After a spate of strategic alliances in the online travel sector, the recent strategic marketing agreement featuring Expedia Inc. and Travelocity has given a new twist to the idea of value-creation.

There are several aspects of this deal, which will see Travelocity’s North American websites will be powered by Expedia’s technology, customer services and supply, that are worth exploring. For instance, will Expedia at some point acquire Travelocity? Can any other firm now acquire a stake in Travelocity? And what about Travelocity’s IPO?

EyeforTravel’s Ritesh Gupta explores this agreement with Lincoln Merrihew, VP, Transportation at the research firm Millward Brown Digital.

EFT: How would you describe the Expedia-Travelocity strategic marketing agreement? Isn’t it too vague to be called a strategic alliance?

LM: Right now I’d call it a business partnership, or ‘power dating’, where Expedia has shifted in this case from rival to vendor. The performance-based aspect of it in my mind, the focus on North America, and the fact that this is not the first time Expedia has provided technology are what makes it a business partnership today. In fact, Expedia was already powering parts of Travelocity before the announcement of the deal.

However, Expedia in the future may have the option to exercise ‘exit rights’ related to the deal, so in that regard it gives Expedia something like a right of first refusal for a possible future acquisition. And in the meantime, the agreement creates a barrier to entry for Expedia rivals to step in and take a stake in Travelocity. Much like a sports team signing a player to avoid him playing for a rival. 

The Expedia agreement is also in contrast to Travelocity Business and other global assets, which have been sold outright.

EFT: What does it signify for the online travel category considering the spate of big deals in the last year?

LM: With the travel economy recovering, we’re seeing the industry increasingly consider mergers for forward strategic reasons (as opposed to, say, smaller or mid-sized companies combining or aligning just to stay afloat as in a recession). I think an emerging smaller opportunity will be better integration of supplier loyalty programmes into OTAs, and broader is fewer different technologies or more commoditisation. For example, booking.com powers other entities in Europe. But my sense is that there are still are a few more big deals still to come, and I think some of those will be surprises as online entities think more out of the box about new revenue streams. Wouldn’t it be interesting to see a hotel buy an OTA? The Expedia-Travelocity agreement in particular may also set the stage for a greater focus on branding and brand-building for online travel as opposed to strictly fulfillment.

EFT: Did you see it coming?  

LM: We did not see this specifically, but expected something like it. We know Travelocity has been talking about an IPO, and any company in that mode, travel or otherwise, will be looking to make financials as strong as possible in the near-term using a low-risk approach. So in this case, there’s a build it or buy decision on the back-end and Expedia has proven it’s a low-risk choice. What makes this deal interesting is that it is not a sell-off of the US and Canada Travelocity assets. That says that there’s a belief that perhaps Travelocity’s brand equity is undervalued by the market and/or consumers and that’s something that Sabre thinks can be addressed relatively quickly. Quickly, as in fast enough to positively influence an IPO.

EFT: Would you say it is a big victory for Expedia as it is now essentially powering more traffic with the same technology?

LM: Certainly any sale to a formal rival can be considered a technological, business and pride-inducing victory. In this case, the scale of the deal makes it look like a key win for Expedia. As long as the cost of building is maintained and the incremental infrastructure to handle more traffic is less than incremental revenue it’s a financial win. No doubt Expedia did its own due diligence on that. The scale of the Travelocity deal also gives Expedia some ‘industry-standard’-like bragging rights, which could help future similar sales.

EFT: Did Expedia’s growing mobile portfolio play a big part in this deal?

LM: The complete Expedia technology suite had to play a role. Consumers are spending more time on mobile as smartphone ownership becomes more common. The key is understanding how desktop and mobile are used as complements versus as stand-alone.

EFT: Considering the significance of brands in the e-commerce category, how do you think this move is going to result in new benefits for Travelocity? How can it strengthen its business model?

LM: The best thing it can do for Travelocity is narrow its focus, in this case on branding, marketing, and conquesting (placing ads right next to content about your competitors). That may be their best short-term opportunity to add traffic and grow revenue, and will require a rich understanding of untapped potential via dissecting the travel path to purchase with the lens specifically focused on low-hanging-fruit opportunities for Travelocity. For Travelocity, that focus should include the hotel path in particular. That is, it needs to be focused and not a broad-brush generalisation approach. 

Success in doing that helps Sabre overall and its IPO and/or gives it more leeway should it decide to sell any remaining Travelocity assets.