UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

 

 

Commission File Number: 001-33599

 

ORBITZ WORLDWIDE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

(312) 894-5000
(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of August 6, 2008, 83,231,614 shares of Common Stock, par value $0.01 per share, of Orbitz Worldwide, Inc. were outstanding.

 

 

Table of Contents

 

 

This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different than the results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Forward-looking statements can generally be identified by phrases such as “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “predicts,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “could,” “designed,” “should be” and other similar expressions that denote expectations of future or conditional events rather than statements of fact. Forward-looking statements also may relate to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. Our actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the factors described in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and in our 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 21, 2008. Accordingly, you should not unduly rely on these forward-looking statements. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

 

The use of the words “we,” “us,” “our” and “the Company” refers to Orbitz Worldwide, Inc. and its subsidiaries, except where the context otherwise requires or indicates.

 

 

ORBITZ WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in millions, except share and per share data)

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

ORBITZ WORLDWIDE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data)

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

ORBITZ WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

(in millions)

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

ORBITZ WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(in millions)

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

Description of the Business

 

Orbitz, Inc. (“Orbitz”) was formed in early 2000 by American Airlines, Inc., Continental Airlines, Inc., Delta Air Lines, Inc., Northwest Airlines, Inc. and United Air Lines, Inc. (the “Founding Airlines”). In November 2004, Orbitz was acquired by Cendant Corporation (“Cendant”), whose online travel distribution businesses included the CheapTickets, HotelClub and RatesToGo brands. In February 2005, Cendant acquired ebookers Limited, an international online travel brand with operations in 13 countries throughout Europe (“ebookers”).

 

On August 23, 2006, Travelport Limited (“Travelport”), which consisted of Cendant’s travel distribution services businesses, including the businesses that currently comprise Orbitz Worldwide, Inc., was acquired by affiliates of The Blackstone Group (“Blackstone”) and Technology Crossover Ventures (“TCV”). We refer to this acquisition as the “Blackstone Acquisition” in this Form 10-Q.

 

Orbitz Worldwide, Inc. was incorporated in Delaware on June 18, 2007 and was formed to be the parent company of the business-to-consumer travel businesses of Travelport, including Orbitz, ebookers and Travel Acquisition Corporation Pty. Ltd. (“HotelClub”) and the related subsidiaries and affiliates of those businesses. We are the registrant as a result of the completion of our initial public offering (“IPO”) of 34,000,000 shares of our common stock on July 25, 2007. At June 30, 2008 and December 31, 2007, Travelport and its affiliates beneficially owned approximately 58% and 59% of our outstanding common stock, respectively.

 

We are a leading global online travel company that uses innovative technology to enable leisure and business travelers to search for and book a broad range of travel products. Our brand portfolio includes Orbitz, CheapTickets, the Away Network, and Orbitz for Business in the Americas; ebookers in Europe; and HotelClub and RatesToGo based in Sydney, Australia, which has operations globally. We provide customers with the ability to book a comprehensive set of travel products from over 75,000 suppliers worldwide, including air travel, hotels, vacation packages, car rentals, cruises, travel insurance and destination services such as ground transportation, event tickets and tours.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements present the accounts of Orbitz, ebookers and HotelClub and the related subsidiaries and affiliates of those businesses, collectively doing business as Orbitz Worldwide, Inc. These entities became wholly-owned subsidiaries of ours as part of an intercompany restructuring that was completed on July 18, 2007 (the “Reorganization”) in connection with the IPO. Prior to the IPO, these entities had operated as indirect, wholly-owned subsidiaries of Travelport.

 

Prior to the IPO, we had not operated as an independent standalone company. As a result, our condensed consolidated financial statements for periods in 2007 prior to the IPO consisted of the business-to-consumer travel businesses of Travelport, which were carved out of the Travelport operations.

 

The legal entity of Orbitz Worldwide, Inc. was formed in connection with the Reorganization, and prior to the Reorganization there was no single capital structure upon which to calculate historical earnings (loss) per share information. Accordingly, earnings (loss) per share information is not presented on our condensed consolidated statements of operations for periods prior to the Reorganization.

 

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). These financial statements include all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations for the interim periods presented. All such adjustments are of a normal and recurring nature. Certain information and footnote disclosures normally included in financial

 

ORBITZ WORLDWIDE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to SEC rules and regulations for interim reporting. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our 2007 Annual Report on Form 10-K filed with the SEC on March 21, 2008.

 

We have reclassified marketing expense for the prior period in our condensed consolidated financial statements to conform to the current period presentation. We stated our marketing expense separately on our condensed consolidated statements of operations in the current period. These amounts were previously included in selling, general and administrative expense.

 

The preparation of our condensed consolidated financial statements in conformity with GAAP requires us to make certain estimates and assumptions. Our estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of our condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting periods. Actual results could differ from our estimates.

 

Restatement

 

Subsequent to the issuance of our consolidated financial statements for the year ended December 31, 2007 and our condensed consolidated financial statements for the three months ended March 31, 2008, we determined that we should restate our previously issued financial statements to correct errors that we identified. As a result, we are restating our previously issued consolidated statement of cash flows for the six months ended June 30, 2007 in this Form 10-Q. See Note 16 — Restatement for further information.

 

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, in February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), which delayed the effective date of SFAS No. 157 for one year for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Our adoption of SFAS No. 157 on January 1, 2008 for our financial assets and liabilities did not have a material impact on our consolidated financial position or results of operations. We do not expect the adoption of SFAS No. 157 for our non-financial assets and non-financial liabilities, effective January 1, 2009, to have a material impact on our consolidated financial position or results of operations.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which provides companies with an option to report selected financial assets and liabilities at fair value. SFAS No. 159’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with detailed rules for hedge accounting. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of their choice to use fair value on their earnings. It also requires companies to display the fair value of those assets and liabilities for which they have chosen to use fair value on the face of the balance sheet. SFAS No. 159 is

 

ORBITZ WORLDWIDE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

effective on January 1, 2008. We have chosen not to apply the provisions of SFAS No. 159 to any of our existing financial assets and liabilities.

 

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), which establishes principles and requirements for the reporting entity in a business combination, including recognition and measurement in the financial statements of the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. This statement also establishes disclosure requirements to enable financial statement users to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and interim periods within those fiscal years. SFAS No. 141(R) will become effective for our fiscal year beginning January 1, 2009. We do not expect the adoption of SFAS No. 141(R) to have an effect on our consolidated financial statements unless we enter into a business combination or reduce our deferred tax valuation allowance that was established in purchase accounting. In connection with the Blackstone Acquisition, we established a deferred income tax valuation allowance of $408 million in purchase accounting. We are forecasting a net overall reduction in the domestic deferred income tax valuation allowance for the year ending December 31, 2008. Beginning January 1, 2009, any future reductions in our remaining deferred income tax valuation allowance that was originally established in purchase accounting will be recorded through our statement of operations.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”), which changes the disclosure requirements for derivative instruments and hedging activities previously identified under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). SFAS No. 161 provides for enhanced disclosures regarding (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 will become effective for our fiscal year beginning January 1, 2009. We are currently evaluating the impact of the adoption of SFAS No. 161 on our consolidated financial statements.

 

 

Property and equipment, net, consisted of the following:

 

 

We recorded depreciation and amortization expense related to property and equipment in the amount of $11 million and $7 million for the three months ended June 30, 2008 and June 30, 2007, respectively, and $22 million and $15 million for the six months ended June 30, 2008 and June 30, 2007, respectively.

 

ORBITZ WORLDWIDE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Goodwill and indefinite-lived intangible assets consisted of the following:

 

 

The changes in the carrying amount of goodwill during the six months ended June 30, 2008 were as follows:

 

 

 

Finite-lived intangible assets consisted of the following:

 

 

We recorded amortization expense related to finite-lived intangible assets in the amount of $6 million and $5 million for the three months ended June 30, 2008 and June 30, 2007, respectively, and $10 million for each of the six months ended June 30, 2008 and June 30, 2007, respectively. These amounts are included in depreciation and amortization expense in our condensed consolidated statements of operations.

 

ORBITZ WORLDWIDE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The table below shows estimated amortization expense related to our finite-lived intangible assets over the next five years:

 

 

 

Accrued expenses consisted of the following:

 

 

 

On July 25, 2007, concurrent with the IPO, we entered into a $685 million senior secured credit agreement (“Credit Agreement”) consisting of a seven-year $600 million term loan facility (“Term Loan”) and a six-year $85 million revolving credit facility (“Revolver”).

 

Term Loan

 

The Term Loan bears interest at a variable rate, at our option, of LIBOR plus a margin of 300 basis points or an alternative base rate plus a margin of 200 basis points. The alternative base rate is equal to the higher of the Federal Funds Rate plus one half of 1% and the prime rate (“Alternative Base Rate”). The Term Loan matures in July 2014. At June 30, 2008 and December 31, 2007, $596 million and $599 million was outstanding on the Term Loan, respectively.

 

We have entered into interest rate swaps that effectively convert $400 million of the Term Loan to a fixed interest rate (see Note 12 — Derivative Financial Instruments). At June 30, 2008, $300 million of the Term Loan effectively bears interest at a fixed rate of 8.21%, and $100 million of the Term Loan effectively bears interest at a fixed rate of 6.39%, through these interest rate swaps. The remaining $196 million of the Term Loan bears interest at a variable rate of LIBOR plus 300 basis points, or 5.48% for $96 million of the

 

ORBITZ WORLDWIDE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

remaining amount which is based on the one-month LIBOR at June 30, 2008 and 5.91% for $100 million of the remaining amount which is based on the three-month LIBOR at June 30, 2008.

 

Revolver

 

The Revolver provides for borrowings and letter of credit issuances of up to $85 million and bears interest at a variable rate, at our option, of LIBOR plus a margin of 250 basis points or an Alternative Base Rate plus a margin of 150 basis points. The margin is subject to change based on our total leverage ratio, as defined in the Credit Agreement, with a maximum margin of 250 basis points on LIBOR-based loans and 150 basis points on Alternative Base Rate loans. We also incur a commitment fee of 50 basis points on any unused amounts on the Revolver. The Revolver matures in July 2013. At June 30, 2008 and December 31, 2007, $0 and $1 million was outstanding on the Revolver, respectively. For each of the three months and six months ended June 30, 2008, commitment fees on unused amounts on the Revolver were almost nil.

 

 

We have a liability included in our condensed consolidated balance sheets that relates to a tax sharing agreement between Orbitz and the Founding Airlines. The agreement governs the allocation of tax benefits resulting from a taxable exchange that took place in connection with the Orbitz initial public offering in December 2003 (“Orbitz IPO”). As a result of this taxable exchange, the Founding Airlines incurred a taxable gain. The taxable exchange also caused Orbitz to have additional future tax deductions for depreciation and amortization due to the increased tax basis of its assets. The additional tax deductions for depreciation and amortization may reduce the amount of taxes we are required to pay in future years. For each tax period during the term of the tax sharing agreement, we are obligated to pay the Founding Airlines a significant percentage of the amount of the tax benefit realized as a result of the taxable exchange. The tax sharing agreement commenced upon consummation of the Orbitz IPO and continues until all tax benefits have been utilized.

 

As of June 30, 2008, the remaining payments that may be due under this agreement were approximately $269 million. Payments under the tax sharing agreement are generally due in the second, third and fourth calendar quarters of the year, with two payments due in the second quarter. We estimate that the net present value of our obligation to pay tax benefits to the Founding Airlines was $142 million and $141 million at June 30, 2008 and December 31, 2007, respectively. This estimate is based upon certain assumptions, including our future operating performance and taxable income, the tax rate, the timing of tax payments, current and projected market conditions and the applicable discount rate, all of which we believe are reasonable. These assumptions are inherently uncertain, however, and actual results could differ from our estimates.

 

The table below shows the changes in the tax sharing liability during the six months ended June 30, 2008:

 

 

 

ORBITZ WORLDWIDE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Based upon the future payments we expect to make, the current portion of the tax sharing liability of $19 million and $27 million is included in accrued expenses in our condensed consolidated balance sheets at June 30, 2008 and December 31, 2007, respectively. The long-term portion of the tax sharing liability of $123 million and $114 million is reflected as the tax sharing liability in our condensed consolidated balance sheets at June 30, 2008 and December 31, 2007, respectively. At the time of the Blackstone Acquisition, Cendant indemnified Travelport and us for amounts due under the tax sharing agreement. As a result, we recorded a receivable of $37 million which is included in other non-current assets in our condensed consolidated balance sheets at June 30, 2008 and December 31, 2007, respectively. We expect to collect this receivable when Cendant receives the tax benefit.

 

The table below shows the estimated payments under our tax sharing liability over the next five years:

 

 

 

In December 2003, we entered into amended and restated airline charter associate agreements, or “Charter Associate Agreements,” with the Founding Airlines as well as US Airways (“Charter Associate Airlines”). These agreements pertain to our Orbitz business, which was owned by the Founding Airlines at the time we entered into the agreements. The Charter Associate Agreements set forth the terms under which Orbitz can offer air travel on behalf of the Charter Associate Airlines to consumers and require the Charter Associate Airlines to provide us with agreed upon transaction payments when consumers book this travel. The transaction payments that we receive are based on the value of the ticket and gradually decrease over time. The agreements also provide Orbitz with nondiscriminatory access to seat availability for published fares as well as marketing and promotional support. The agreements expire on December 31, 2013.

 

Under the Charter Associate Agreements, we must pay a portion of the global distribution system (“GDS”) incentive payments earned from Worldspan back to the Charter Associate Airlines in the form of a rebate. The rebate payments are required when airline tickets for travel on a Charter Associate Airline are booked through the Orbitz.com website utilizing Worldspan. The rebate payments are made in part for in-kind marketing and promotional support we receive. However, a portion of the rebate payments are deemed unfavorable because we receive no benefit for these payments.

 

The rebate structure under the Charter Associate Agreements was considered unfavorable when compared to market conditions at the time of Cendant’s acquisition of Orbitz in 2004 and the Blackstone Acquisition in 2006. As a result, an unfavorable contract liability was recorded at its fair value at each acquisition date. The fair value of the unfavorable contract liability was determined using the discounted cash flows of the expected rebates, net of the expected fair value of in-kind marketing support.

 

At June 30, 2008 and December 31, 2007, the net present value of the unfavorable contract liability was $18 million and $20 million, respectively. The current portion of the liability of $3 million was included in accrued expenses in our condensed consolidated balance sheets at June 30, 2008 and December 31, 2007. The long term portion of the liability of $15 million and $17 million was included in unfavorable contracts in our condensed consolidated balance sheets at June 30, 2008 and December 31, 2007, respectively.

 

ORBITZ WORLDWIDE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

This liability is being amortized to revenue in our condensed consolidated statements of operations on a straight-line basis over the remaining contractual term. We recognized revenue for the unfavorable portion of the Charter Associate Agreements in the amount of $1 million for each of the three months ended June 30, 2008 and June 30, 2007, respectively, and $2 million for each of the six months ended June 30, 2008 and June 30, 2007, respectively.

 

 

Our commitments as of June 30, 2008 did not materially change from the amounts set forth in our 2007 Annual Report on Form 10-K.

 

Company Litigation

 

We are involved in various claims, legal proceedings and governmental inquiries related to contract disputes, business practices, intellectual property and other commercial, employment and tax matters within the United States and abroad.

 

We are party to various cases brought by consumers and municipalities and other U.S. governmental entities involving hotel occupancy taxes and our merchant hotel business. Some of the cases are purported class actions and most of the cases were brought simultaneously against other Internet travel companies, including Expedia, Travelocity and Priceline. The cases allege, among other things, that we violated the jurisdictions’ hotel occupancy tax ordinance with respect to the charges and remittance of amounts to cover taxes under the ordinance. While not identical in their allegations, the cases generally assert similar claims, including violations of local or state occupancy tax ordinances, violations of consumer protection ordinances, conversion, unjust enrichment, imposition of a constructive trust, demand for a legal or equitable accounting, injunctive relief, declaratory judgment, and in some cases, civil conspiracy. The plaintiffs seek relief in a variety of forms, including: declaratory judgment, full accounting of monies owed, imposition of a constructive trust, compensatory and punitive damages, disgorgement, restitution, interest, penalties and costs, attorneys’ fees, and where a class action has been claimed, an order certifying the action as a class action. An adverse ruling in one or more of these cases could require us to pay tax retroactively and prospectively and possibly pay penalties, interest and fines. The proliferation of additional cases could result in substantial additional defense costs.

 

We have also been contacted by several municipalities or other taxing bodies concerning our possible obligations with respect to state or local hotel occupancy or related taxes. The City of Baltimore, Maryland, City of New Orleans, Louisiana, the City of Philadelphia, Pennsylvania, the City of Madison, Wisconsin, the City of Phoenix, Arizona, the counties of Mecklenburg, Stanly and Brunswick, North Carolina, the counties of Miami-Dade and Broward, Florida, the cities of Alpharetta, Atlanta, Cartersville, Cedartown, College Park, Columbus, Dalton, East Point, Hartwell, Macon, Rockmart, Rome, Tybee Island and Warner Robins, Georgia, the counties of Augusta-Richmond, Clayton, Cobb, DeKalb, Fulton and Gwinnett, Georgia, the cities of Anaheim, Oakland, Los Angeles, San Francisco and San Diego, California, the cities of Pine Bluff and North Little Rock, Arkansas, the county of Jefferson, Arkansas, the county of Suffolk, New York, state and local tax officials from Arizona, Florida, Wisconsin, Pennsylvania, Hawaii and Indiana, and a third-party on behalf of unnamed municipalities and counties in Alabama, among others, have begun or attempted to pursue formal or informal administrative procedures or audits or stated that they may assert claims against us relating to allegedly unpaid state or local hotel occupancy or related taxes.

 

We believe that we have meritorious defenses and we are vigorously defending against these claims, proceedings and inquiries. We have not recorded any reserves related to these hotel occupancy tax matters.

 

Litigation is inherently unpredictable and, although we believe we have valid defenses in these matters based upon advice of counsel, unfavorable resolutions could occur. While we cannot estimate our range of

 

ORBITZ WORLDWIDE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

loss, an adverse outcome from these unresolved proceedings could be material to us with respect to earnings or cash flows in any given reporting period. We do not believe that the impact of this unresolved litigation would result in a material liability to us in relation to our financial position or liquidity.

 

We are currently seeking to recover insurance reimbursement for costs incurred to defend the hotel occupancy tax cases. During the three and six months ended June 30, 2008, we recorded a $1 million and $5 million reduction to selling, general and administrative expense in our condensed consolidated statements of operations, respectively, for the reimbursement of these costs. The recovery of additional amounts, if any, by us and the timing of receipt of these recoveries is unclear. As such, in accordance with SFAS No. 5, “Accounting for Contingencies,” as of June 30, 2008, we have not recognized a reduction to selling, general and administrative expense in our condensed consolidated statements of operations for the outstanding contingent claims for which we have not yet received reimbursement.

 

Surety Bonds and Bank Guarantees

 

In the ordinary course of business, we obtain surety bonds and bank guarantees, issued for the benefit of a third party, to secure performance of certain of our obligations to third parties. At June 30, 2008 and December 31, 2007, there were $3 million of surety bonds outstanding and $4 million and $6 million of bank guarantees outstanding, respectively.

 

Financing Arrangements

 

We are required to issue letters of credit to certain suppliers and non-U.S. government agencies. Travelport issues letters of credit on our behalf. The letter of credit fees were almost nil for each of the three months ended June 30, 2008 and June 30, 2007, respectively, and $1 million for each of the six months ended June 30, 2008 and June 30, 2007, respectively. At June 30, 2008 and December 31, 2007, there were $71 million and $74 million of outstanding letters of credit issued by Travelport on our behalf, respectively (see Note 14 — Related Party Transactions).

 

 

In accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), we have established a liability for unrecognized tax benefits that management believes to be adequate. The table below shows the changes in this liability during the six months ended June 30, 2008:

 

 

The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate is $3 million. We do not expect to make any cash tax payments nor do we expect any statutes of limitations to lapse related to this liability within the next twelve months.

 

We have computed the tax provision for the period ended June 30, 2008 in accordance with the provisions of FASB Interpretation No. 18, “Accounting for Income Taxes in Interim Periods” and Accounting Principles Board Opinion No. 28, “Interim Financial Reporting.” We recognized an income tax provision in tax jurisdictions which had pre-tax income for the period ended June 30, 2008 and are expected to generate pre-tax book income during the remainder of fiscal year 2008. We recognized an income tax benefit in tax jurisdictions which incurred pre-tax losses for the period ended June 30, 2008 if the tax jurisdictions are

 

ORBITZ WORLDWIDE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

expected to be able to realize these losses during the remainder of fiscal year 2008 or are expected to recognize a deferred tax asset related to such losses at December 31, 2008.

 

 

We currently issue share-based awards under the Orbitz Worldwide, Inc. 2007 Equity and Incentive Plan, as amended (the “Plan”). The Plan provides for the grant of equity-based awards, including restricted stock, restricted stock units, stock options, stock appreciation rights and other equity-based awards to our directors, officers and other employees, advisors and consultants who are selected by the Compensation Committee of the Board of Directors (the “Compensation Committee”) for participation in the Plan. At our Annual Meeting of Shareholders on May 8, 2008, our shareholders approved an amendment to the Plan, increasing the number of shares of our common stock available for issuance under the Plan to 15,100,000 shares, subject to adjustment as provided in the Plan. As of June 30, 2008, 6,628,013 shares were available for future issuance under the Plan.

 

Stock Options

 

The table below summarizes the option activity under the Plan during the six months ended June 30, 2008:

 

 

 

The exercise price of stock options granted under the Plan is equal to the fair market value of the underlying stock on the date of grant. Stock options generally expire seven to ten years from the grant date. The stock options granted at the time of the IPO as additional compensation to our employees who previously held equity awards under Travelport’s long-term incentive plan vest quarterly over a three-year period. All other stock options granted vest annually over a four-year period. The fair value of stock options on the date of grant is amortized on a straight-line basis over the requisite service period.

 

The fair value of stock options granted under the Plan is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions for stock options granted during the six months ended June 30, 2008 are outlined in the following table. Expected volatility is based on implied volatilities for publicly traded options and historical volatility for comparable companies over the estimated expected life of the stock options. The expected life represents the period of time the stock options are expected to be outstanding and is based on the “simplified method,” as defined in SEC Staff Accounting Bulletin No. 110, “Share-Based Payments.” The risk-free interest rate is based on yields on U.S. Treasury

 

ORBITZ WORLDWIDE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

strips with a maturity similar to the estimated expected life of the stock options. We use historical turnover to estimate employee forfeitures.

 

 

Based on the above assumptions, the weighted average grant date fair value of stock options granted during the six months ended June 30, 2008 was $2.54.

 

Restricted Stock Units

 

The table below summarizes activity regarding unvested restricted stock units under the Plan for the six months ended June 30, 2008:

 

 

 

The restricted stock units granted at the time of the IPO upon conversion of unvested equity-based awards previously held by our employees under Travelport’s long-term incentive plan vest quarterly over a three-year period. All other restricted stock units cliff vest at the end of either a two-year or three-year period, or vest annually over a three-year or four-year period. The fair value of restricted stock units on the date of grant is amortized on a straight-line basis over the requisite service period.

 

The total number of restricted stock units that vested during the six months ended June 30, 2008 and the total fair value thereof was 170,700 restricted stock units and $2 million, respectively.

 

Restricted Stock

 

There was no significant restricted stock activity for the six months ended June 30, 2008.

 

Performance-Based Restricted Stock Units

 

On June 19, 2008, the Compensation Committee approved a grant of performance-based restricted stock units (“PSUs”) under the Plan to certain of our executive officers. The PSUs entitle the executives to receive a certain number of shares of our common stock based on the Company’s satisfaction of certain financial and strategic performance goals, including net revenue growth, adjusted EBITDA margin improvement and the achievement of specified technology milestones during fiscal years 2008, 2009 and 2010 (the “Performance Period”). The performance conditions also provide that if the Company’s aggregate adjusted EBITDA during the Performance Period does not equal or exceed a certain threshold, each PSU award will be forfeited. Based

 

ORBITZ WORLDWIDE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

on the achievement of the performance conditions during the Performance Period, the final settlement of the PSU awards will range between 0 and 1662/3% of the target shares underlying the PSU awards based on a specified objective formula approved by the Compensation Committee. The PSUs will vest within 75 days of the end of the Performance Period.

 

The target number of shares underlying the PSUs that were granted to certain executive officers during the six months ended June 30, 2008 totaled 249,108 shares and had a grant date fair value of $6.28 per share. As of June 30, 2008, the Company expects that the PSUs will vest at target.

 

As of June 30, 2008, $37 million of unrecognized compensation costs related to unvested stock options, unvested restricted stock units, unvested PSUs and unvested restricted stock are expected to be recognized over the remaining weighted-average period of 3 years.

 

Non-Employee Directors Deferred Compensation Plan

 

During the six months ended June 30, 2008, a total of 129,944 deferred stock units were granted to our non-employee directors at a weighted average grant date fair value of $6.15 per share. The deferred stock units are issued as restricted stock units under the Plan and are immediately vested and non-forfeitable. The deferred stock units entitle the non-employee director to receive one share of our common stock for each deferred stock unit on the date that is 200 days immediately following the non-employee director’s retirement or termination of service from the board of directors, for any reason. The entire grant date fair value of deferred stock units is expensed on the date of grant.

 

Compensation Expense

 

We recognized total equity-based compensation expense of $5 million and $1 million for the three months ended June 30, 2008 and June 30, 2007, respectively, and $8 million and $1 million for the six months ended June 30, 2008 and June 30, 2007, respectively, none of which has provided us a tax benefit.

 

 

Interest Rate Hedges

 

On July 25, 2007, we entered into two interest rate swaps that effectively convert $300 million of the Term Loan from a variable to a fixed interest rate. The first swap has a notional amount of $100 million and matures on December 31, 2008. The second swap has a notional amount of $200 million and matures on December 31, 2009. We pay a fixed rate of 5.207% on both swaps and in exchange receive a variable rate based on LIBOR.

 

On May 1, 2008, we entered into a third interest rate swap that effectively converts an additional $100 million of the Term Loan from a variable to a fixed interest rate. The swap has a notional amount of $100 million and matures on May 31, 2011. We pay a fixed rate of 3.39% on the swap and in exchange receive a variable rate based on LIBOR.

 

The objective of entering into our interest rate swaps is to protect against volatility of future cash flows and effectively hedge the variable interest payments on the Term Loan. We determined that these designated hedging instruments qualify for cash flow hedge accounting treatment under SFAS No. 133.

 

The interest rate swaps are reflected in our condensed consolidated balance sheets at market value. At June 30, 2008 and December 31, 2007, the total market value of the swaps entered into on July 25, 2007 represented a liability of $6 million, of which $1 million was included in other current liabilities and $5 million was included in other non-current liabilities in our condensed consolidated balance sheets. At June 30, 2008, the total market value of the swap entered into on May 1, 2008 represented an asset of $1 million, which was included in other non-current assets in our condensed consolidated balance sheets. The corresponding market

 

ORBITZ WORLDWIDE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

adjustment was recorded to accumulated other comprehensive income. There was no hedge ineffectiveness recorded during the three or six months ended June 30, 2008.

 

Foreign Currency Hedges

 

We enter into foreign currency forward contracts (“forward contracts”) from time to time to manage exposure to changes in the foreign currency associated with foreign receivables, payables, intercompany transactions and forecasted earnings. As of June 30, 2008, we have forward contracts outstanding with a total net notional amount of $45 million, which mature in July 2008. The forward contracts do not qualify for hedge accounting treatment under SFAS No. 133. Accordingly, changes in the fair value of the forward contracts are recorded in net income, as a component of selling, general and administrative expense in our condensed consolidated statements of operations. We recognized losses related to foreign currency forward contracts of $1 million for each of the three months ended June 30, 2008 and June 30, 2007 and $1 million for each of the six months ended June 30, 2008 and June 30, 2007. The total market value of forward contracts at June 30, 2008 and December 31, 2007 represented a liability of almost nil and an asset of almost nil, respectively, which was included in accrued expenses and other current assets in our condensed consolidated balance sheets.

 

 

We calculate loss per share in accordance with SFAS No. 128, “Earnings per Share.” Basic loss per share is calculated by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated by dividing the net loss for the period by the weighted average number of common shares and potentially dilutive common shares outstanding during the period.

 

The following table presents the calculation of basic and diluted loss per share:

 

 

 

ORBITZ WORLDWIDE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The following equity awards are not included in the diluted loss per share calculation above because they would have had an antidilutive effect:

 

 

 

Related Party Transactions with Travelport and its Subsidiaries

 

The following table summarizes the related party balances with Travelport and its subsidiaries as of June 30, 2008 and December 31, 2007, reflected in our condensed consolidated balance sheets. We net settle amounts due to and from Travelport.

 

 

We also purchased assets of $1 million from Travelport and its subsidiaries during the six months ended June 30, 2008 which are included in property and equipment, net in our condensed consolidated balance sheet at June 30, 2008.

 

The following table summarizes the related party transactions with Travelport and its subsidiaries for the three months and six months ended June 30, 2008 and June 30, 2007, reflected in our condensed consolidated statements of operations:

 

 

 

The tables above reflect amounts resulting from agreements with Travelport and its subsidiaries, including our transition services agreement, master license agreement, equipment, services and use agreements, intercompany notes payable, GDS service agreement, hotel sourcing and franchise agreement and corporate travel agreement. In addition, prior to the IPO, our condensed consolidated statements of operations reflect an allocation from Travelport of both general corporate overhead expenses and direct billed expenses incurred on our behalf.

 

On January 1, 2008, our new Master Supply and Services Agreement (the “GTA Agreement”) with GTA became effective. Under this agreement, we pay GTA a contract rate for hotel and destination services inventory it makes available to us for booking on our websites. The contract rate exceeds the prices at which

 

ORBITZ WORLDWIDE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

suppliers make their inventory available to GTA for distribution and is based on a percentage of the rates GTA makes such inventory available to its other customers. We are also subject to additional fees if we exceed certain specified booking levels. The initial term of the GTA Agreement expires on December 31, 2010. Under this agreement, we are restricted from providing access to hotels and destination services content to certain of GTA’s clients until December 31, 2010.

 

In May 2008, we amended the separation agreement with Travelport that was entered into in connection with the IPO. The amendment, among other things, clarifies how Travelport’s aggregate ownership of our voting stock is determined for all purposes of the separation agreement. In addition, Travelport agreed to continue to issue letters of credit on our behalf through at least March 31, 2009, in an aggregate amount not to exceed $75 million (denominated in U.S. dollars). Travelport charges us a fee for issuing, renewing or extending letters of credit on our behalf. This fee is included in interest expense in our condensed consolidated statements of operations. At June 30, 2008 and December 31, 2007, there were $71 million and $74 million of letters of credit issued by Travelport on our behalf, respectively (see Note 9 — Commitments and Contingencies).

 

Related Party Transactions with Affiliates of Blackstone and TCV

 

The following table summarizes the related party balances with affiliates of Blackstone and TCV as of June 30, 2008 and December 31, 2007, reflected in our condensed consolidated balance sheets:

 

 

The following table summarizes the related party transactions with affiliates of Blackstone and TCV for the three months and six months ended June 30, 2008 and June 30, 2007, reflected in our condensed consolidated statements of operations:

 

 

The tables above reflect amounts resulting from agreements entered into in the normal course of conducting business with these affiliates. We believe that these agreements have been executed on terms comparable to those of unrelated third parties. For example, we have agreements with certain hotel management companies that are affiliates of Blackstone and that provide us with access to their inventory. We also purchase services from certain Blackstone and TCV affiliates such as telecommunications and advertising. In addition, various Blackstone and TCV affiliates utilize our partner marketing programs and corporate travel services.

 

 

We adopted SFAS No. 157 on January 1, 2008. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In accordance with FSP 157-2, we will defer the adoption of SFAS No. 157 for our non-financial assets and non-financial liabilities, except those items recognized or disclosed at fair value on an

 

ORBITZ WORLDWIDE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

annual or more frequently recurring basis, until January 1, 2009. Under SFAS No. 159, companies may choose to measure many financial instruments and certain other items at fair value. We did not elect the fair value measurement option under SFAS No. 159 for any of our financial assets or liabilities (see Note 2 — Recently Issued Accounting Pronouncements).

 

We have derivative financial instruments that must be measured under the new fair value standard. We currently do not have non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis. SFAS No. 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

In accordance with the fair value hierarchy described above, the following table shows the fair value of our financial assets and liabilities that are required to be measured at fair value as of June 30, 2008, which are classified as other non-current assets, other current liabilities and other non-current liabilities in our condensed consolidated balance sheets:

 

 

We value our derivatives using valuations that are calibrated to the initial trade prices. Subsequent valuations are based on observable inputs to the valuation model including interest rates, credit spreads and volatilities.

 

 

Subsequent to the issuance of our consolidated financial statements for the year ended December 31, 2007 and our condensed consolidated financial statements for the three months ended March 31, 2008, we determined that we should restate our previously issued consolidated financial statements for errors relating to (1) the non-cash impact of certain intercompany transactions with Travelport in our consolidated statements of cash flows and (2) the classification of certain credit card receipts in-transit in our consolidated balance sheets. As a result, we are restating our previously issued consolidated statement of cash flows for the six months ended June 30, 2007 in this Form 10-Q to correct these errors.

 

We determined that the non-cash impact of certain intercompany transactions with Travelport was overstated in “Net cash provided by operating activities” and correspondingly understated in “Net cash used in financing activities” in our consolidated statement of cash flows for the six months ended June 30, 2007.

 

In addition, we determined that credit card receipts in-transit at our foreign operations (which are generally collected within two to three days) should have been classified as “Accounts receivable” rather than “Cash and cash equivalents” in our consolidated balance sheet as of December 31, 2006. This change in

 

ORBITZ WORLDWIDE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

classification is consistent with our presentation of credit card receipts in-transit at our domestic operations and resulted in a reduction in “Net cash provided by operating activities” in our consolidated statement of cash flows for the six months ended June 30, 2007.

 

The following table reflects the impact of the restatement on our consolidated statement of cash flows for the six months ended June 30, 2007.

 

 

The following discussion should be read in conjunction with our condensed consolidated financial statements included elsewhere in this report and our 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 21, 2008. The following discussion gives effect to the restatement discussed in Note 16 — Restatement of the Notes to the Unaudited Condensed Consolidated Financial Statements.

 

OVERVIEW

 

We are a leading global online travel company that uses innovative technology to enable leisure and business travelers to search for and book a broad range of travel products. Our brand portfolio includes Orbitz, CheapTickets, the Away Network, and Orbitz for Business in the Americas; ebookers in Europe; and HotelClub and RatesToGo based in Sydney, Australia, which have operations globally. We provide customers with the ability to book a comprehensive set of travel products, from over 75,000 suppliers worldwide, including air travel, hotels, vacation packages, car rentals, cruises, travel insurance and destination services such as ground transportation, event tickets and tours.

 

We generate revenue through multiple sources, including our retail model, merchant model, incentive payments, advertising, and white label and hosting businesses. Through our retail model, we earn fees and commissions from travel suppliers for airline tickets, hotel rooms, car rentals and other travel products and services booked on our websites. Through our merchant model, we generate revenue for our services based on the difference between the total amount the customer pays for the travel product and the negotiated net rate plus estimated taxes that the supplier charges for that product. Under both the retail and merchant models, we also earn revenue by charging customers a service fee for booking airline tickets and certain other travel products. In addition, we receive incentive payments for each segment of travel that is processed through a global distribution system (“GDS”).

 

We generate advertising revenue through our partner marketing programs. These programs provide direct access to our customer base through a combination of display advertising, performance-based advertising and other marketing programs. Our white label and hosting businesses enable us to earn revenue by licensing our technology platform to, or hosting websites on behalf of, third-party partners.

 

We continue to focus on the execution of our strategic plan, including increasing non-air revenue, growing our international brands and improving our operational efficiency through investing in our global technology platform. We are a leader in air travel, the largest online travel segment. This leadership position has enabled us to drive growth in non-air categories, specifically hotels and dynamic vacation packages. Dynamic vacation packages are vacation packages that include different combinations of travel products. These non-air categories generally have higher margins, and we believe these categories will present significant growth opportunities for us.

 

We believe that there are substantial growth opportunities in regions outside of the U.S. for our international brands. We experienced growth in our international gross bookings of 26% during the three months ended June 30, 2008 as compared to the three months ended June 30, 2007 and 27% during the six months ended June 30, 2008 as compared to the six months ended June 30, 2007, excluding the impact of fluctuations in foreign exchange rates and the results of Travelbag, an offline U.K. travel business that we sold in July 2007.

 

We believe our global technology platform will enhance our ability to drive growth internationally and improve our operational efficiency. Our new platform will provide a single technology infrastructure that will support our brand portfolio in the Americas and Europe as well as our white label partnerships. In 2007, we launched the global technology platform for our ebookers brand in the U.K. and Ireland. In June 2008, we migrated our ebookers brand in Belgium onto the platform, and by late 2008, we expect to complete the migration of our remaining ebookers websites. We believe the global technology platform and other technology enhancements we are making will:

 

 

 

We have already realized benefits as a result of the migration to the platform. The platform allows us to offer a broader range of hotels to customers for booking. As a result, the number of hotels on the websites that have migrated has tripled to over 75,000 hotels globally. We expect to see further improvements in the hotels available for booking on these websites as our global hotel supply team continues to expand our relationships with hotel suppliers. We have made significant improvements in the hotel and dynamic packaging booking path. We have also experienced operational efficiencies and eliminated many of the manual processes required under the old platform. We expect these improvements, combined with the anticipated centralization of certain business functions and the retirement of the old platform, to lower our operating costs at ebookers over time.

 

As part of our strategy to grow our dynamic packaging and hotel businesses, we have significantly increased the number of hotel market managers on our global hotel supply team, particularly in Europe and Asia Pacific. With these additional resources in place, we have signed a substantial number of new direct hotel contracts, and we are beginning to realize the benefits of developing these relationships.

 

Industry Trends

 

Growth in travel, internet usage and online travel booking continues to increase worldwide. Online travel booking rates are highest in the U.S. and continue to grow on a year-over-year basis. According to PhoCusWright, an independent travel, tourism and hospitality research firm, 2007 was the first year in which more than half of all travel in the U.S. was purchased online. The remainder of travel in the U.S. was booked through traditional offline channels. Suppliers, including airlines, hotels and car rental companies, have continued to focus their efforts on direct sale of their products through their own websites, further promoting the migration of customers to online booking. In the current environment, suppliers’ websites are believed to be taking market share domestically from both online travel companies (“OTCs”) and traditional offline travel companies.

 

Although online travel booking rates continue to grow faster than the travel industry as a whole, we believe that the rate of growth of the domestic market has slowed as this market has matured. Much of the initial rapid growth experienced in the online travel industry was driven by consumers shifting from purchasing travel through traditional offline channels to purchasing travel through online channels. Accordingly, we believe that growth rates in the domestic online travel market may begin to more closely follow the growth rates of the overall travel industry.

 

Internationally, the online travel industry continues to benefit from rapidly increasing Internet usage and growing acceptance of online booking. We expect international growth rates for the online travel industry to continue to significantly outpace growth rates of the overall travel industry. As a result, we believe OTCs will increasingly generate a larger percentage of their growth from outside of the U.S. According to PhoCusWright, in 2007, approximately one-third of all travel in Europe was booked online and about 15% of all travel in Asia was booked online. The hotel-only business models have had particular success in delivering high growth rates in international markets. We believe that our international brands, including ebookers, HotelClub and RatesToGo, provide us with substantial growth opportunities outside of the U.S.

 

In the U.S., the booking of air travel has become increasingly driven by price. As a result, we believe that OTCs will continue to focus on differentiating themselves from supplier websites by offering customers the ability to selectively combine travel products such as air, car, hotel and destination services into dynamic vacation packages. Dynamic packaging and other non-air categories generally have higher margins, and we foresee significant growth potential for OTCs for these types of services.

OTCs generally charge a booking fee in connection with the booking of airline tickets and certain other travel products. We charge a service fee on many of our websites and in exchange provide our customers with a set of comparison shopping tools, access to extensive travel products and a wide range of services, including coverage from our OrbitzTLC customer care platform. Certain OTCs eliminated booking fees on retail airline tickets and hotel rooms, which has created uncertainty around the sustainability of booking fees. We will continue to monitor the competitive environment and regularly evaluate our fee structure.

 

In the U.S., the current economic environment has created some uncertainty in the travel industry, particularly the airline industry. As a result of higher fuel prices, airlines have raised ticket prices and announced capacity reductions. We believe that capacity reductions and the expected associated higher airline ticket prices will negatively impact air traveler demand, which could impact the transaction volume and net revenue that OTCs generate from the booking of airline tickets. Potential bankruptcies and consolidation in the airline industry could also result in capacity reductions that would further increase ticket prices and reduce the number of seats available for booking on OTCs’ websites.

 

OTCs make significant investments in marketing through both online and traditional offline channels. Key areas of online marketing include search engine marketing, display advertising, affiliate programs and email marketing. Online marketing costs have been rising in the U.S. over time, and competition for search-engine key words has intensified in the past year. Increasing competition from supplier websites and the growing significance of search and meta-search sites has contributed to the increase in online marketing costs. If this trend continues, these rising costs could result in lower margins or declining transaction growth rates for OTCs. We are actively pursuing tactics to optimize the results of our online marketing efforts by increasing the value from existing traffic and by acquiring additional traffic that is more targeted and cost effective. These tactics include pay-per-click optimization and search optimization efforts, loyalty programs and email marketing that targets customers with specific offers that correspond to their particular interests.

 

Despite the increase in online marketing costs, the continued growth of search and meta-search sites as well as Web 2.0 features creates new opportunities for OTCs to add value to the customer experience and generate advertising revenue. Web 2.0 is a term used to describe content features such as social networks, blogs, user reviews, videos and podcasts. We believe that the ability of OTCs to incorporate Web 2.0 features on their websites can create value for customers, suppliers and third-party partners while simultaneously creating new revenue streams.

 

RESULTS OF OPERATIONS

 

Key Operating Metrics

 

Our operating results are affected by certain key metrics that represent overall transaction activity. Gross bookings and net revenue are two key metrics. Gross bookings is defined as the total amount paid by a consumer for transactions booked under both the retail and merchant models. Net revenue is defined as commissions and fees generated through our retail and merchant models as well as advertising revenue and certain other fees and commissions.

 

Gross bookings provide insight into changes in overall travel activity levels, changes in industry-wide online booking activity, and more specifically, changes in the number of bookings through our websites. We follow net revenue trends for our various brands, geographies and product categories to gain insight into the performance of our business across these categories. Both metrics are critical in determining the ongoing growth of our business.

The table below shows our gross bookings and net revenue for the three and six months ended June 30, 2008 and June 30, 2007:

 

 

 

Comparison of the three months ended June 30, 2008 to the three months ended June 30, 2007

 

Gross Bookings

 

For our domestic business, which is comprised principally of Orbitz, CheapTickets and Orbitz for Business, total gross bookings decreased $30 million, or 1%, during the three months ended June 30, 2008 from the three months ended June 30, 2007. Of the $30 million decrease, $47 million was due to a decrease in air gross bookings, which was primarily driven by lower transaction volume. A higher average price per air ticket, due in part to increased fuel prices, partially offset the decline in air transactions. Non-air and other gross bookings increased $17 million during the three months ended June 30, 2008 from the three months ended June 30, 2007. This increase was primarily driven by an increase in gross bookings for dynamic packaging due to an increase in transaction volume and a higher average price per transaction. A decrease in gross bookings for car rentals due to a decline in transaction volume partially offset the increase in gross bookings for dynamic packaging.

 

For our international business, which is comprised principally of ebookers, HotelClub and RatesToGo, total gross bookings increased $138 million, or 41%, during the three months ended June 30, 2008 from the three months ended June 30, 2007. Of this increase, $40 million was due to foreign currency fluctuations. The remaining $98 million increase was due in part to an $82 million increase in air gross bookings driven by higher transaction volume and a higher average price per air ticket. The remaining growth of $16 million was primarily driven by an increase in gross bookings for dynamic packaging and car rentals at ebookers.

 

Net Revenue — See discussion of net revenue in the Results of Operations section.

Comparison of the six months ended June 30, 2008 to the six months ended June 30, 2007

 

Gross Bookings

 

For our domestic business, total gross bookings decreased $173 million, or 3%, during the six months ended June 30, 2008 from the six months ended June 30, 2007. Of the $173 million decrease, $168 million was due to a decrease in air gross bookings, which was driven by lower transaction volume. A higher average price per air ticket, due in part to increased fuel prices, partially offset the decline in air transactions. Non-air and other gross bookings decreased $5 million during the six months ended June 30, 2008 from the six months ended June 30, 2007. This decrease was primarily driven by a decrease in hotel and car gross bookings due to a decline in transaction volume, partially offset by a higher average price per transaction. An increase in dynamic packaging gross bookings resulting from a higher average price per transaction, partially offset the decrease in hotel and car gross bookings.

 

For our international business, total gross bookings increased $281 million, or 41%, during the six months ended June 30, 2008 from the six months ended June 30, 2007. Of this increase, $75 million was due to foreign currency fluctuations. The remaining $206 million increase was due in part to a $159 million increase in air gross bookings driven by higher transaction volume and a higher average price per air ticket. The remaining growth of $47 million was primarily driven by an increase in gross bookings for dynamic packaging and car rentals at ebookers and an increase in gross bookings for hotels at HotelClub.

 

Net Revenue — See discussion of net revenue in the Results of Operations section.

 

Results of Operations

 

Comparison of the three months ended June 30, 2008 to the three months ended June 30, 2007