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Hotels.com Cuts Travelocity Loose

In his ongoing bid to colonize the Internet travel market, Barry Diller's Hotels.com has terminated a contract with Travelocity, paving the way for Expedia to fully take on its Internet travel competitor.

As Diller has expanded his aegis in the online travel marketplace, a combination of factors led to his company's decision to end its agreement with Travelocity.

"On Friday, August 29, 2003, Travelocity terminated the exclusivity to which Hotels.com was entitled under the hotel supply agreement between Hotels.com and Travelocity. In response to that improper action and other prior breaches of the agreement by Travelocity over the past year, Hotels.com announced today that the company has terminated the agreement in full and ceased offering its industry-leading lodging inventory on the Travelocity web site," Hotels.com said in a press release.

The move opens the way for what the company "full cooperation and cross selling initiatives" between Hotels.com and its sister company Expedia, both of which are owned by Diller's InterActiveCorp parent company. .

Prior to Tuesday's termination of its agreement with Travelocity, Hotels.com and the company's contract had precluded the types of marketing and sales synergies that it clearly will pursue with Expedia going forward.

"We had generally enjoyed the working relationship with Travelocity, and so their actions in recent months are unfortunate. But we're also excited because increasing cooperation between Hotels.com and Expedia is something we've been eager to implement, and now we will be able to do so at a much faster pace," said Bob Diener, president of Hotels.com, in a press release.

The press release goes onto say "reservations made via Travelocity will be honored. Customers that have previously viewed Hotels.com special rates on Travelocity will no longer be able to book these rates directly with Travelocity. These special rates will be available directly via www.hotels.com. As we begin the busy fall travel season, Hotels.com and Expedia will have substantially stronger product offerings than any other online travel sites."

Expedia and Hotels.com are expected to combine not only their listings, but also aim to find cost savings in their technology platforms and various business and billings processes.

Hotels.com went onto detail some of the other reasons it is terminating its contractual arrangements with Travelocity.

"The financial benefits from working with Travelocity have decreased over time. Revenues derived from Travelocity declined from approximately 4 percent of IAC's revenues in Q2 2002 to approximately 3 percent in Q2 2003 and were marginally profitable in Q2 2003, representing approximately 2.5 percent of IAC's Operating Income before Amortization. The exclusivity arrangement in the hotel supply agreement was scheduled to expire in December 2004 and the agreement was due to expire in July 2005," Hotels.com said.

InterActiveCorp. said it expects the termination of its deal with Travelocity to have minimal impact on its third-quarter earnings with results likely to be marginally lower for the fourth quarter as a result of the move.

Just as Hotels.com was releasing details about its decision to terminate its contract with Travelocity, the Fort Worth, Texas-based online travel site, owned by Sabre Holdings Corp. said its merchant hotel program "now includes more than 7,000 hotels -- on display and currently on sale -- far exceeding its year-end goal of 4,000 signed and operational merchant hotels."

"Helping to fuel this rapid growth is additional inventory from Carlson Hotels Worldwide, one of the first major hotel chains to sign on as a Travelocity merchant partner shortly after the launch of the program in October 2002. Carlson Hotels' brands include Regent International Hotels, Radisson Hotels & Resorts, Park Plaza Hotels & Resorts, Country Inns & Suites By Carlson and Park Inn Hotels," Travelocity said in a press release.

In an unrelated development, on August 29, Hotels.com agreed to pay overtime wages in the aftermath of a Labor Department inquiry.

Diller's Hotels.com agreed to pay $126,133 in back overtime wages following the federal probe which found his company had underpaid workes at three of its call centers.

The U.S. Department of Labor study found Hotels.com was deducting 30 minutes a day, for two 15-minute rest breaks, from the paychecks of 898 current and former telephone operators in its Dallas, Forth Worth and Pharr call center facilities. The company said it will be complying with federal labor practices going forward.

Calls to both Travelocity and Hotels.com were not returned by press time. It is unclear, whether either company will take formal legal action against the other, or if the matter of the existing contract will be resolved.