Orbitz, the pioneering online ticket site created by a group of five major US airlines as a direct link to consumers, is about to be consumed by travel distribution giant Cendant, parent of the Galileo global distribution system (GDS).
The $1.25 billion takeover of Orbitz should be completed by year-end. The five airlines that own Orbitz will raise cash in the short term. Collectively, American, Continental, Delta, Northwest and United Airlines have a 67% stake in Orbitz even after a partial flotation last year. The airlines founded Orbitz four years ago with an initial investment of about $200 million.
The long-term implications of the deal are widespread, says consultant Richard Eastman. One of the results of the takeover is that Orbitz chairman Jeffrey Katz will leave before year-end.
Cendant, a hotel and car rental franchiser that owns CheapTickets and lodging.com as well as Galileo, stands ready to assert online leadership, taking a controlling position in the direct supplier links that Orbitz created to bypass the GDSs. This positions Cendant to take on IAC/Interactive Corp, parent of Expedia, hotels.com, Hotwire and other online sites. Cendant, which owns Avis, Days Inn, Ramada and other travel brands, is saved the expense of building up a major site with the needed consumer brand awareness.
Expedia is the leading online travel agency with 49% of the US market. Cendant, now the fifth largest, will become number two with 22% after purchasing Orbitz. It will surpass Sabre's Travelocity, according to Legg Mason analyst Thomas Underwood.
Cendant will operate the CheapTickets and Orbitz sites as separate brands, say Cendant officials. In part that is because Orbitz has a long-term contract with independent GDS Worldspan for its transaction processing, although the pact, valid until October 2011, cannot keep Orbitz from moving business to its direct supplier links. Cendant officials say they will maintain and commit to the existing Orbitz airline commission deals, which lower rates to $3.89 and will bring them down to $1.50 over two years.
Cendant says it will commit to keeping Orbitz unbiased, but says the deal will allow Cendant and its travel-agent unit, Travelport, to increase dramatically the volume of combination air/car/lodging or dynamic packaging deals. Cendant has had a limited online presence, with online travel producing less than $200 million in revenue out of its total $10 billion travel segment. Cendant recently said it would divest its mortgage and fleet-leasing units, increasing its need to grow online.
Cendant sees "major prospects for growth" in Europe, where pending transactions involving online distribution sites suggest a major consolidation.
Because of its airline ownership, the creation of Orbitz was hailed as a major transformation in distribution. But rather than reshaping consumer behaviour, it limited third-party internet sites and became a tool in the fight to discipline GDS fees and costs.
DAVID FIELD WASHINGTON
Source: Airline Business
