Orbitz 2013 Annual Report Download - page 60

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ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
60
because unlike air travel where the reservation is secured by a customer's credit card at booking, car rental bookings and hotel
bookings are not secured by a customer's credit card until the pick-up date and check-in date, respectively. Allowances for
cancelled reservations primarily relate to cancellations that do not occur through our websites, but instead occur directly
through the supplier of the travel product. The amount of the allowance is determined based on our historical experience. The
majority of commissions earned under the retail model are based upon contractual agreements.
Vacation packages offer customers the ability to book a combination of travel products. For example, travel products
booked in a vacation package may include a combination of air travel, hotel and car rental reservations. We recognize net
revenue for the entire package when the customer uses the reservation, which generally occurs on the same day for each travel
product included in the vacation package.
Under both the merchant and retail models, we may, depending upon the brand and the travel product, charge our
customers a service fee for booking their travel reservation. We recognize revenue for service fees at the time we recognize the
net revenue for the corresponding travel product. We also may receive override commissions from suppliers if we meet certain
contractual volume thresholds. These commissions are recognized when the amount of the commissions becomes fixed or
determinable, which is generally upon notification by the respective travel supplier.
We utilize global distribution systems (“GDS”) services provided by Galileo, Worldspan and Amadeus IT Group. Under
our GDS service agreements, we earn revenue in the form of an incentive payment for air, car and hotel segments that are
processed through a GDS. Revenue is recognized for these incentive payments at the time the travel reservation is processed
through the GDS, which is generally at the time of booking.
The Company issues credits in the form of points related to its loyalty programs. The value of points earned by loyalty
program members is included in accrued liabilities and recorded as a reduction of revenue at the time the points are earned,
based on the percentage of points that are projected to be redeemed.
The Company issued credits in the form of loyalty points related to a consumer price protection program. Prior to August
2012 the Company paid cash under this program. The Company reduced revenue when the liability was identified whether paid
in points or cash. In the fourth quarter of 2013, the Company discontinued the program. Also in the fourth quarter of 2013, the
Company determined it had sufficient history to determine the number of points under the program that will not be redeemed
and we recorded an immaterial adjustment to the liability.
We also generate other revenue, which is primarily composed of revenue from advertising, including sponsoring links on
our websites, and travel insurance. Advertising revenue is derived primarily from the delivery of advertisements on our
websites and is recognized either at the time of display of each individual advertisement, or ratably over the advertising
delivery period, depending on the terms of the advertising contract. Revenues generated from sponsoring links are recognized
upon notification from the alliance partner that a transaction has occurred. Travel insurance revenue is recognized when the
reservation is made, secured by a customer with a credit card and we have no further obligations to the customer, which for
travel insurance is at the time of booking.
Cost of Revenue
Cost of revenue is primarily composed of direct costs incurred to generate revenue, including costs to operate our
customer service call centers, credit card processing fees and other costs, which include customer refunds and charge-backs,
connectivity and other processing costs. These costs are generally variable in nature and are primarily driven by transaction
volume.
Marketing Expense
Marketing expense is primarily composed of online marketing costs, such as search and banner advertising and affiliate
commissions, and offline marketing costs, such as television, radio and print advertising. Online advertising expense is
recognized based on the terms of the individual agreements, based on the ratio of actual impressions to contracted impressions,
pay-per-click, or on a straight-line basis over the term of the contract. Offline marketing expense is recognized in the period in
which it is incurred. Our online marketing costs are significantly greater than our offline marketing costs.