Travelport's Clarke Grasps Opportunity

Cendant Corp. last month announced the sale of Travelport, whose divisions include Orbitz and the Galileo global distribution system, to private equity firm The Blackstone Group for approximately $4.3 billion. BTN editors Jay Boehmer and David Meyer early last week sat down with Travelport CEO Jeff Clarke—a former Computer Associates and Hewlett-Packard executive, only two months into his new role—to discuss the deal, growth plans and emerging travel distribution models.

BTN: What's the Blackstone transaction status?

Jeff Clarke: We've got to get regulatory approval and the debt has to be raised by Blackstone. It's really the perfunctory closing-the-deal stuff. We're thinking end of August would be great. It may sneak into September, but we don't see any roadblocks.

BTN: Blackstone sometimes buys to sell. How are they characterizing this deal? Will they break out the units and sell them piecemeal?

Clarke: They're definitely aligned with the strategy we have, which is to be the broadest travel distribution company in terms of geography and mix of business. We have the Galileo GDS business, the whole online empire with Orbitz and Cheaptickets and EBookers and we have the wholesale business with Gullivers. If you look at that compared with anybody else, we have the broadest mix of business. On a geographic basis, we are mixed internationally with strong positions in Europe, Asia and the U.S., whereas Sabre is strong in the U.S. but weak internationally. Amadeus is strong internationally but weak in the U.S. Expedia is really online travel only and doesn't have that mix of business. Worldspan is GDS only and doesn't have the mix of business or geography mix. Our strategy in acquiring the companies at Cendant was to build the most diversified and broadest travel distribution company and Blackstone understands that. We expect to build on that.

BTN: Is there more value in keeping everything together?

Clarke: We believe so. Our economics are quite strong: We have $2.5 billion in revenue, $550 million of EBITDA. Blackstone understands that with that kind of cash flow and that kind of profit, you can lever the company and if you execute well there's quite a strong return. And Blackstone has an outstanding record of returns.

BTN: Will Blackstone be hands-off with the management team?

Clarke: Blackstone is known for being a financial sponsor and buying companies with outstanding management teams. We're quite pleased that they have been positive in their interest in retaining and incenting the management team.

BTN: Do you have any cost-cutting initiatives planned at this point?

Clarke: The plans that we've reviewed with all the prospective buyers really were based on strong growth, based on our platform that I described earlier. Because of our strong online position, which is growing faster, and international is growing faster than domestic; we expect most of our profit to go off leverage of growth. That said, you can always run a tighter ship and we'll always be looking for efficiencies and productivity and continuous improvement, but the primary driver of our improvement and profit plans are growth.

BTN: Were any strategic players looking at Cendant, as were financial buyers?

Clarke: There was extraordinary interest from both strategic and financial buyers.

BTN: Can you say if any GDSs were looking at a purchase or vice versa?

Clarke: No. I can't.

BTN: Because you haven't opted for the opt-in model, and because it's the ending of the marketing relationship between American Airlines and Sabre, is there now an opportunity to grow the Galileo business in the United States?

Clarke: I think the Galileo business will continue to grow. The GDS business in the United States is very sticky. People are trained on the GDS and people generally will renew with the GDS. I think renewal rates are in high 90s. The satisfaction from all of the players is relatively high. It's a relatively mature and sticky business. That said, we will take advantage of the opportunities where there is dissatisfaction among the agency or corporate communities, but it's too early to tell on the implications of opt-in. We have been watching it closely and we were disappointed when Sabre took that route. That said, we realize that Sabre has a large marketshare and we're going to watch this closely and make tactical moves. We have to watch and play by the ultimate economics in the industry.

BTN: Sabre has said incentives are going down, while Cendant indicated they've been coming up.

Clarke: It's really on a transaction-by-transaction basis. I wouldn't make generalizations across the entire incentive structure.

BTN: Galileo just signed AA to a new distribution pact. Were the terms similar to their agreement pre-deregulation?

Clarke: We're not going to comment at all on any of the terms.

BTN: It appears that agencies are coming to a similar contract transition time.

Clarke: They're all very staggered. It's not like the airlines, which tend to cluster. The agencies' agreements are much more staggered, so I wouldn't describe it in the same manner. This is, I think, how the industry goes. There's going to be regular renegotiations and regular term expirations, and renewals and so forth. For the agency I wouldn't call this any apex or nadir.

BTN: Are European airlines pressure you to lower their distribution costs?

Clarke: The European markets and the international markets are substantially different for various reasons. The U.S. has become a very homogenous market. It is not unusual for someone in Texas, even though Delta is based in Atlanta, to go to Delta.com. It is not unusual for someone in Chicago, where United is very strong, to go to Southwest.com. The penetration of supplier dot-com sites is stronger in the U.S. because you have a homogenous market. It is still unusual for a person in France to go to Lufthansa.com—not at all uncommon for a Frenchman to travel to Germany, in fact, there is extraordinary cross-traffic. The distribution framework is different in many ways. First of all, online penetration is lower. Second of all, you still have more flagship carriers per country, and less carrier independence across geographic borders, and you also have a stronger travel agency model because of lower online penetration as well as local differences, such as language and, in certain cases still, currency and also lower credit card use. All of those factors allow a distributor to add more value to provide the additional choice to the user. The net-net result is that the market is stronger in Europe. There's better value that the distributor provides, so there is better pricing. There are more choices, there's more travel—there are more people in the continent and the U.K. than there are in the U.S. It is more fragmented. All of those play factors that provide for better economics. There is also—with the exception of the World Cup, which slows down travel—a very strong travel dynamic. There are obviously more vacations, more general travel, and so forth. The international markets and our penetration internationally, where we have a larger international presence than a U.S. presence, bode well for TravelPort. It's a significant differentiator for us.

BTN: Yet, they are talking about GDS deregulation in Europe.

Clarke: They are talking about it many years from now. I think it is a slow process, but, regardless of the regulation, we believe that we will continue to have strong content and the GDS has a very strong role and travel agents will have a strong role in Europe for many, many years to come.

BTN: Has U.S. deregulation opened opportunities to you?

Clarke: The entire industry has adapted to it. Obviously, it has allowed us to work with the airlines to ensure that we get the full content. It has caused good dialogue. Again, I am a strong believer that all distribution partners should want to have full distribution on the GDS. To me, the normal, market economics, the Adam Smith part of this whole equation, regardless of government regulation, should want people to be incented to have distribution. It's a matter of our efficiency, our ability to provide value beyond simply an electronic transaction, and it's a matter of price. Regulated or deregulated, we need to, as a distribution community, provide enough content that all suppliers want to use the GDS.

BTN: Sabre CEO Sam Gilliland said something to the effect that the definition of full content has changed since deregulation. Has it? Is there more or fuller content coming through with these new agreements?

Clarke: All suppliers are setting up staggering levels of content. I think this is differentiation. You start thinking about the decommodification of transport from point A to point B and you want to differentiate your content. One of the key elements to distribution is to have access to all of that content and ideally additional information. Its not necessarily that suppliers are trying to differentiate content in order to reduce distribution costs. They are trying to differentiate content to compete. Part of that requires us to be able to keep our references up to date, to make the GDSs more of a malleable tool, so as you go through you it can see the richer differentiation in your supplier sites. I'm not necessarily sure what Sam meant by his point, but clearly there is an explosion of content that distribution can access now, and that content again can be class fares, can be tiering both within seating or hotel rooms and additional services—whether breakfast is or is not included. There's whole sets of new content that we need to make our tools malleable enough to address, and the consumer can access what exactly fits for them—and do it in a universe where they don't have to go to 15 supplier sites to do it.

BTN: What's going on with Supplier Link? That was a huge factor in the original Orbitz acquisition.

Clarke: There continues to be a significant amount of traffic going through Orbitz. On a technical basis, it continues to work very well. From an economic basis, it continues to be very strong for all parties. No change, no updates from its formation. The whole business is growing and that part is also growing.

BTN: You noted China is particularly ripe for growth. TravelSky dominates China. Is that an entity to work with or against?

Clarke: I believe that every distribution company is having discussions with TravelSky. Having been to China recently, it's fascinating, because when I was in Guangzhou and when you fly in, you see infrastructure that is really multiples of current capacity. They are building the highways, the infrastructure, the airports—clearly in advance of current demand. That will cause current demand, just as, if you build a 12-lane highway, you will very soon see suburbs popping up and people accessing the transportation thoroughfare. It's fascinating. People think Shanghai and Beijing, but when you start going to some of the other cities, they're gigantic, with burgeoning middle classes and great roads. With any country you see growing with high single-digit GDP growth, you're going to see a lot of wealth created, and that wealth will lead to travel.

BTN: In the de-merger, will you lose the connection to the Cendant hotel group?

Clarke: We'll continue to distribute their product quite significantly. However, there's not a corporate tie.

BTN: With Blackstone, you pick up a hotel group, but not the same kind of portfolio.

Clarke: We're a broad-based distributor and having that in the family is always helpful, but the bottom line is that we have a level playing field for all hotels, all potential products or inventory or content that we can deliver. While it's often easy when it's in the same company, the bottom line is, given the breadth of our distribution—we're talking 14,000 online hotels a day, and thousands more GDS hotel bookings a day—you are not going to significantly have your own owned content. It's really a broader game than that.

BTN: Have you had the chance to interact with corporate buyers?

Clarke: Of course.

BTN: In what capacity?

Clarke: Selling. Certainly talking to them about Galileo, talking about Galileo leisure, talking to them about corporate booking tools, talking about travel in general, talking to them about TravelPort and our differentiation. Having been a former CFO and COO of major companies, it's been helpful having been a buyer of these services . Many of these people are people I have sold technology to in the past or bought services from in the past. It's a very comfortable relationship to talk to the C-level executives about our company.

BTN: What are they asking for?

Clarke: More efficiency. Like anyone, they want more efficiency in terms of the booking tool, but what they really want is better information to help them manage travel expenses. Our ability is to provide corporate managed travel with great reporting, compliance information, security as well as efficiency and cost. When people think of travel, they think of the service, but they also think of the cost to serve and the support they get out of it. The focus has been predominately on how do you help me as a partner manage the travel expense rather than per-transaction or booking-fee cost, which I am sure it will ultimately get to in some discussions. But that broader discussion of us as a travel expert providing the best travel experience, is really what we want to do to all our buyers.

BTN: Because of their input, have you put in place any changes?

Clarke: Certainly, on a deal-by-deal basis. We've listened, as you do to all customers, and then modify specific execution on an account and so forth. Having been here two months, I'm not excited to move all the dials at once. You have to listen, and talk to management teams and so forth. I'm learning a lot about corporate needs, a lot of which intuitively—having bought travel coming from the other side—I knew a lot about, with a lot of procurement organizations under me in my prior experiences. That said, the emerging ability of travel distribution, particularly good corporate booking tools to provide very detailed compliance data and managed travel data is much better than it was even a few years ago. Continuing to build out the robustness of that capability is going to be a key priority for us.

BTN: Is traveler tracking something you're continuing to enhance?

Clarke: Absolutely. I think it's here. Part of it is the customization to the existing policies of the corporations. It is really an alignment of our capabilities and our tools with the corporate requirements—the referencing that is required to build it into their systems, their ERP systems or, in some cases, purchasing systems. In a lot of cases, we have a lot of ability and continue to do that, but it is an investment on both sides in order to get to the endpoint.

BTN: Is carbon calculation something Galileo will be delivering in the future?

Clarke: It is certainly something we're looking at. I'm not up to date on all of our offerings, but the environmentally conscious corporation and consumer is going to be a predominant part of travel decision-making. All distribution companies are going to have to provide information on that, and provide alternatives and choices that people are going to want. It is an emerging attribute for travel distribution systems and our industry, and one that is going to be an increasingly interesting buying decision. As corporations go through their tradeoffs, increasingly this is going to be an increased tradeoff, and all distribution will need to meet this new demand.

BTN: Any other online integration that you're looking at including?

Clarke: We're all excited about destination services beyond air, hotel and car rental. Then you start thinking cruise, which is today already a strong offering, and then you start getting into dynamic packaging. With our Gullivers capabilities, we have a unique position of already providing soup-to-nuts packaged group travel. When you think of group travel—which we define as more than nine people on an itinerary—we will often package from Gullivers and these are tens of thousands of trips a year. We will package hotels, transfers, bus tours, entertainment, group restaurants, ticketing for events and so forth. Given that set of relationships and the scale of Gullivers, we believe that we can then expand that inventory and those supplier relationships into broader elements. Ticketing is very interesting, whether it's movies, plays, sporting or music events, it's an interesting offering. There are certain players with large concentrated positions there, which I frankly don't believe are that consumer-friendly. A little more competition and open distribution in those industries would benefit the consumer and the promoter. I define travel distribution as any time you leave the house, so there certainly are many opportunities. The restaurant industry is interesting. I and many other people are strong users of OpenTable and products like that. In the future, automating concierge services and self-concierge is going to be a big part of the industry.

BTN: Can the Gullivers model be applied to corporate meetings?

Clarke: No question. Today, you have large corporations and medium-sized business that manage meetings and they do it really on an ad-hoc basis, as opposed to a managed travel basis—using the leverage that you can use across a broader company that can manage distribution for you. That includes the full extent of those meetings—the dinner or entertainment as well as the classic air , hotel or shuttle services. Today, it is not uncommon to have a 40-person corporate meeting and have 20 different black cars come up from perhaps seven different vendors. Usually, there is one hotel or one meeting room, then multiple dinners, but they are self-booked and there are no economies of scale. There is great savings in that because again, in a corporation, interaction is so critical. As we become more global, you have to meet more. It is a huge opportunity and an untapped one for the distribution industry.