Cendant Corp. last week agreed to pay $1.25 billion for Orbitz in a deal likely to close before year-end, bringing Cendant a household name brand in travel distribution as well as management talent and a stronger technology platform for online corporate and leisure travel.
The acquisition gives the giant Parsippany, N.J.-based real estate and travel supplier and distribution company a counterpart to the Travelocity offering of chief rival Sabre, while providing Orbitz access to broader resources and lower hotel and car rates. It also holds Cendant to the long-term contracts that Orbitz had in place with another rival, Worldspan, and with airlines regarding direct connections and commission payments.
"The deal makes sense from a superficial competitive viewpoint, in that it puts Cendant in contention as the number-two online travel company after Expedia," said Norm Rose, president of Travel Tech Consulting. "More importantly, it gives Cendant the capability to move away from mainframe to a modular, distributed processing environment that has lower operating and programming costs."
Early reactions from travel buyers and agents ranged from cautious to enthusiastic as Cendant's expressed intent is to enhance both its Travelport corporate online booking system and the Orbitz For Business product and to run both on the Orbitz platform. Samuel Katz, chairman and CEO of the Cendant Travel Distribution Services Division, said devising a plan for the two businesses presents a fortuitous dilemma. "We have to figure out how to take two businesses with a lot of traction, each with some unique stuff, and put them together on one platform that will create even better products. The buyers will get the chance to have broader offerings and choose the path they want to go down, depending on how much and how they book and manage travel. There are a lot of decisions to be made around that for which, quite frankly, we have got to talk to the customers. So far, it has all been very positive feedback."
All parties to the deal certainly seem happy. Said travel management technology consultant Robert Lichtman of Menlo, Calif.-based Corporate Solutions Group, "Airlines get the cash, which they need desperately, Cendant gets a really good product that has terrific branding, Orbitz gets lower fees and better vendor relationships and Orbitz customers get a more stable environment with the resources of a major travel supplier."
Part of what the deal offers Cendant is a presence in part of the market that it previously has not pursued. "We have not gone after the smaller companies and unmanaged travelers as Orbitz and Orbitz For Business and Expedia have," Katz said. "They have high customer counts and a lot of smaller accounts, although Orbitz also has won some major accounts like McDonald's and Knight-Ridder. So I would say we each have traction. We've just gone at it differently. Now, by coordinating that effort, it will be much more powerful."
Katz noted that Travelport has "a lot of policy and reporting tools because we have a lot of large corporate customers, and we also have a global product, which Orbitz does not have. The other area of Orbitz strength is that it has great customer care, fulfillment and all that infrastructure, and we do a very good job with all those as well, but you sort of have to pick where to go. There are efficiencies you get by having more scale and transaction in those areas, and we're going to organize those around what Orbitz has today.
"They have great management, a very creative group and they get things done quickly," Katz continued. "As good as we feel about what we're doing and as great as we feel about our people, we can't have enough great people."
Orbitz will remain a separate business unit, based in Chicago. Jeffrey Katz, Orbitz chairman, president and CEO, will leave the leadership of the unit in the hands of the existing Orbitz senior management team after a transition period before year-end. "We're pleased that the consumer-friendly and supplier-friendly aspects of the Orbitz model will go forward due to Cendant's agreement to continue providing unbiased fare displays on Orbitz.com and to maintain Orbitz Charter Associate and Supplier Link contracts providing low distribution costs," Jeff Katz said.
Jeff Katz, who is not related to Sam Katz, said the two have known each other for a long time but it was only several weeks ago that "Sam approached us with their substantial interest and idea."
The Orbitz board moved rather quickly on the offer to receive an "attractive premium" as it had been "looking at strategic options for the past three years," Jeff Katz said.
Jeff Katz said initially this acquisition would be transparent to Orbitz corporate customers, but that eventually it would improve choice and product functionality for users of both corporate products. "Our most important mission is to take care of Orbitz For Business and Travelport customers," he said. "This will make both products better and more on target to their needs."
While the Orbitz CEO doesn't yet have an estimate on how or how long it will take to bring Travelport onto the Orbitz platform, "the basics are achievable, there is just a lot of work to do," he said. "We'll get into it reasonably soon, and it will happen quickly."
Both Jeff and Sam Katz stressed how critical Orbitz's customer care is to advancing Cendant's strategy for both brands. What Cendant won't get in the near term is the Orbitz transaction processing business, as Cendant will honor Orbitz's contract with Worldspan through October 2011. Meanwhile, Sam Katz said Orbitz will seek to move as much of that business as possible to Supplier Link. Cendant also will stand by Orbitz's airline commission deal, which is now at $3.89 and will decline to $1.50 over two years. Then it will freeze for another eight years.
"We're committed to keeping Orbitz unbiased and honoring all of those agreements," Cendant's Katz said, "but that's not getting in the way of Orbitz becoming more profitable on selling non-air products and profitable on selling air, because they have a low-cost model and a great brand. Obviously, when you bring people in to buy air tickets and they buy other things, you create more margin."
Asked how the acquisition would affect the Galileo travel agency business, Sam Katz said, "to the extent Orbitz helps us add some more tools and offerings that agencies can use to continue transforming their business, that's going to help the Galileo business. I would almost call this transaction processing for suppliers, because Supplier Link is one economic model and GDS is another. Over time, why this benefits our Galileo or transaction processing business is that we think in the future a supplier is going to choose more carefully who they participate with. By being very large in the direct business on the leisure and corporate side, that's really going to make our transaction processing—whether it's called Galileo or something else—extremely relevant. We'll be able to get the most content and then that content will be available to travel agencies as well."
Orbitz is debt-free and, as of June 30, had approximately $200 million in cash on hand.
American, Continental, Delta, Northwest and United airlines, which founded Orbitz four years ago, made a healthy profit on their initial investment of about $200 million. According to an executive from one of the owner airlines, Orbitz accomplished what it was created to do: help drive down GDS costs and discipline third-party Internet sites.
The acquisition was "not completely surprising," said Ian Wheeler, vice president of marketing for GDS competitor Amadeus. "Cendant has gone through a process of vertical integration, and this is in keeping with that strategy. What is unclear is what this means to the marketplace. Will Orbitz somehow be integrated, or will it continue business as usual? If the Cendant-Orbitz deal goes through, you will see more of these types of deals."