or otherwise, it could have an adverse effect on our business, results of
operations and financial condition.
With respect to our airline suppliers, the airline industry has experienced a shift in market share from full-
service carriers to low-cost carriers that focus primarily on discount fares to leisure destinations and we expect this
trend to continue. Some low-cost carriers, such as Southwest, have not historically distributed their tickets through
us or other third-party intermediaries. In addition, certain airlines have significantly limited or eliminated sales of
airline tickets through opaque channels, preferring to consistently show the lowest available price on their own
website. Since the start of the worldwide recession, domestic airline capacity has been significantly reduced, which
reduces the number of airline tickets available to our customers and the amount of discounted airline tickets
available for our Name Your Own Price® business. During 2010, airlines significantly increased their average fares
compared to 2009, which adversely impacts travel demand. Reduced airline capacity and lower travel demand
negatively impact our priceline.com air business, which in turn has negative repercussions on our priceline.com
hotel and rental car businesses, and could have a material adverse effect on our business, results of operations and
financial condition. Conversely, decreased airfares can adversely impact our Name Your Own Price® airline tickets
sales by reducing the amount of absolute dollar savings as compared to retail airline tickets.
We could be adversely affected by changes in the airline industry, and, in many cases, we will have no
control over such changes or their timing. Recently, there has been significant domestic airline industry
consolidation, as evidenced by mergers of United Air Lines with Continental Airlines and Delta Air Lines with
Northwest Airlines, as well as the recently announced future acquisition of AirTran by Southwest Airlines. If one of
our major airline suppliers merges or consolidates with, or is acquired by, another company that either does not
participate in the priceline.com system or that participates on substantially lower levels, the surviving company may
elect not to participate in our system or to participate at lower levels than the previous supplier. For example, in
September 2010, Southwest Airlines announced that it entered into an agreement to acquire AirTran. AirTran has
participated in our Name Your Own Price® system on only a limited basis, but Southwest Airlines has never
participated. In fact, Southwest Airlines does not currently distribute airline tickets through any online travel agent
or permit its fares to appear in comparative fare displays. If AirTran fares are taken out of the online marketplace as
a result of this acquisition, those fares would no longer be available to us. Similarly, United Air Lines has
historically participated in our Name Your Own Price® system at a high level, while Continental Airlines has
historically participated at a much lower level. We cannot predict the effects that the acquisition of AirTran by
Southwest Airlines or the merger of United Air Lines with Continental Airlines will have on our business.
In addition, in the event that one of our major suppliers voluntarily or involuntarily declares bankruptcy and
is subsequently unable to successfully emerge from bankruptcy, and we are unable to replace such supplier, our
business would be adversely affected. For example, in April 2008, Aloha Airlines and ATA Airlines each ceased