Travelocity Gives Up, Outsources Itself to Expedia

If you like to use online travel agents for booking, your options just got narrower. Travelocity, known pretty much for its gnome these days and not much else, has decided to become just a brand without much behind it. It’s outsourcing its back-end to rival Expedia in the US and Canada.

You might be scratching your head on this one. Why would Travelocity just give up? Well, it’s part of a larger issue going on at parent company Sabre. Sabre just Travelocity Gnome Expediakicked out its CEO and appears to be focused on an IPO. That means cutting or fixing the businesses that aren’t earning their keep. And Travelocity is one of those.

Of course, much of this is likely Sabre’s own doing. It hasn’t invested much in Travelocity for quite some time while other sites like Expedia and Priceline have done the exact opposite. In airline circles, Travelocity was best known for its awesome Dream Maps that let you see fares from a single city to many destinations. That disappeared several years ago. And Travelocity just continues to flounder.

How do you fix that? Well, you can start pouring cash into building a better site for consumers, but that costs money and the outcome is uncertain since others already have a large head start. If you’re trying to pretty up a company to get to an IPO, the last thing you want to do is spend a ton of money like that.

Instead, Travelocity can just gut itself. The company has effectively admitted that Expedia can do a better job, so it’s just going to show the same results. Of course, the results don’t have to be exactly the same. Travelocity becomes a marketing engine. They might choose to sort differently than Expedia, or maybe they’ll filter out options in different ways. On the hotel side, Travelocity may choose a different mark-up than Expedia does. But you should never see a hotel available on one site and not the other, because the inventory is coming from the same place.

Worst case, Travelocity ends up like Cheap Tickets. That used to be an independent website with a niche that worked well. But once Cheap Tickets was bought buy Orbitz’s parent, it became simply a clone of Orbitz with a slightly different color scheme. This move may not go nearly as far since Travelocity will remain a separate company, but if you can’t differentiate yourself with better results, then you really hurt your value proposition.

If this is the case, why wouldn’t Sabre just sell Travelocity entirely instead of putting together this goofy arrangement? I can think of two reasons, the first which seems more likely. First, Sabre wants to keep Travelocity’s revenue stream in the portfolio. In 2011, Travelocity generated $825 million in revenue but it was unprofitable. (All of Sabre generated $3 billion total.) If you can gut the costs by outsourcing the back-end, you can hopefully turn a profit. And then you have nearly an extra billion bucks in revenue to make you look more awesome for your IPO.

Another theory was put forward by Henry Harteveldt at Hudson Crossing. He says:

We believe one reason why Expedia opted not to buy Travelocity outright was concern that, in the wake of the US Department of Justice’s antitrust lawsuit contesting the American Airlines-US Airways merger, such a deal would be denied. Instead, we have this “arm’s length” marriage.

Ah yes, the whole “DOJ is on the warpath” argument. I suppose that’s possible as well, but I still think the former makes the most sense. Still, Sabre wants to get to IPO as quickly as it can so clearly there’s no interest in any long drawn out fight with anything.

If you’re a Travelocity user, I’ll be curious to hear if you notice any big differences once this all goes into effect, sometime in 2014.

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