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Hotels.com checks out of Travelocity deal

The hotel reservation network is closing the door on its partnership with the Web travel company in favor of strengthening its ties with sister site Expedia.

Hotels.com is closing the door on its partnership with Web travel company Travelocity.com in favor of strengthening its ties with sister site Expedia.

The Web-based hotel reservation network said Tuesday that it terminated its agreement to provide lodging inventory on Travelocity. Company executives said the decision to cancel the partnership was made in reaction to Travelocity's announcement that it would no longer use Hotels.com as its exclusive provider for lodging reservations.

On Friday, Travelocity's parent company, Sabre Holdings, filed a statement with the U.S. Securities and Exchange Commission, announcing that it would exercise its right to expand distribution of its own merchant hotel inventory. Sabre claimed that the move would allow it greater flexibility to sell and promote its own merchant hotels throughout Travelocity, while retaining access to Hotels.com inventory. Hotels.com cited the SEC announcement and prior breaches in the two companies' partnership as the reasons it would no longer work with Travelocity.

Travelocity representatives could not immediately be reached for comment.

The end of the partnership opens the door for Hotels.com to work more closely with Expedia, the online travel site operated by its own parent company, InterActiveCorp (IAC), formerly known as USA Interactive. IAC is headed by well-known Internet entrepreneur Barry Diller.

Hotels.com President Bob Diener called the termination of the Travelocity agreement "unfortunate" but played up the increased cross-selling opportunities between his company and Expedia.

"The Travelocity deal wasn't a good one for us as it was expensive and limited our ability to cross-sell with Expedia, which we will immediately begin to do more aggressively," Diener said. "We had a good working relationship with Travelocity, so their announcement was disappointing, but there are advantages in this for us."

Hotels.com executives said all existing reservations made via Travelocity will be honored and that special rates the company previously offered on Travelocity will still be made available on Hotels.com.

Hotels.com said its lodging inventory made up a "substantial portion" of Travelocity's hotel bookings but that the financial benefits of working with Travelocity had decreased over time. Hotels.com reported that revenue from its Travelocity business declined from approximately 4 percent of IAC's revenue in the second quarter of 2002 to approximately 3 percent in the same period in 2003.

However, industry analysts questioned the move by Hotels.com, indicating that the loss of Travelocity's distribution could seriously affect the company's ability to generate traffic and book rooms.

"Hotels.com may have shot itself in the foot by making this move," said Henry Harteveldt, analyst at Cambridge, Mass.-based Forrester Research. "I don't understand why any online hotel-reservation provider would want to sever ties to the no. 2 online travel agency, it just doesn't make business sense."

In addition, Harteveldt said Hotels.com may have done Travelocity a huge favor in ending the partnership. According to the analyst, Hotels.com's cutthroat pricing policies and delays in making payments for rooms reserved through its services have hurt the company's standing with hoteliers. Travelocity will also be able to move into new markets where Hotels.com doesn't operate, he said. Harteveldt said the end of the Hotels.com relationship would likely result in Travelocity inking a number of new hotel deals.

The question marks for Hotels.com would seem to stretch beyond the end of the Travelocity agreement. According to Harteveldt, a Forrester survey of 13 global hotel chains found that better than half of those polled were unhappy with Hotels.com and had plans to curtail business with the company. Although the analyst believes that Expedia and Hotels.com "form the cornerstones for a powerful online travel organization," he said that IAC will need to work to differentiate the two holdings and better define what Hotels.com brings to the table.

"This was a knee-jerk reaction on the part of Hotels.com," Harteveldt said. "It is going to be critical for IAC to figure out just where Hotels.com can fit in."

Diener said the perception that Hotels.com is hard to work with is "old news" and emphasized that his company has been actively working to shift its business model to improve its relationships with hoteliers. The executive disputed that Hotels.com has ever had issues paying its bills on time, and said the company has worked with its hotel partners to reorganize its pricing structure so both parties would benefit from short-term room-rate increases.

As for fitting in with Expedia, Diener said there is little confusion as to how the two sites differentiate themselves. Hotels.com remains focused squarely on lodging, deriving more of its business from non-airplane travelers and summer rentals, he said, while Expedia draws the "business flyer" and vacation crowds.