The joint venture in the Asia-Pacific region announced this week between Expedia and Air Asia caught many people – me included – by surprise.
It is probably the most significant move by Expedia since it bought Mobiata in November 2010 and comes after a period in which it has been embroiled in a very public battle with American Airlines and it's stock has taken a beating in the market, hitting a six month low in mid-January and a quarter of its value since late last year.
Meanwhile its involvement in the FairSearch coalition seems to paint Expedia as a reactionary, Old School travel intermediary.
The overall numbers from its US operation are looking a little uncomfortable.
Ostensibly Barry Diller has handed over control of his empire to his lieutenants. However, his presence in Singapore for the media circus at the launch would underline to many Diller watchers that the "retirement" was a smokescreen of sorts.
Diller also wasted no time in spreading the goodwill by stating that he felt the battle between Expedia and American Airlines could soon be over.
Speaking at the announcement of the Air Asia JV, he said:
"We are in (a) dispute with American that’s gone for too long, what we would like will be that we and American can be back in business soon."
It is not clear whether the "we" referred to his own company or also included American.
But the AirAsia is partnership is extremely interesting. Standing as an interested bystander, watching these activities, we can see emerging the results of a significant amount of legwork in the region.
Since his appointment at the end of 2009, Asia-Pacific managing director Dan Lynn has set about to remake the tepid performance of the company in the region. Let’s be clear, however, this does NOT include China where eLong is the nameplate and the organization.
Earlier this year Expedia announced it would be opening up Singapore and Indonesia as part of its worldwide expansion.
In other countries in the region, India has seen Expedia languishing in fifth place for some years. In Australia and Japan, the other major markets, Expedia’s performance has also been less than stellar.
But things are now changing. Expedia seems to be on the move in Asia. And this could not have come any time sooner.
The Expedia name and the market model do not work in all international markets as they do in the USA, a message that Expedia often never quite seems to understand.
The lack of appropriate local product in many of its international sites has been a constant source of frustration for Expedia users. However its global reach as the world’s largest OTA cannot be understated.
If we take a quick look at the detail of the JV we can see that there are some distinct carve outs. It is not the entire region. Specifically excluded are the following markets:
Korea was not highlighted, and it is unclear whether the deal includes the market. Deutsche Bank analyst Herman Leung, on a briefing call this week, outlined the JV.
The deal will combine five of Expedia's international sites (Japan, Singapore, India, Malaysia, Thailand) and (non-airline) websites of AirAsia (AirAsiaGo, Gorooms) to create the new OTA venture, expected to launch in 3Q 2011.
Revenues from the combined assets are at a $65 million-$70 million runrate, with $40 million coming from Expedia APAC assets and $25 million-$30 million from AirAsia online assets.
This puts the property in the comparable size to Priceline's SE Asia asset Agoda ($72 million in 2010 recenues on $452 million in bookings, DB estimates).
However the announcement was not enough to get Leung (widely regarded as one of the savviest analysts on Wall Street following the OTA space) to change his long term view which remains at HOLD. The sustained stock target price stays at $25.00.
The JV itself represents a big jump for Air Asia, but It is a win-win for both.
For Expedia, it represents access to the content of the major LCC in the region. It also clearly lays out Expedia’s strategy with regard to accessing content directly from Air Asia, bypassing the GDS.
For Air Asia, it will allow a big push into a wide number of international markets. Its content will be provided for a limited period of time exclusively to the JV for non-air only sites.
More details are likely to emerge, but this will provide a strong degree of consternation to those OTAs based in SE Asia, such as Sabre’s Zuji business unit who must be feeling the pain somewhat this week.
Furthermore, in other markets such as Thailand and Indonesia, which are both emerging as major online markets, access by Expedia to this exclusive content will do much to dampen the enthusiasm of local homegrown favorites.
For GDSs this represents a threat and will probably have those advocating so-called Direct Connects smiling just a bit.
This also puts pressure on current arrangements in the Indian market where Expedia has quietly transformed its domestic engine from the lacklustre performing, internally-developed solution based on Sabre’s BFS, to the engine developed by the number two player in the Indian market, Cleartrip.
With the AirAsia deal, and both a bigger marketing spend and more direct inventory from local LCCs, Expedia hopes to raise its profile and grab the the number market spot behind the current big three Indian OTA players: MakeMyTrip, ClearTrip and TravelGuru.
Large holders of Expedia’s stock are probably breathing a sigh of relief at the news.
However is this good enough? Not according to Australian OTA leader Webjet, which had some choice words to throw in Expedia’s direction.
The pissing match between the two online players could be a case of pot calling the kettle black. Webjet is still sticking to its fee-based model, which allows it to claim to be more of a consumer advocate as it can be argued that the consumer is paying for the service.
On the other hand, Expedia's supplier-paid (in some parts) model makes the service free but tends to cloud the unbiased nature of the seller which was always at the lack of trust placed in any supplier funded model.
Webjet claimed in its press release:
"…we are completely agnostic when it comes to providing consumers the broadest and most robust range of travel options in all of our geographic locations".
...conveniently forgetting that it has a long running dispute with Delta Airlines which sees the world’s second largest carrier along with the US largest single brand passenger carrier Southwest not participating in their site.
For Expedia in Asia, the future is now looking up in the markets included in the JV. The long term picture could now be very different and will likely stimulate some consolidation in the market.
When looking at the near and long term prospects for growth, the announcement also makes some other propositions look more attractive than others. There are some players who are now under threat.
At a global level this is also good news for Expedia – in short: more product to sell. Interestingly I believe the deal shows how willing Expedia is to be move away from the pure GDS-sourced content model for air.
This represents a good growth opportunity for Expedia to become more attractive to those airlines who are eschewing the GDS-based model.
So, in context, this makes Diller’s comment about Peace between Expedia and AA more likely. And if that does happen, then perhaps Expedia has turned a corner.
I think I will sit on the fence a little longer. Expedia is a very large oil tanker. Changing direction will take some time.