Orbitz 2008 Annual Report Download - page 46

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including airlines, hotels and car rental companies, have continued to focus their efforts on direct sale of their products through their own websites, further
promoting the migration of customers to online booking. In the current environment, suppliers' websites are believed to be taking market share domestically from
both online travel companies ("OTCs") and traditional offline travel companies.
Although online travel booking rates continue to grow faster than the travel industry as a whole, we believe that the rate of growth of the domestic market
has slowed as this market has matured. Much of the initial rapid growth experienced in the online travel industry was driven by consumers shifting from
purchasing travel through traditional offline channels to purchasing travel through online channels. Accordingly, we believe that growth rates in the domestic
online travel market may begin to more closely follow the growth rates of the overall travel industry.
Internationally, the online travel industry continues to benefit from rapidly increasing Internet usage and growing acceptance of online booking. We expect
international growth rates for the online travel industry to continue to significantly outpace growth rates of the overall travel industry. As a result, OTCs will
increasingly generate a larger percentage of their growth from outside of the U.S. According to PhoCusWright, in 2007, approximately one third of all travel in
Europe was booked online and about 15% of all travel in Asia was booked online. The hotel-only business models have had particular success in delivering high
growth rates in the international markets. We believe that our international brands, including ebookers, HotelClub and RatesToGo, provide us with substantial
growth opportunities outside of the U.S.
In the U.S., the booking of air travel has become increasingly driven by price. As a result, we believe that OTCs will continue to focus on differentiating
themselves from supplier websites by offering customers the ability to selectively combine travel products such as air, car, hotel and destination services into
dynamic vacation packages. Dynamic packaging and other non-air categories generally have higher margins, and we foresee significant growth potential for
OTCs for these types of services.
OTCs generally charge a booking fee in connection with the booking of airline tickets and certain other travel products. We charge a service fee on many of
our websites and in exchange provide our customers with a set of comparison shopping tools, access to extensive inventory and a wide range of services,
including coverage from our OrbitzTLC customer care platform. Two OTCs have recently eliminated booking fees on retail airline tickets, which has created
uncertainty around the sustainability of booking fees. We will continue to monitor the competitive environment and regularly evaluate our fee structure.
OTCs make significant investments in marketing through both online and traditional offline channels. Key areas of online marketing include search engine
marketing, display advertising, affiliate programs and email marketing. Online marketing costs have been rising in the U.S. over time, and competition for
search-engine key words has intensified in the past year. Increasing competition from supplier websites and the growing significance of search and meta-search
sites has contributed to the increase in online marketing costs. If this trend continues, these rising costs could result in lower margins or declining transaction
growth rates for OTCs. We are actively pursuing tactics to optimize the results of our online marketing efforts by increasing the value from existing traffic and by
acquiring additional traffic that is more targeted and cost effective. These tactics include pay-per-click optimization and search optimization efforts, loyalty
programs and email marketing that targets customers with specific offers that correspond to their particular interests.
Despite the increase in online marketing costs, the continued growth of search and meta-search sites as well as Web 2.0 features creates new opportunities
for OTCs to add value to the customer experience and generate advertising revenue. Web 2.0 is a term used to describe content features such as social networks,
blogs, user reviews, videos and podcasts. We believe that the ability of OTCs to
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Source: Orbitz Worldwide, In, 10-K/A, August 28, 2008