Expedia: Changing Pilots in Mid-Climb

Richard N. Barton was leading a charmed life. At 35, he ran one of the most successful
Web businesses on the planet, online travel agency Expedia Inc. He harbored soaring
ambitions. He saw Expedia taking control of much of the travel business, dictating terms
and prices to airlines and hotel chains alike.

In the past year, he had outmaneuvered none other than consummate dealmaker Barry
Diller, chairman of USA Interactive, a 62% owner of Expedia. When Diller tried to buy the
rest of Expedia, Barton’s board thwarted him. Barton wasn’t yet the king of
travel, but he sure was a powerful prince on the rise.

And yet, as Expedia prepared to announce record sales and earnings for a breakout 2002
on February 5, Barton did something shocking–he quit. The travel industry, which had
come to view the hard-charging Barton as a rising force for years ahead, was left
wondering what happened. Barton, who has joined the board of USA Interactive, isn’t
providing many clues.

He says simply that he, his wife, and children will pursue a more peaceful life for the
next year or two in Italy and France. "The world for me is not necessarily creating
this business," he says.

But sources within both companies say friction between Diller and the young CEO grew as
they battled for control last year.

That tension didn’t evaporate after Barton prevailed. Anything but. It was clear
to people involved that Diller would eventually try again. When Barton quit, he insisted
it was the appeal of free time in Europe that led to his resignation. And Diller angrily
denies that any tension between them led to Barton’s departure, saying: "We
didn’t push him out. Nothing close to it."

Barton leaves behind long-time lieutenant Erik C Blachford as CEO. The genial,
36-year-old Canadian joined Expedia in 1995 and now serves as the company’s president
of Expedia North America. He says he will follow the strategy Barton mapped out, and the
market seems undaunted. After dipping below $56 on February 4, Expedia’s shares are
trading at about $63 thanks to better-than-expected earnings: The company reported 2002
net income of $66 million on revenue of $591 million. Analysts project an 79% jump in
earnings for 2003, to $113 million.

Yet Blachford takes over at a time of nerve-jangling uncertainty. Looming war in the
Middle East could knock whatever stuffing is left out of the beleaguered travel industry.
And online copycats are nipping at Expedia’s heels. What’s more, as Blachford
plows into the corporate market, he’ll face richer and brawnier rivals than the
mom-and-pop travel agencies Barton whipped in the consumer realm. "I think
they’re in for a rude awakening," says Pamela M Arway, American Express
Co’s executive vice-president for business travel.

And it’s not clear what role Chairman Diller will play. Already, he has rankled
Expedia employees by forcing them to accept restricted stock and fewer stock options,
which are potentially more lucrative. Will Blachford be able to stand up to Diller? To
date, he has played the diplomat, smoothing over flaps with airlines and hotel chains
while Barton pushed for industry domination. Blachford insists that "day to day, I
call the shots," though he’ll consult with USAI and collaborate with sister
companies.

Fortunately for Blachford, he’s taking over just as Expedia is hitting its stride.
The company has been thriving even in the midst of a wake-me-when-it’s-over travel
slump. Gross sales grew some 75% last year, to $5 billion. Expedia zoomed past Sabre
Holdings’ Travelocity.com to become No 1 in Web travel. And it’s expanding
rapidly into Europe, which now accounts for 10% of its business. "Expedia is going to
be the biggest travel-distribution brand on the planet," predicts Philip C Wolf,
president of leading travel consulting firm PhoCusWright Inc in Sherman, Conn.

Indeed, the six-year-old company is scaring the daylights out of the rest of the $550
billion travel industry. It is viewed as a fearsome mini-Microsoft Corp. Like Microsoft,
where it was created and which spun it off three years ago, Expedia is throwing its weight
around, demanding better terms from airlines and hoteliers. "Expedia, which is
another word for Microsoft, wants domination," says Samuel L Katz, CEO of the
travel-distribution unit of Cendant, parent of Ramada Franchise Systems, an Expedia
partner. "This is not a culture that divides the world up. It asks: ‘How do we
kill everyone else?’"

While Blachford projects a softer image than Barton, he insists Expedia will stay
aggressive. The next target? Corporate travel, worth $70 billion a year in the US–and
the stomping ground of American Express. Expedia entered the business in November,
capitalizing on easy-to-use, low-cost technology to undercut traditional corporate
travel-services fees by over 75%. Analysts believe Expedia could be a solid No. 2 in the
corporate realm in as little as five years.

Such bullish predictions for Web merchants were common in the go-go ’90s. The idea
was that old-line industries would be ‘Amazoned’–elbowed aside by Net
companies. While it hasn’t happened in most industries, online forces, led by
Expedia, are wreaking havoc in travel. The US online consumer travel market jumped 37%, to
$28 billion, last year, or 15% of the total market, and is on the way to double its share
by 2005, according to PhoCusWright.

Early on, Expedia faced formidable foes. Travelocity Inc and Preview Travel Inc both
launched earlier in 1996 and held the early lead. And while all three services grew fast,
it looked at first as if the airlines would be able to hold them in check. In 1997,
carriers sliced base commissions to online agencies from 10% to 8%–and later cut them
to 5% and then zero. Then they launched their own competing Web site, Orbitz.com.

It wasn’t until Barton broadened Expedia’s offerings beyond airfares to
include hotel rooms that he positioned the company to dominate online travel. Instead of
angling for commissions of 10%, he bought hotel rooms at wholesale prices, marked them up
an average of 26%, and resold them to consumers at attractive prices–the so-called
merchant business.

Getting into hotels helped Expedia trump the airlines. As its audience grew, lured by
hotel deals, Expedia was able to command the lowest airfares, which analysts had expected
to go exclusively to Orbitz. And Expedia has been racing ahead ever since. Travelocity
waited until last year before trying to match Expedia’s hotel strategy, and Orbitz,
late to the market, has been playing catch-up. "We haven’t been very effective
at neutralizing our biggest competitor," concedes Orbitz CEO Jeffrey G Katz.

Expedia’s big leap came just when it looked as if it was heading for deep
trouble–after September 11. Sales had fallen by 65% just after the attacks. Yet
rather than slice spending, as everybody else did, Barton boosted marketing by 56% and
tech research and development by 35% for 2002. Now, just a year later, Expedia is doing
55% more business than Travelocity, and Expedia’s share of the online travel market
has risen to 19%, up from 12% two years ago.

Expedia’s earnings are richer than those of its rivals, too–operating profit
margins are forecast to hit 26% this year. The company’s main online competitors,
Orbitz and Travelocity, don’t break out financials, but Priceline.com, a much smaller
rival, reported a 1% operating profit margin last quarter. Expedia’s fat profits
allow it to undercut online rivals, outspend them for product development, and drive hard
bargains with struggling suppliers.

Expedia aims to gain a similar edge in corporate travel. The initial goal–to win
market share by using technology to lower transaction costs and make travel planning and
expense accounting easier. The first service, aimed at SMEs, charges $5 per Web
reservation plus a $100-per-year membership fee. A second service, expected to be launched
by midyear, targets midsize-to-larger corporations with an array of online and
telephone-agent services that are expected to include most of what companies can get from
the large agencies. Pricing hasn’t been set yet.

If Blachford can establish traction in the corporate business, he could gain the upper
hand over the airlines when it comes to pricing. Bolstered by a large number of corporate
accounts, Expedia would be able to steer more and more business to preferred airlines and
hotel chains. With that clout, Blachford hopes to be able to force the airlines to sell
more seats at wholesale. One early sign that the plan might work: JetBlue Airways Corp,
which isn’t hurting and usually avoids agents, is talking to Expedia about selling
corporate tickets.

Expedia’s suppliers are trying belatedly to blunt its power. This spring, a group
of major hotel chains will relaunch Travelweb.com. But analysts say the site will have to
build a huge audience before it has any clout. What’s more, sites controlled by
suppliers, such as Orbitz, have trouble promoting one brand over another. This dulls their
marketing. For now, the economy seems to be cooperating with Expedia. Trade groups say
demand for trips and hotel rooms won’t pick up much until 2004 at the earliest.
Meanwhile, hotel construction continues apace. That means loads of discounted
rooms–and plenty of leverage for Expedia. If it keeps growing fast over the next
year, analysts say, its customer base could give it lasting clout.

Expedia isn’t likely to become the Microsoft of travel. Not quite. Yet even with
its top brass in turmoil, Expedia is in the pilot’s seat–and no one else in the
travel business will be comfortable for a long time to come.

By Timothy J Mullaney in New York, with Jay Greene
in Seattle in BusinessWeek. Copyright 2003 by The McGraw-Hill Companies, Inc

Why Expedia Scares the Travel Industry

Why Expedia Scares the Travel Industry

Online Travel In the $28 billion market for online leisure and small-biz travel, Expedia is 55% ahead of No.2 Travelocity. Airline-backed No.3 Orbitz lags behind. Expedia is expanding in Europe ahead of US rivals. Corporate Travel Expedia went after the $70 billion market on Nov. 19, undercutting AmEx and others by up to 75%. Demand is shrinking, but online potential is mostly untapped. Rivals are cutting jobs to compete. Hotels Expedia pays wholesale prices for 80% of the rooms it handles. It marks them up an averaage of 26%, rather than taking the usual 10% commission on reservations. That pinches hotelier's profits. Hotel Chains Franchisers such as Best Western fear they'll have to cut fees they get from owners as Expedia supplies more customers. Hotels may channel marketing dollars away from franchisers toward Expedia. Airlines Expedia is pushing a weakened industry to sell it seats at steep discounts, to be marked up and included in vacation packages. Even low-cost, healthy JetBlue is in talks to bundle its tickets with Expedia's packages. Global Distribution Sabre, Galileo, and Worldspan charge airlines $11 to $ 14 per round trip to process transactions. Someday, Expedia may connect directly to airlines, elbowing out these intermediaries.