Why Expedia Will Eventually Acquire Travelocity Outright

Expedia Inc. reported its first quarter results and outlined the positive impact of its new Travelocity partnership on air ticket and room night growth, but Expedia essentially finds itself in an untenable position over the long term, and will likely end up acquiring Travelocity outright at some point.

Travelocity.com, the U.S. site, was migrated to the Expedia technology platform in the first quarter, and Travelocity.ca, the Canadian site, did likewise this week.

Expedia reported that the Travelocity partnership contributed 18 percentage points to Expedia's air ticket growth in the first quarter, and Travelocity also chipped in 3 percentage points to Expedia's 24% hotel room-night growth.

But, as Expedia ramps up the Travelocity partnership in North America, and optimizes it, one of its big problems is that the partnership's success is largely dependent on how much Travelocity decides to market its North America sites, and Expedia officials said they have little visibility into Travelocity's marketing efforts and strategy.

Expedia CEO Dara Khosrowshahi said during the company's first quarter earnings call May 1 that Travelocity remains independent of Expedia, and Expedia only feels the impact of Travelocity's marketing spend after the fact.

"So we have very little visibility into their marketing strategy," Khosrowshahi said.

At this juncture, Travelocity and Expedia probably can't cooperate more openly because of antitrust-related issues, and that contributes to the inefficiencies.

Expedia, which has an option to acquire Travelocity at fair market value as part of their partnership agreement, clearly intends to leverage everything it can out of the relationship.

Expedia's Big Plans in Advertising and Media

For example, in the first quarter Expedia's high-margin advertising and media business increased revenue 116%, and it now accounts for 8% of Expedia's total global revenue.

Much of that advertising and media revenue growth was driven by an 80% revenue increase at Expedia's Trivago unit in Germany, but Khosrowshahi said plans call for ramping up media sales on Travelocity's North America sites, as well.

Assuming Expedia and Travelocity parent Sabre can resolve any antitrust issues and the partnership proceeds at an upward trajectory, it makes total sense for Expedia to acquire Travelocity outright so Expedia can essentially control its own destiny and not be subject to Travelocity's whims and considerations.

Selling Travelocity, which is definitely no longer a core asset for Sabre, at a fair market value would likely be attractive to Sabre's shareholders, as well.

Meanwhile, despite the financial losses Travelocity piled up as it fell further behind the competition over the years, it still has a positive brand reputation as evidenced this week by the fact that Travelocity received the top customer satisfaction scores among online travel agencies in a J.D. Power consumer survey.

Travelocity scored higher marks than Expedia -- and everyone else.

Diversifying Into Vacation Rentals

In other Expedia news, Khosrowshahi said the company is "very hopeful" about a beta under way where HomeAway markets its vacation rentals through Expedia.com, although both parties have a lot of tech work to do as only a minority of HomeAway's properties are distribution-ready.

Khosrowshahi said Expedia has seen little pushback from hotels or regulatory authorities about its HomeAway marketing partnership. He added that HomeAway is older than Airbnb, and HomeAway has its "regulatory marks right on target."

Hotwire and Mobile Trends

Expedia Inc. officials said its Hotwire unit continues to under-perform, is investing aggressively in mobile, and should stabilize later in 2014.

That being said, Expedia CFO Mark Okerstrom said the company doesn't expect Hotwire to contribute to earnings in 2014.

Speaking of mobile, Khosrowshahi said about 30% of Hotwire's bookings are transacted on mobile devices, and its about 20% at other Expedia Inc. brands engaged in mobile.

The handset continues to drive primarily last-minute bookings, Khosrowshahi said, while the pattern on tablets resembles desktops, and isn't heavily for last-minute stays.