Orbitz 2010 Annual Report Download - page 53

December 31, 2009 and December 31, 2008, there were $59 million and $67 million of outstanding letters of
credit issued by Travelport on our behalf, respectively, pursuant to the Separation Agreement, as amended, that
we entered into with Travelport in connection with the IPO (the “Separation Agreement”). Under the
Separation Agreement, Travelport has agreed to issue U.S. Dollar denominated letters of credit on our behalf
in an aggregate amount not to exceed $75 million through at least March 31, 2010 and thereafter so long as
Travelport and its affiliates (as defined in the Separation Agreement) own at least 50% of our voting stock.
In addition, at December 31, 2009, there was the equivalent of $5 million of outstanding letters of credit
issued under our revolving credit facility, which were denominated in Pounds Sterling. There were no
outstanding letters of credit issued under our revolving credit facility at December 31, 2008. The amount of
letters of credit issued under our revolving credit facility reduces the amount available to us for borrowings.
In January 2010, certain regulatory requirements required us to provide additional letters of credit of
$16 million, $11 million of which were denominated in U.S. Dollars and issued by Travelport on our behalf
and the equivalent of $5 million of which were denominated in Pounds Sterling and issued under our revolving
credit facility.
Under our merchant model, customers generally pay us for reservations at the time of booking, and we
pay our suppliers at a later date, which is generally after the customer uses the reservation. Initially, we record
these customer receipts as accrued merchant payables and either deferred income or net revenue, depending on
the travel product. We generally recognize net revenue when the customer uses the reservation, and we pay
our suppliers once we have received an invoice, which typically ranges from one to sixty days after the
customer uses the reservation. The timing difference between when cash is collected from our customers and
when payments are made to our suppliers improves our operating cash flow and represents a source of
liquidity for us. If our merchant model gross bookings increase, we would expect our operating cash flow to
increase. Conversely, if our merchant model gross bookings decline or there are changes to the model which
reduce the time between the receipt of cash from our customers and payments to suppliers, we would expect
our operating cash flow to decline.
Historically, under both our merchant and retail models, we charged customers a service fee for booking
airline tickets, hotel stays and certain other travel products on our websites, and cash generated by these
booking fees represented a significant portion of our operating cash flow and a source of liquidity for us. In
2009, we removed booking fees on most flights booked through Orbitz.com and CheapTickets.com, and we
significantly reduced booking fees on all hotel stays booked through Orbitz.com and CheapTickets.com. The
combination of our cost reductions, our improved marketing efficiency and the increase in air transactions we
have experienced since removing fees enabled us to offset most, if not all, of the decrease in our operating
cash flow and liquidity due to lower booking fees. If we are unable to effectively continue to offset the impact
of the booking fee reductions, our cash flow and liquidity could be materially reduced.
Seasonal fluctuations in our business also affect the timing of our cash flows. Gross bookings are
generally highest in the first half of the year as customers plan and purchase their spring and summer
vacations. As a result, our cash receipts are generally highest in the first half of the year. We generally have
net cash outflows during the second half of the year since cash payments to suppliers typically exceed the
cash inflows from new merchant booking reservations. While we expect this seasonal cash flow pattern to
continue, changes in our business model could affect the seasonal nature of our cash flows.
In 2009, in light of concerns about the financial industry and in order to ensure availability of liquidity,
we borrowed $63 million under our revolving credit facility, which increased our cash position throughout
year. We repaid $21 million of these borrowings during the fourth quarter of 2009 and repaid the remaining
borrowings during the first quarter of 2010.
On January 26, 2010, we completed two transactions that improved our overall liquidity and financial
position. In the first transaction, PAR Investment Partners L.P. (“PAR”) exchanged $50 million principal
amount of term loans under our senior secured credit agreement for 8,141,402 shares of our common stock.
We immediately retired the term loans received from PAR in accordance with the amendment to the credit
agreement that we entered into with our lenders in June 2009. As a result, the amount outstanding on the
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