Expedia 2009 Annual Report Download - page 45

of incremental traffic and transactions through our various media and advertising offerings on both the
TripAdvisor Media Network and on our transaction-based websites. For additional information about our
portfolio of brands, see the disclosure set forth in Part I, Item 1, Business, under the caption “Management
Overview.”
All percentages within this section are calculated on actual, unrounded numbers.
Trends
The travel industry, including offline agencies, online agencies and suppliers of travel products and services,
has been characterized by intense competition, as well as rapid and significant change. In addition, beginning in
late 2008, global economic and financial market conditions worsened markedly, creating uncertainty for travelers
and suppliers. This macroeconomic downturn has pressured discretionary spending on travel and advertising,
with initial weakness in the United States and the United Kingdom markets increasing and spreading to all
geographies. Although recent macroeconomic trends have been generally stable to slightly improving,
unemployment remains at historically high levels and consumer spending remains pressured. As such, our near-
term visibility remains limited.
In late April 2009, the World Health Organization acknowledged an outbreak of swine influenza (“H1N1”),
which was categorized as a pandemic in June 2009, with reported cases in Mexico and eight other countries. In
response, travel advisories were issued by several countries against non-essential travel, primarily to Mexico.
Expedia observed an increase in cancellation activity from both customers traveling to higher risk destinations
and customers in APAC regions, which have a heightened sensitivity to virus risk. However, the pandemic does
not seem to have intensified, and any related cancellation activity has abated.
Airline Sector
The airline sector in particular has historically experienced significant turmoil. U.S. airlines responded to
chronic overcapacity, financial losses and extreme volatility in oil prices by aggressively reducing their cost
structures and seating capacities. Reduced seating capacities are generally negative for Expedia as there is less air
supply available on our websites, and in turn less opportunity to facilitate hotel rooms, car rental and other
services on behalf of air travelers. Most carriers aggressively reduced capacities in 2008 and 2009, and at this
time, plans for re-visiting capacity expansion in 2010 appear to be relatively limited.
In 2008, many carriers raised their per seat yields by increasing fares, assessing fuel surcharges and
increasing the use of a la carte pricing for such items as baggage, food and beverage and preferred seating. To a
large degree, the use of ancillary fees to supplement revenues have remained, and in some cases been expanded.
However, as overall travel demand waned at the end of 2008 and into 2009, carriers began lowering ticket prices
in order to attract more leisure travelers.
Expedia generally favors a low fare environment, as low fares tend to encourage leisure travel, leave more
of the travel budget for hotel spend and because our air revenues are tied principally to ticket volumes, not prices.
Hence, the 2009 fare environment was a favorable one for Expedia, as airfares on tickets sold by Expedia
decreased 15% in 2009. More recently, however, given the stabilization in the macro economy and aggressive
capacity reductions, carriers have been cutting fares less aggressively. In the fourth quarter of 2009, fares were
down just 4%, and our expectations are for fares to begin growing again in 2010.
In addition to capacity and pricing actions, carriers have responded to industry conditions by aggressively
reducing costs in every aspect of their operations, including distribution costs. Prior to 2008, airlines lowered
(and in some cases, eliminated) travel agent commissions and overrides, and increased direct distribution through
their proprietary websites. Carriers also reduced payments to GDS intermediaries, which have historically passed
on a portion of these payments to large travel agents, including Expedia.
In 2009, Expedia.com and other major online travel agencies began offering air tickets to consumers without
an associated online booking fee, matching the airline supplier sites, which also do not charge online booking
fees. Expedia has broadened this fee elimination to many of its international websites, as well as removed most
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