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NEW YORK -- Without a trace of irony, president and CEO Jeff Clarke wastes no time in describing Travelport as a travel-services conglomerate. Just a year ago, the term "conglomerate" was an epithet within former parent company Cendant Corp. Former Cendant chairman and CEO Henry R. Silverman cited the discount that stockholders and analysts assigned to the company's structure as an umbrella for several industries, and the Byzantine financial statements that came with it, as a chief culprit in the stock price moving little in seven years. As the answer, Cendant was broken into four pieces on the theory that investors would rather own stock in individual industries that they liked than have to buy a package. The rehabilitation of the conglomerate, in Clarke's view, gives Travelport the base that it needs to ride out the turbulence of computer travel booking as well as pay down the $3.6 billion in junk-bond debt that it shouldered when New York investment firm Blackstone Group bought it for $4.3 billion in August. "We have an incredible amount of geographic diversity and an incredible amount of business diversity," he said while sitting in the lush former Cendant headquarters on West 57th Street that the company will soon vacate. "We have a company that is hard to match in the travel industry." Travelport will maintain a small Manhattan presence elsewhere but is shifting the New York location, as well as another in Parsippany that it inherited from Cendant, into a more modest building in Parsippany. The company's recent history has not been as upbeat as the new outlook. In December, Samuel L. Katz stepped down as chairman and CEO of what was then Cendant's Travel Distribution Services division after stumbles, particularly overseas, forced the company to issue a reduced earnings estimate that sent the stock downward. Earnings before interest, taxes, depreciation and amortization of $469 million in 2004 plunged by more than three-fourths last year. While Silverman defended the division as generally strong and growing, with problems confined to a few areas, he felt compelled to reassure investors that "TDS is not melting down." In addition, Travelport and its rivals face several structural changes that are squeezing them financially, both for bookings made through travel industry professionals and by consumers directly. Airlines, which account for more than half of all bookings and are projected to remain dominant for several years, have steadily reduced what they pay in fees and commissions to booking services while trying to lure passengers to use their Web sites. Although they account for much lower sales, hotels and car-rental companies, including former Cendant divisions, have followed suit. 'Competitive environment' "This is certainly a very competitive environment," said Susan Clarkson, a senior analyst at Jupiter Research. "You don't see that kind of direct sales by providers in other industries." Furniture makers, for example, will maintain online catalogues but they always direct customers to the nearest store. Jupiter predicts that total online travel bookings will rise from $72 billion last year to $128 billion in 2011, but the share of purchases flowing through a supplier's Web site will grow from 56 percent to 62 percent during the same span. The convergence of the trends became apparent in August, when Blackstone paid $4.3 billion for Travelport. This caused Travelport to take a $1.2 billion writedown in the second quarter. The amount represented the difference between the price that Blackstone paid and the higher value that Cendant showed for Travelport on its books based on how much it cost Cendant to acquire the different pieces. Clarke, who was hired in April after stints at CA, formerly Computer Associates, and Hewlett-Packard, said this is where the value of the conglomerate kicks in. He has announced a plan to combine certain operations to reduce operating costs by $75 million a year as well as meld some of the technologies among the divisions. CheapTickets, aimed at consumers, has been put on the same technological platform as Galileo, which sells to large corporate travel departments and travel agents. "To try to find synergies between rental cars, hotels, real estate and travel distribution is a challenge, a very high bar to clear," Clarke said, referring to the former Cendant businesses. "We have found very clear areas (within Travelport) for working together." And, he said, the geographic spread and differences between consumer and business orientations among Travelport's more than 20 brands help prevent weakness in a particular area from dragging down the whole company, a classic trait of conglomerates. The ultimate goal, within the next few years, would be to generate enough growth on sales, which were $2.6 billion for the 12 months ended June 30, and strong enough profits so Blackstone could launch an initial public stock offering and cash out at a profit. 1 company, 3 divisions The company has been reorganized along "decentralized" lines into three divisions: Galileo, Orbitz Worldwide and Gulliver Travel Associates. Clarke described this as a way to overcome some of the previous internal hurdles, particularly along geographic lines. The reorganization also makes it easier to sell or spin off divisions if that looks more attractive than a stock sale. Here is a breakdown of the divisions: • Gulliver, a wholesaler of travel products mainly in Europe. • Galileo, which falls under the broad category of global distribution services. Galileo acts a one-stop middleman for travel agents and companies with large platoons of road warriors. It can book land, air and sea trips. Travelport has signed contracts spanning five to seven years, with the top six U.S. airlines and has added others, such as JetBlue. "While there were some price concessions, we are pleased with the outcome because the economics are known and stable," Clarke said. In various forums, he has yet to spell out how the contracts will affect revenues and profits, but airlines have continually pressed for lower fees and tried to circumvent distribution networks whenever possible. Combined with the maturity and widespread use of the systems -- Galileo traces its roots to the early 1970s -- growth has run in low and mid-single-digit percentages and profit margins have been squeezed. This has been the experience throughout the industry, including at major rivals, such as Sabre, Clarkson said. One alternative has been to evolve from middlemen to technology consultants. European governments have discussed, but so far moved slowly, to deregulate the distribution systems as a way to open up competition. Business-to-business booking accounted for $1.8 billion of Travelport's $2.6 billion in revenues for the 12 months through June. The company does not break out the results of Galileo and Gulliver separately. The second-quarter earnings announcement did disclose that Galileo subscription and software revenues fell as bookings rose. • Orbitz and several other labels grouped under it that are used by travelers. Although much smaller than business-to-business at $774 million of Travelport's revenues, the division has been growing at a much faster clip than the business side, but the profit margins remain lower. This division faces the same competition as suppliers trying to land more bookings for themselves. Continental Airlines, for example, gives full elite status credit for certain deep discount fares only for tickets purchased on www.continental.com. "This is something that has been happening across the board," said Aaron M. Kessler, who covers the industry as an analyst at the brokerage Piper Jaffray. "Airlines have been essentially cutting fees to the (online) agencies." To try to overcome this, various booking sites have added extras, such as Expedia's recent creation of a loyalty points program tied to Citigroup credit cards and Orbitz's post-sale updates on such things as flight delays or changed timetables. This practice showed up in the second quarter, when Travelport's consumer bookings rose more than 40 percent from a year earlier but revenue went up only 13 percent. The higher volumes and sale of higher-margin products boosted earnings before interest, taxes, depreciation and amortization by 38 percent. Other entrants have cropped up that surf through a range of Web sites to find the best prices.
BOB KARP / DAILY RECORD
Travelport analysts Ramma Subramani, left, and Lava Mishra confer at the company's new office in Parsippany. The former Cendant Corp. division is consolidating its New York and New Jersey offices in Parsippany.
Tim O'Reiley can be reachedat (973) 428-6651 or toreiley@gannett.com.
