SeekingAlpha (InternetStockBlog) has excerpts of Scott Devitt’s recent downgrade of Expedia highlighting GDS Incentive Risk:
Recently Worldspan announced that it had signed a five-year content distribution agreement with American Airlines. We believe that the economics of the new Worldspan deal could be significantly below historical GDS deals. We also believe that American could be using the Worldspan deal to improve its negotiating position with Sabre. Given our belief that Expedia generates more than $100 million from GDS incentives, we believe the ongoing negotiations should be watched closely. In our view, the Worldspan deal reestablishes the GDS incentive risk which had recently trailed off following Sabre’s early deals with US Air and Northwest.
We should note that historical segment GDS fees have been in the area of $3.85 per segment. We have assumed that approximately $12 per air ticket is paid from the airline to the agency of which an incentive payment is made to the agency that booked the ticket. In the case of Expedia, the incentive fee per air transaction is in the range of $6-$7. Last year, Expedia generated 38.8 million transactions of which we assume somewhere in the range of 18 million – 20 million were air transactions. Based on these assumptions, we believe Expedia generates between $100 million and $140 million in air incentives. We do not know what will happen with GDS agreements in 2006, but we do believe Expedia would have exposure if deals were materially changed from current GDS pricing. We were beginning to become comfortable with the risk until the announcement of the Worldspan deal earlier this week.
Read the full report.
