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The View from Expedia's Pilot

Call it an Internet stock with wings. Online travel company Expedia (EXPE) has managed avoid the drag of 2002's bear market. From 52-week lows of $17.57 in September, 2001, the stock has risen some 225%, to its current price in the high 50s. And that's despite the recent 20% dive shares took when the market responded unfavorably to a takeover offer by majority shareholder USA Interactive (USAI).

Why the investor confidence? Online travel is one of the few areas of the economy that continues to boom. Online travel researcher PhoCusWright expects Web-based corporate-travel bookings to grow by 69% this year, to $14.5 billion. The online leisure-travel market has grown in five years from less than $1 billion to the more than $20 billion it's expected to pull in this year.

Expedia CEO Richard Barton declines to give a figure for its share of the online travel market, but the company -- the largest of such Web services -- is clocking triple-digit annual growth in gross revenues. Net operating income increased by nearly 200% from the fourth quarter of 2001 to the first quarter of 2002, from $6.1 million to $17.8 million. That's a lot of hotel rooms, rental cars, and plane tickets.

Two clouds darken Expedia's horizon, however. The first: How successful will Barton and his cohorts be in penetrating the $300 billion U.S. business-travel market, which is key to the company's ability to sustain growth? Second, how will Barton manage to satisfy the interests of USA Interactive, controlled by media mogul Barry Diller, while defending the interests of minority shareholders? The rejection of Diller's offer of a 7.5% premium on a swap of Expedia and USA Interactive shares as insufficient is seen by some as a sign that Expedia will announce boffo earnings on July 23.

BusinessWeek Online Technology Editor Alex Salkever talked to Barton about the deal, Expedia's expansion plans, and the future of online travel on July 16. Edited excerpts of their conversation follow:

Q: Tell us about trends you see in the industry.

A: The top one is something that we're pushing on very hard -- dynamic packaging. People are assembling a complete trip rather than just buying individual components à la carte. And that's something online can do very well -- make packages on-the-fly. We can help people plan ahead and think through their itineraries. Of course, we can also help them get better value.

Now, we're also doing things like selling tickets to shows with our sister company TicketMaster [also majority-owned by USA Interactive].

Another really strong new trend is business travel moving to online. It had been a laggard...but the onset of zero commissions to agents from the airlines and the corresponding charges agents have had to put in place are making all these corporations reassess the value their corporate travel manager is providing.

So the corporations are all moving online [for their travel needs]. Not to mention all of their travelers are using online already. Over the next five years, online travel -- bookings, updates on schedules, reminders, etc. -- will be increasingly mobile and wireless. It's not a fad. It's a megatrend, especially in business travel.

Q: Why is getting business travelers so important to Expedia?

A: In the U.S. alone, corporate travel is probably a $300 billion a year business. It's huge. And we've always had a component of Expedia's business in what I call rogue business travelers booking with us outside of company policies. We'll change that by selling the complete corporate package to corporations themselves, so that they don't have to be rogues.

A service that Expedia is offering in a preview form right now is actually a corporate travel agency. It will be competing with corporate travel agents that exist right now for the whole corporation's business. We have the best technology to solve travel problems, and we can probably save companies some money.

We got there by spending $125 million on research and development and having seven-years experience in Internet travel booking. It's hard stuff. The traditional corporate travel agents have not historically been investors in technology. And we firmly believe that technology is one of, if not the most critical component of, delivering travel-planning services to corporations.

Q: On July 10, you bought a good-size bricks-and-mortar travel agency in Seattle, Metropolitan Travel.

A: It was a way to accelerate our entry into the managed corporate travel space, which was not an area of expertise we have had historically. We haven't had the type of agents needed to support the demanding business traveler. We could get a really premier group of people in our backyard to help accelerate and complete our offering to the corporate market.

Q: What advantages do you have in business travel over Orbitz and Travelocity?

A: We have, I believe, the most complete service and the best customer service for leisure travelers. We can easily translate that to business travel. More important, we have already been around the block in [building the technology] for the corporate travel space. Most people don't know this, but four and a half years ago we built American Express' corporate-travel product -- software that's used for booking, managing expense reports, and other aspects of corporate travel.

Q: How will Expedia fend off the pending offer from USA Interactive, particularly when it holds such a high percentage of the voting interest?

A: It's not a unique situation. It's fairly straightforward. And it's not something that's distracting us. We have a group of board members who are independent directors who formed a special committee when USA Interactive made its [stock] trade offer six weeks ago. That committee's sole responsibility is to evaluate any proposal that comes out of USA Interactive.

Q: Is there any danger that USAI could uses it's majority-shareholder status to take over control of the company, maybe make changes in the board of directors?

A: Technically, I don't know exactly what it is they could or could not do relative to the directors. I'm fairly certain they couldn't remove the independent directors.

Regardless of what the rules say, it's a matter of what is practical and what is possible, especially given the current corporate climate. It's incredibly important that minority shareholders have independent representation on the board. The interest of the majority might diverge from the interests of the minority.

Q: Do you have any concerns about dealing with Barry Diller, who, although he has been very successful, also has a reputation for being a very hands-on manager?

A: He's the chairman of my board right now. I have been working with him for over a year. He has been incredibly supportive and aggressive on our behalf.

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