The last example of this growing trend comes from Orbitz. Most of the focus for OWW (Orbitz) is on their mobile growth and attempt to brand themselves in foreign markets. The company, though, continues to struggle with growth, gaining market share, and profitability. While we see a lot of potential in mobile, it’s a crowded space, and it is hard for the company to gain a ton of edge there even if they have the best mobile device. Internationally, the market is crowded as well. Domestic services are taking precedent in most markets, and the only way into them is through acquisitions. The company has not created positive EPS since 2006 (when it was first reported). They have had two years of positive operating margins (both under 5%) in the past ten years as well. The company continues to be plagued by very high SG&A costs, which are mostly marketing expenses.

Moving forward, therefore, the company needs opportunities that create better earnings without high SG&A costs – mobile, online expansion, and current propositions have struggled to create consistent earnings. Therefore, we believe opportunities outside of this are the keys for Orbitz moving forward in cooperation with their other opportunities. That is why we want to focus on the JTG deal moving forward.

The partnership with Jetset Travelworld Group (JTG) is intriguing to us as it allows Orbitz (OWW) to work with a company on their technology end, but it does not require a high amount of costs for the business. The agreement for Orbitz is to provide technology for JTG. Jetset Travel has been, for the most part, a bricks and mortar travel agency based in Australia. The company, though, is now moving their booking onto a new platform called «helloworld.» The company will bring existing members in its network as well as franchises to create lower costs of overhead and more potential upside as the company moves onto the digital market. The key is to bring all their various agents under one platform to allow them to scale their business and bring down costs.

Rob Gurney, JTG CEO says:

«We believe that helloworld will change the way Australians choose to travel. With more than 40 years of travel industry experience behind our agencies, the goal of helloworld is to offer travellers unparalleled convenience, industry-leading service and the best value, tailor-made travel experiences. We look forward to the journey ahead. The new brand will provide an opportunity to leverage our agents’ vast experience,» says Gurney.

Orbitz’s role will be to help JTG create their websites and proven technology. The company’s role is to provide a «powerful global technology platform will provide JTG with robust desktop booking functionality, as well as industry-leading mobile capabilities. This will offer customers mobile-optimised booking experiences and mobile-enhanced applications. The technology platform, powered by Orbitz, promises to provide helloworld’s online customers with a best-in-class shopping and booking experience.»

For Orbitz, the deal is a big win because it allows OWW to leverage its already established technologies and put them into the JTG business. The costs are low but the potential gains are very strong. Just how strong are those potential gains?

Let’s take a look at the Australian market further. Currently, expectations are for Australian online travel to grow by about 10% this year. In 2011 and 2012, the market grew by mid-double digits. Australia has been strong during weakness in Europe and emerging markets. Penetration rates in Australia for Internet stand at 89%, so there is room for growth in the market overall. Online travel is not nearly as strong as in the USA, and OWW hopes to fill some of this gap with JTG. Orbitz will benefit greatly from this partnership, and we see it as a great growth mechanism for them. Helloworld is expected to launch in Q2 of FY2014. OWW is expected to receive benefits, although exactly what these are, at that time.

The key thing about this deal that we see for Orbitz is that the online travel marketplace is becoming a must have for travel agents, and further, a mobile marketplace will be quite important as well. As travel agencies want to move online and online marketplaces want to develop a mobile platform, companies can use leverage from companies like Orbitz to create digital solutions. For OWW, the company can create new streams of revenue without taking on high costs as a solutions provider/consultant. Is this the new wave of business for Orbitz? Not at all. Their online marketplaces and Orbitz brands are significant parts of their business, but more deals like this could provide OWW with a solution to the earnings struggle that they have been seeing. Building out a network pipeline is a key part of the business moving forward for Orbitz.

As Harford, Orbitz´s CEO noted in his last earnings call:

So with regard to the partner network, we talked briefly in the script and there were some announcements a few weeks ago about one partner that, I think, is indicative of some of the opportunities we have ahead of us, JTG, which is the second-largest off-line travel group in Australia and New Zealand. As you know, we’ve invested significantly over the last 4, 5, 6 years in building the global platform and migrating all of the consumer businesses on Orbitz over to that global platform. Since we completed our migration, we’ve also invested into capabilities in particular our flex infrastructure, which allows for very modularized page creation, which allows us to really personalize and customize stuff on our global platform. What this means is we’re now able to start to offer to private label partners around the world the ability to develop, customize, but highly compelling OTA offerings. While we are currently present in the United States and then 12 geographies in Europe from an OTA perspective, that is only a small percentage of the overall OTA market opportunity. And while there’s obviously organic growth for our existing brands as an opportunity, that type of growth is always limited by marketing investment. You can’t expand into every market at the same time. But the private label opportunity given this technology, we see is extremely scalable in a very cost-effective manner. And so the JTG partnership is an example of the type of partnership that we are extremely excited about where we look to partner with international players that have existing scales and customer relationships and with which we can partner to bring cutting-edge OTA offerings to the market.

The company seems prepared to take on more deals like this, and we believe this is the key to profitability for the company. They have built out the technology, and they have good technology. They have struggled in building out their brand name and taking market share from leaders that seem to be more effective at marketing and have built a large business that commands more users. For Orbitz, doing these private partnerships is a key to success moving forward. Where else are there opportunities?

In the USA, 40% of online total travel sales were done digitally in 2012. Yet, 60% were still done through private agents. That ratio is much higher in nearly every other nation. So, there are a lot of opportunities to take large travel agents and build online marketplaces for them to operate within as another part of their overall business. It’s cost effective and allows them to be a part of the changing landscape. Even for those that prefer a physical travel agent store, these groups can use an online database like Orbitz to gain access to more vendors, build better software, and use partnerships to grow business. We find this opportunity very intriguing, and while companies like Priceline (PCLN) and Expedia (EXPE) focus on online travel growth, OWW should be focusing here.

The company is obviously still in the initial stages of this development, and its long-term potential is definitely unknown. Yet, what the company is currently doing is not working for long-term investor success. Building partnerships with low costs that can provide revenue sources while their partners take on marketing and other costs is going to vastly improve margins and profitability. We like this move a lot. For now, we are in a «wait and see» mode with Orbitz.