Orbitz 2014 Annual Report Download - page 32

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32
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
EXECUTIVE OVERVIEW
General
As previously noted, the following discussion excludes any impact that may result from the Merger Agreement.
We are a global online travel company that uses innovative technology to enable leisure and business travelers to
research, plan and book a broad range of travel products and services including hotels, flights, vacation packages, car rentals,
cruises, rail tickets, travel insurance, destination services and event tickets. We provide our customers an easy-to-use booking
experience across a wide variety of devices. Our global brand portfolio includes Orbitz.com and CheapTickets in the United
States; ebookers in Europe; and HotelClub which focuses on the Asia Pacific region. We also own and operate Orbitz for
Business, which is a corporate travel management company, and the Orbitz Partner Network, which delivers private label travel
solutions to a broad range of partners.
Industry Trends
Our position in the industry is affected by the industry-wide trends discussed below, as well as a number of factors
specific to our global operations and supplier relationships. In addition, the continuing uncertainty about the state of the global
economy and regional conflicts and the related pressure on consumer spending cause uncertainty and volatility in the travel
market.
Worldwide travel is estimated to be a $1.3 trillion industry in 2014 that has been characterized by rapid and significant
transformation driven by changes in demographic trends, globalization and higher consumer discretionary spending. The travel
industry continues to benefit from increasing internet usage and higher online and mobile booking penetration rates. We compete
in various geographic markets, with our primary markets being the United States, Europe and the Asia Pacific region. Internationally,
approximately one third of travel sales are transacted online and the market is highly fragmented, which represents a significant
opportunity for us. Phocuswright estimates that online travel bookings will grow approximately 11% annually from $402 billion
in 2013 to $492 billion in 2015, with annual growth of approximately 6% in the United States, 8% in Europe and 15% in the Asia
Pacific region. (Phocuswright, Global Online Travel Overview, 3rd ed.).
The online travel industry is highly competitive and competition has intensified in recent years. Airlines and hotels have
increasingly focused on distributing their products through their own websites, and meta-search and travel research sites have
gained in popularity and some of our competitors have acquired or invested in meta-search companies. We have also seen
technology companies, such as Google, increase their interest in online travel.
Intense competition in the travel industry has historically led OTCs and travel suppliers to aggressively spend on online
marketing. Competition for search engine key words continues to be intense as certain OTCs and travel suppliers increase their
marketing spending in this area. Competitive dynamics could cause the cost to acquire traffic to continue to increase.
Over the past few years, fundamentals in the global hotel industry have strengthened. In general, we have seen rising
hotel occupancy rates and higher average daily rates for hotel rooms. In addition, we have seen a shift in the business model
under which some of our competitors make hotel rooms available to consumers. Our hotel business operates predominantly
under the merchant model, however some of our competitors have adopted a retail model, or a model where the traveler can
choose to purchase a hotel room under either a retail or merchant model. This could put pressure on the economics of historical
business models.
Demand in the air travel industry has strengthened over the past few years driven largely by increased corporate travel
demand. The increased corporate travel demand combined with continued discipline by airlines around capacity has resulted in
higher airfares. Higher airfares generally put pressure on leisure travel demand, which represents the majority of air bookings
through OTCs. Further consolidation of the airline industry could put additional pressure on capacity and airfares in the future.
Suppliers continue to look for ways to decrease overall distribution costs, which could significantly reduce the net
revenue OTCs earn from travel and other ancillary travel products. We have encountered, and expect to continue to encounter,
pressure on supplier economics as certain supply agreements are renegotiated. We expect that our shift in mix towards hotels
and dynamic packaging will positively impact our overall transaction economics over time.