Orbitz 2011 Annual Report Download - page 7

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from suppliers after the customer uses the travel reservation. We may, depending upon the brand and the product, earn revenue
by charging customers a service fee for booking their travel reservation. Generally, our net revenue per transaction is lower
under the retail model compared with the merchant model. However, airline tickets booked under the retail model contribute
substantially to our overall gross bookings and net revenue due to the high volume of airline tickets booked on our websites.
We recognize net revenue under the retail model when the reservation is made, secured by a customer with a credit card and we
have no further obligations to the customer. For air transactions, this is at the time of booking. For hotel transactions and car
transactions, net revenue is recognized at the time of check-in or customer pick-up, respectively, net of an allowance for
cancelled reservations. In the retail model, we do not take on credit risk with the customer; we are not the primary obligor with
the customer; we have no latitude in determining pricing; we take no inventory risk; we have no ability to determine or change
the products or services delivered; and the customer chooses the supplier.
Global Distribution Systems and Supplier Relationships
Global Distribution Systems
Global distribution systems (“GDSs”) provide us access to a comprehensive set of supplier content through a single
source. Suppliers, such as airlines and hotels, utilize GDSs to connect their product and service offerings with travel providers,
who in turn make these products and services available to travelers for booking. Certain of our businesses utilize GDS services
provided by Galileo, Worldspan and Amadeus IT Group (“Amadeus”). Under our GDS service agreements, we receive revenue
in the form of an incentive payment for air, car and hotel segments that are processed through a GDS.
Galileo and Worldspan are subsidiaries of Travelport, and we have an agreement with Travelport that covers the GDS
services provided by both Galileo and Worldspan. This agreement contains volume requirements for the number of segments
that we must process through Galileo and Worldspan and requires us to make shortfall payments if we do not process the
required minimum number of segments for a given year. As a result, a significant portion of our GDS services are provided by
Travelport GDSs. For the year ended December 31, 2011, we recognized $111.5 million of incentive revenue for segments
processed through Galileo and Worldspan, which accounted for more than 10% of our total net revenue.
Supplier Relationships
We work with our suppliers to provide our customers with a broad and deep range of highly competitive travel products
and services on our websites. We have teams that manage relationships and negotiate agreements with our suppliers. These
agreements generally cover access to the supplier's travel inventory as well as payment for our services. Our teams cover air,
hotel, car rental, cruise, travel insurance and destination services suppliers. Our teams focus on managing relationships,
obtaining supplier-sponsored promotions and negotiating contracts.
For hotels, we are focused on offering our customers the ability to book the most relevant hotels at the most competitive
prices. To do this, we are focused on improving our infrastructure to ensure we have appropriate connectivity with our
suppliers, sophisticated sort order algorithms and robust promotional capabilities. We have a global hotel services team that
works closely with chains and independent hotels to increase the number of properties that participate on our websites and
works with hotels to ensure that our customers have access to their best available prices.
For airlines, we have long-standing and, we believe, generally good relationships with our suppliers. The airlines,
however, continue to look for ways to decrease their overall costs, including the cost of distributing airline tickets through
OTCs and GDSs, and to increase their control over distribution by taking actions such as pursuing direct-connect strategies,
limiting forward distribution of their fares to meta-search providers, such as Kayak, and limiting the extent to which certain
fare classes may be used in the construction of multi-carrier itineraries. To date, our economics under the terms of our air
agreements have generally been stable. In February 2012, we signed a multi-year marketing and distribution agreement with
United Airlines that gives Orbitz.com, CheapTickets and Orbitz for Business customers access to all United and Continental
fares, schedules and inventory. However, in December 2010, American Airlines (“AA”) removed its content from our websites
in connection with its pursuit of a direct-connect relationship with us. In June 2011, as a result of a favorable ruling in
litigation, AA's content was reinstated on our websites. In the third quarter of 2011, we and our GDS partner, Travelport, agreed
with AA to keep AA's content on our websites until March 31, 2012, and in March 2012, we entered into a Letter Agreement
with AA pursuant to which AA agreed to keep its content on our websites until October 31, 2012. To the extent we are unable to
reach an acceptable longer-term commercial arrangement with AA or if the economics of our arrangements with other airlines
deteriorate, in the long term, our business, financial condition and results of operations will be adversely affected, potentially
materially. We intend to continue to work with our suppliers, including AA, to provide our customers with a highly competitive
product offering.