Expedia 2006 Annual Report Download - page 36

The need to rationalize high fixed cost structures to better compete with low cost carriers offering “no
frills” flights at discounted prices, as well as jet fuel inflation have caused the airlines to recently consider a
series of merger opportunities to better share fixed costs and reduce redundant flight routes. In addition,
carriers have aggressively pursued cost reductions in every aspect of their operations. These cost reduction
efforts include distribution costs, which the airlines have pursued by increasing direct distribution through their
proprietary websites, as well as seeking to reduce travel agent commissions and overrides. The airlines have
also generally successfully reduced their fees with the GDS intermediaries as their contracts with the GDSs
expired in mid to late 2006. These reductions impacted offline and online travel agents as large agencies,
including Expedia, have historically received a meaningful portion of their air remuneration from GDS
providers.
In addition, the U.S. airline industry has experienced increased load factors and ticket prices. At the same
time, the airline carriers which participate in the Expedia marketplace have been reducing their relative flight
capacities; while the lower cost carriers that are largely replacing this capacity generally do not currently
participate in the Expedia marketplace. These trends have affected our ability to obtain inventory in our
agency and merchant air businesses, reduced discounts for merchant air tickets and limited supply of merchant
air tickets for use in our package travel offerings.
As a result of these industry dynamics and reduced economics stemming from recently negotiated GDS
and airline agreements, Expedia’s air revenue per ticket has declined significantly since the fourth quarter of
2004, and we anticipate it will continue to decline further in 2007.
The hotel sector has recently been characterized by robust demand and constrained supply, resulting in
increasing occupancy rates and average daily rates (“ADR”). Industry experts expect demand growth to
continue to outstrip supply through at least 2007. While increasing ADRs generally have a positive effect on
our merchant hotel operations as our remuneration increases proportionally with the room price, higher ADRs
can impact underlying demand, and higher occupancies can restrict our ability to obtain merchant hotel room
allocation, particularly in high occupancy destinations popular with our travel base, including Orlando, Las
Vegas and New York. Higher occupancies also have historically tended to drive lower margins as hotel room
suppliers have less need for third-party intermediaries to meet demand. A large number of our contracts with
major chain hotel operators are scheduled for renewal in 2007.
Increased usage and familiarity with the internet has driven rapid growth in online penetration of travel
expenditures. According to PhoCusWright, an independent travel, tourism and hospitality research firm, in
2006 49% of leisure, unmanaged and corporate travel expenditures occurred online in the United States,
compared with 22% of European travel and 12% in the Asia Pacific region. These penetration rates have
increased considerably over the past few years, and are expected to continue growing.
In addition to the growth of online travel agencies, airlines and lodging companies have aggressively
pursued direct online distribution of their products and services over the last several years, with supplier
growth outpacing online growth since 2002. Differentiation among the various website offerings have narrowed
in the past several years, and the travel landscape has grown extremely competitive, with the need for
competitors to generally differentiate their offerings on a feature other than price.
Strategy
We play a fundamental role in facilitating travel, whether for leisure or business. We are committed to
providing our travelers with the best set of resources to serve their travel needs by taking advantage of our
critical assets — our brand portfolio, our technologies and continuous innovation, our global reach, and our
breadth of product offering. In doing so, we take advantage of our growing base of knowledge about our
destinations, suppliers and travelers based on our unique position in the travel value chain.
A discussion of the critical assets that we leverage in achieving our business strategy follows:
Portfolio of Travel Brands. We seek to appeal to the broadest possible range of travelers and suppliers
through our collection of industry-leading brands. We target several different demographics, from the value-
conscious traveler through our Hotwire brand to luxury travelers seeking a high-touch, customized vacation
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