United and Expedia Group’s distribution agreement expires at the end of September. In the run-up to that deadline, the two companies have been battling it out in court — and in the court of investor and analyst opinion — during their respective earnings calls.
In one such discussion with financial analysts Thursday, Expedia Group CEO Mark Okerstrom said he “would find it completely bewildering if United decided not to engage in that discussion,” meaning talks to see how each party could be mutually beneficial to one another.
“I think we’re about five months out from contract expiration,” Okerstrom said. “We’ve always been very excited about having this type of discussion with United. But listen, at the end of the day, this is a platform. It has market-level economics. And to the extent that United, for whatever reason, decides to go [in] a different direction, no one of our carriers represents more than 1 percent of our revenue.”
Despite the relatively modest revenue hit that Expedia might be subject to if it were no longer offering United flights on its sites, one has to wonder whether consumers, knowing that Expedia doesn’t have airfares from one of the world’s largest airlines, might go elsewhere for trip planning.
United reacted to Okerstrom’s comments:
“The sentiments expressed by Expedia today stand in stark contrast to its actions over the past years in its dealings with United,” the airline stated. “Expedia has refused to engage in any substantive discussions with United about a future relationship, leaving us no choice but to move on with partners who truly value collaboration. It is unfortunate that Expedia chose to attempt legal action rather than productive discussions, but we were gratified by the favorable ruling we received which allows us to protect our customers from disservice. We continue to prepare for United’s relationship with Expedia to end.”
[See the full text of Okerstrom’s remarks below.]
FIGURatively Scratching His Head
Okerstrom sounded fairly incredulous about the prospect of United not wanting to reach a deal.
“But at the end of the day, they’ve got to make their choice, and we will just move on,” he said. “And I think United’s competitors would be very happy with the outcome. But I think it will be value distractive to both of us, and that’s not the place where we particularly want to end up. And I suspect that they really, in their heart of hearts, probably don’t want to end up there, either.”
From United’s perspective, it might argue that the time is right for a new era in airline-online travel agency relationships. Big hotel chains are attracting plenty of direct bookings so United likewise may be well-equipped to go in that direction.
During United’s first quarter earnings discussion on April 17, Chief Commercial Officer Andrew Nocella put it this way: “This is time to change. Companies need to evolve and innovate, and we here at United changed a lot. We have invested in our own website and our app and continue to develop much more cost-effective and transparent and optimal sales abilities to distribute our content.”
Now the question is whether this is United posturing to gain competitive advantage in contract talks or whether a new era in airline distribution begins October 1.
Here are Okerstrom’s full remarks about United and Expedia’s airline relationships from Thursday’s earnings call:
“Honestly, that is probably where the majority of our U.S. carriers are at — are, including the big ones, the competitors of United. And to give you a sense of the breadth of places where we are working together, if you look at the traditional distribution business, the ticketing business, that has evolved significantly over the course of the last five years. Not only are we significantly larger than we’ve ever been, we’ve got huge audiences in the hundreds of millions of visitors and customers that we can showcase brands to and showcase products to. But increasingly, it’s become a very cost-efficient channel as consumer credit card fraud has become an issue, as automation and customer services become an issue. And if you look at our major carriers, in many cases, we are driving billions and billions and billions and billions of dollars of revenue for them at the same time as doing it with lower broadcast in fact on fraud protection, we’re covering that for our partners for customer service. We’re covering that for our partners. And that can add up to tens, if not, more than that millions of dollars per carrier. We also have great partners like American Airlines, where we’re working on ways to actually help them reduce their customer service cost.
“And again, this is just kind of the beginning of things. We’re also working with again American Airlines on thinking about ways where we can be creative around upselling from economy or basic economy up until higher fare classes. But if you look across Expedia Group, there is more. We’ve got our strategic partners are using our advertising platform to target specific customers, to showcase the unique differentiators that each of our carriers bring to bear. Air Canada has done some really incredible things on this front in conjunction with our EMS or Expedia Media Solutions team. Our Expedia Partner Solutions business drives the hotel portion of many, if not most of the major carriers dot-com, including providing them with packaging technology.
“That’s been really an area of value creation. And our Egencia business, fourth largest corporate travel business in the world, has got preferred relationships with the likes of Delta, who’s doing some super-creative things around status matching, targeting meetings business and being part of a preferred program.
“The other new thing I would say is over the last year or so, as we transitioned really into more of a platform company, we found new ways to use our real-time review data to help our airline partners understand how they compare with their peers on customer service items. Things like check-in experience, in-flight experience, in-flight entertainment, all of these things and enable our partners to drill down literally to the root level and understand how they’re performing versus their peers. We’ve also started working with partners to help provide them with some of our forward-looking demand data for revenue management.
“And I think, honestly, we’re just getting started. So I think when you look at all of that and you think about what our more sophisticated players are doing in the airline space, I just think there’s tons of opportunity for us to create value with United with all of our other carriers. I think we’re about five months out from contract expiration. We’ve always been very excited about having this type of discussion with United. But listen, at the end of the day, this is a platform. It has market-level economics. And to the extent that United, for whatever reason, decides to go a different direction, no one of our carriers represents more than 1 percent of our revenue. We’ve got very strong relationships with our leading carriers in the U.S.
“Our customers shop at Expedia because they’re largely carrier agnostic and certainly, we have a lot of experience with what happens when we have certain … or not. So — but when I look at the value that can be created by expanding the pie as opposed to focusing on dividing it, I think for both strategic and economic reasons, I would find it completely bewildering if United decided to not engage in that discussion. But at the end of the day, they’ve got to make their choice and we will just move on. And I think United’s competitors would be very happy with the outcome. But I think it will be value-distractive to both of us, and that’s not the place where we particularly want to end up. And I suspect that they really, in their heart of hearts, probably don’t want to end up there, either.”