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Expedia couldn’t acquire Travelocity even if it wanted to because it would have triggered an antitrust investigation. The pact marks the obituary of the Travelocity turnaround attempt, and the big winner is Expedia, which gets more volume and EVEN MORE negotiating clout with suppliers. Bad news for hotels.
Within an hour or so of the news that Travelocity was letting Expedia take the reins of its North American websites and supplier relationships, CEOs Carl Sparks of Travelocity and Tom Klein of parent company Sabre were arguing that the deal was the best option given a very rough and tumble competitive space.
In a telephone interview Skift conducted with the two CEOs, Sparks spoke of a “highly competitive” market and the difficulties of differentiating Travelocity from other online travel agencies, as well as presssure from supplier sites and metasearch players, all of which have access to similar content, technology and marketing tools.
With the deal slated to be implemented in 2014, Sparks said Travelocity can move forward without major investments and capital expenditures, and focus on marketing, which is a strength.
“On brand metrics, we punch way above our weight,” Sparks said.
“There will be significant changes to our North America organization,” Sparks said, adding “we will be a small organization.”
Expedia is Easy to Talk To
Tom Klein, the newly appointed CEO Sabre, said Expedia is one of Sabre’s largest global distribution system customers.
“Clearly, some of those relationships made talking about an innovative structure easier,” said Klein, who declined to speculate about how the deal may fit into the industry’s worst-kept secret, a potential Sabre IPO.
Neither Klein nor Sparks would reveal how many people Travelocity employs as severe job cuts loom. Klein noted that Sabre as a whole has more than 10,000 employees.
“Sometimes you have to take a step back to keep things moving forward again,” Klein said.
Sparks said Travelocity’s revenue is strong — meaning the bottom line likely isn’t — and argued that this “is a smart deal no matter what your parent company was planning.”
Neither CEO would provide details on the economics of the agreement, which provides Travelocity with performance-based payments flowing out of transactions powered by Expedia on the Travelocity brand’s North America websites.
About a provision that could have Expedia acquiring certain Travelocity assets at some point in future, Klein didn’t provide any detail, saying such language is customary in such agreements to paint end-game scenarios.
Sabre and Travelocity clearly see their lastminute.com unit in Europe as a more valuable piece of the puzzle, and perhaps Sabre could sell it in the near future. It certainly doesn’t fit in with what is shaping as part of Sabre’s core business. And Sabre has been shedding noncore assets, including Zuji, Holiday Autos and Travelocity Business over the last year.
Travelocity Desperately Needed a Change
One person who was upbeat about the deal and candid about Travelocity’s recent performance was Terry Jones, who founded the company as part of Sabre in 1996 and stayed on until May 2002. Most recently Jones was on the Kayak board until it was sold to Priceline.
“Although the numbers haven’t been made public, it’s pretty clear that there hasn’t been growth at Travelocity for a long time,” Jones said.
Jones said he didn’t anticipate this move and thought Travelocity might have been sold “or bought something” instead.
“This is not the way I thought the chips would have fallen,” Jones said.
The big winner in all this is Expedia, Jones said, because Expedia will be able to negotiate better supplier deals and lower its unit costs.
Such a marketing arrangement between Travelocity and Expedia is probably the closest deal that could have been forged between the two without triggering antitrust concerns, he said.
Jones isn’t writing Travelocity off just yet, saying it all depends what kind of strategy it develops under the new structure as essentially being an extension of Expedia.
“Travelocity’s brand recognition is still quite good and its brand qualities are still good,” Jones said. “I don’t think the consumer will know the difference and I expect perhaps they will get better product than Travelocity could get by itself.”
In that regard, a lot will utlimately depend not on whether the agreement is good or bad for Travelocity and/or Expedia, but how it will impact customers, Jones said.
Said Jones: “This move is a radical change and Travelocity certainly needed a change.”