Executives
Frank Petito - SVP Corporate Development
Barney Harford - President and CEO
Marsha Williams - SVP and CFO
Analysts
Michael Millman - Millman Research
Fred Krom - Goldman Sachs
Mark Mahaney - Citigroup
Imran Khan - JPMorgan
Ron Josey - Barclays Capital
Michael Olson - Piper Jaffray
Robert Hopper - UBS
Scott Hamann - KeyBanc Capital Markets
George Askew - Stifel Nicolaus
Orbitz Worldwide, Inc. (OWW) Q1 2009 Earnings Call May 6, 2009 10:00 AM ET
Operator
Welcome, and thank you for standing by. At this time all participants lines will be on listen-only mode for the duration of today's call. We will conduct a question-and-answer session. (Operator Instructions) Today's conference is being recorded. If you have any objections you may disconnect at this time.
And I would like to turn the call over to your host Mr. Frank Petito.
Frank Petito
Thank you, Christian. Good morning, everyone and thank you for joining us on our first quarter earnings call. I'm pleased to be joined on this call by Barney Harford, President and CEO of Orbitz and Marsha Williams, our CFO.
As many of you have seen we filed a press release this morning, detailing our first quarter results. If you have not received this press release it is available on the IR portion of our website. Additionally, the webcast will be archived on the site for at least 30 days.
Also, some of the statements made during this call constitute forward-looking statements that involve known and unknown risks, uncertainties, and other factors including the risk factors described in our SEC filings. These risks and uncertainties may cause our actual results or performance to be materially different from any future periods or performance expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements.
Finally, during the call, we will be referencing certain non-GAAP financial measures as defined by the SEC rules, where required, we have provided in our press release or on our Web site a reconciliation of those measures to the GAAP financial measures we consider to be the most comparable. This reconciliation is available on our IR website.
At this time, I would like to turn the call over to Barney Harford, our President and CEO.
Barney Harford
Thanks, Frank. And thanks to you all for joining us on the call today. It's now been 4 months since I joined Orbitz and in that relatively short space of time we have been pretty busy. We have delivered on a number of small quick wind projects designed to improve usability of our US sites and drive conversion.
We have stepped up our focus on generating cost effective traffic by a search engine optimization and CRM.
We have launched some significant new features including Total Price hotel search results and Hotel Price Assurance both of which are industry firsts. And we have been making some organizational changes and bringing some new talents in the key areas.
We are pleased with our Q1 operating performance given what was a challenging economic environment. We had anticipated reduced levels of demand and took actions to reduce our cost structure in November 2008 and January 2009.
These changes included both operating expense and CapEx reductions. The combined impact was to take $40 million to $45 million worth of cash cost out of the business on an annual run rate basis.
Since our announced cost reduction actions in November and January, we have continued to skiver that organization for additional opportunities to enhance operating efficiency.
We have rationalized our approach to e-marketing, putting increased focus on operating efficiency to ensure that various distribution partnerships achieved a spend ratio targets we have set. Even if this means sacrificing some top line growth.
These efforts combined with a lower variable costs associated with lower transaction volumes resulted in those having operating expenses, excluding the impairment charge that was $41 million less for the first quarter than in the same quarter last year.
The net result is that adjusted EBITDA for the first quarter was up 39% to $28 million even as net revenue declined. We are pleased with our results in the face of what has been the worst economy downturn that most of us have ever seen.
While gross bookings were down in aggregate in the face of a tough demand environment. We saw strength in some key strategic areas.
Our dynamic packaging product continued the strong trend in the last quarter with booked transactions of over 25% year-on-year, and packaging revenue of 5% year-on-year.
As I discussed in our last call, in the current environment, we are seeing a significant year-on-year increase in the level of packaged discounts being offered by our supplier partners, allowing us to pass on significant savings to our customers while at the same time helping stimulate incremental demand to suppliers.
Hotel room nights were down 2% year-on-year. The relative performance varies dramatically by destination, however.
Certain destinations saw a very strong, levels of room night growth, driven in particular by the compelling nature of the deals we were able to source and the ability of our websites to stimulate incremental leisure demand when you make such great deals available.
In Las Vegas, for example, room nights booked in the quarter were up 41% year-on-year. In the Caribbean and Hawaii, room nights booked were up 44% and 60% respectively.
In this challenging economic environment, we are intensely focused on providing our customers with unparalleled value and transparency.
In early April, we announced our Fly Fee Free promotion, removing booking fees on most flights booked by May 31 on Orbitz and CheapTickets.
Since removing flight booking fees, we have seen a significant increase in the volume of air tickets booked on our US sites. Specifically, we have seen an increase in year-on-year air ticket growth rates of over 15 percentage points.
Looking forward, however, we believe that building out our hotel offering is the most important long-term strategic initiative for the company. This is an initiative that will take time, investment and commitment. But we believe the effort is worth it.
The global hotel market is huge. Yet the online hotel distribution landscape is still very immature. It is still very complicated for consumers to compare all the different options. There is still so much to be done to make things better for customers.
We demonstrated this pretty clearly just 10 days ago with the launch of Total Price hotel search results becoming the first major online travel company to show total price upfront on initial search results page.
Previously, there was no convenient way for consumers to compare hotels on a total price basis. Consumers had to click through to the hotel details page for each hotel to see how much it would cost to book.
And Total Price is just a start. We are just scratching the surface of how we can make booking a hotel easier and better for customers.
In mid-April we announced our Hotel Fee Cut promotion drastically cutting booking fees on all of our hotels around the world for rooms booked by July 15th. And just yesterday we announced Orbitz Hotel Price Assurance a ground-breaking innovation that automatically refunds customers when lower hotel rates are booked on orbitz.com.
We have a laser like focus on improving the customer experience when booking hotels online. With the introduction of Total Price hotel search results dramatically reduced hotel booking fees and now Hotel Price Assurance we believe Orbitz is delivering market leading innovation in an area where consumers have historically been underserved.
We recognize that we are currently under indexed in the hotel compared to some of our competitors. However, we have strong travel brands around the world that generated over $10 billion in consumer demand over the last 12 months. We have scale at the level of customer demand and have the opportunity to close the gap by focusing on initiatives that make it easier for those customers to book hotel.
In coming quarters we look forward to discussing some of these specific initiatives in more detail.
Before passing the call over to Marsha, let me touch briefly on the question of our financial situation and our ability to sustain the various fee related actions that we have taken.
We believe that the $40 million to $45 million of cost take-outs that we announced in November and January. Our ongoing focus on marketing efficiency and the significant incremental volume we have seen to-date as a result of the air bookings fee removal, give us the flexibility to sustain these actions if we choose to do so.
But more on this in our financial and operating performance in the quarter. I will now turn the call over to Marsha.
Marsha Williams
Thanks Barney and good morning. Despite what was a very difficult macroeconomic environment. We are pleased to announce that our adjusted EBITDA was $28 million for the first quarter of 2009 which is an increase of 39% from the $20 million we reported in the first quarter of last year.
We aggressively cut costs, starting in the fourth quarter of last year and those cost reductions were a key contributor to our strong adjusted EBITDA growth in the quarter. We also significantly improved our online marketing efficiency in the first quarter due to a number of e-marketing strategy changes.
In broad terms, we achieved our net revenue goals for the quarter while spending $21 million less in marketing than we spent in the first quarter of 2008.
Marketing is our single largest expense, so delivering this type of leverage had a very positive impact on our first quarter results. We expect these marketing efficiencies will continue throughout 2009 and will help mitigate the impact of the various fee reductions that we took in April.
Gross bookings declined 17% in the first quarter as a result of fewer transactions, lower average hotel rates, lower average air fares and currency changes.
Gross bookings for our international brands were weaker than for our domestic brands.
Net revenue in the first quarter of 2009 met our expectations. On a constant currency basis, net revenue was down 10% on a year-over-year basis.
In our press release you may have noticed that we have provided details about our key revenue streams by disclosing domestic, international, air, hotel, dynamic packaging and advertising and media revenue individually for the first quarters of both 2008 and 2009.
We plan to continue this practice and hope you find this additional information helpful. We have posted the 2008 quarterly revenue information in this format on our website for your reference.
We have also made a minor change to our definition of adjusted EBITDA by no longer adding back severance expenses. The schedules on our website also adjust 2008 numbers for this minor change.
First quarter 2009, air net revenue declined 14% on year-over-year basis. Reflecting primarily to soft economy but also the impact of stronger dollar. The industry fee cut occurred late enough in the first quarter that there was very little impact to us during that quarter.
Hotel net revenue was soft in the first quarter with a decline year-over-year of 29% or 21% on a constant currency basis. A significant driver of this weakness was poor trends at HotelClub.
Internationally net revenue decline 39% or 23% on a constant currency basis in the first quarter of 2008.
Our European transaction volume was down for all of our international brands. While ebookers has benefited from being on one common platform. Economic weakness in Europe has been persistent and has caused an overall decline in their net revenue on year-over-year basis.
In addition to the strength in dynamic packaging that Barney described, we continue to be pleased with the growth in our advertising and media revenue which increased 12% on year-over-year basis to $14 million in the first quarter. Revenue from advertising and media was 7% of total first quarter 2009 revenue.
Our cost of revenue declined nearly 80 basis points to 18.8% in the first quarter. Costs declined as a result of lower volume. Also we were able to significantly reduce our level of credit card fraud as compared to the first quarter of 2008, which is another reason that our gross margin improved.
An important driver for the quarter was that marketing expenses declined 24% or $21 million year-over-year. As we look ahead to the remainder of 2009, we expect to spend less on e-marketing as a percentage of revenue than we did in 2008.
Our selling, general and administrative expense in the first quarter of 2009 declined by 14% or $11 million as compared with the first quarter of 2008.
In November 2008 and January 2009, we announced that we would deliver between $40 million and $45 million of annualized cost savings from both expense cuts and lower capital expenditures in 2009 and we are well on track to achieve that goal.
Finally, we have recorded a non-cash impairment charge of $332 million related to goodwill and certain intangible assets that rose at the time of the Blackstone acquisition.
A major trigger for the impairment was the significant decline in our stock price during the first quarter of 2009. This impairment charge has no impact on the covenants in our credit agreement.
Turning to the balance sheet, cash was $173 million at March 31, 2009 including the $61 million borrowed under the revolver. Due to the seasonality of our business, we received a significant amount of cash in the first four months of every year when our customers booked their spring and summer travel.
Our cash balance is historically highest in the spring of every year. We drew most of our revolver in March primarily due to concerns we had about the financial industry.
You may recall that when Lehman Brothers filed for bankruptcy we lost some revolver capacity and we wanted to preserve our liquidity in these difficult and uncertain economic times.
We are currently in compliance with all of the financial covenants in our credit agreement and based on what we know today we expect to continue to be in compliance with these covenants, even with the airline and hotel fee reductions we have taken.
As we have said, in 2009, we intend to cut operating and capital costs by $40 million to $45 million in cash on an annual run rate basis. And we also expect to continue to realize significant savings from focusing on the productivity of our e-marketing spend.
Also we are very pleased with the significant volume increases we have experienced in our air bookings since our fee actions in April.
Finally, we have also taking another look at our capital spending plans in 2009, and now expect to spend in the range of $40 million to $45 million, down slightly from our prior plans.
That concludes my remarks. Thanks for joining us today. And we will open the call for questions. Operator, if you could please open the call.
Question-and-Answer Session
Thank ma'am. (Operator Instructions) Our first question comes from Mr. Michael Millman of Millman Research.
Michael Millman - Millman Research
Thank you. Just have a couple of questions. I was kind of curious as how given what's occurring in the marketplace, and what your competitors are doing. How do you want to position yourself, and where do you think you are in that process today. How do people look at you today? And also had a couple of other questions.
Barney Harford
Well, I think we are very clear that we want to position ourselves as the innovator, and a company that is extremely focused on building out a strong hotel business. As I said in my prepared remarks, we launched Total Price hotel search results couple of weeks ago, making us the only online travel site; that shows customers the total price upfront. And establishing ourselves as a clear force for transparency in the industry, making it easier for customers to see the price they are going to pay.
And with Hotel Price Assurance, we think we are layering on another layer of value for consumers when they are booking a hotel. In the case of Hotel Price Assurance you book a hotel on Orbitz and if another Orbitz customer books the same hotel for rest, we will send you a check automatically.
We believe with innovations like these that line up well with the strong track record for innovation that Orbitz has had over its history. And we believe that these are establishing ourselves clearly as a company that is focused on innovation and focused on the customer.
Michael Millman - Millman Research
Can you give us an idea as to, very early but what the Total Price has accomplished in terms of customer interest, in terms of actual purchase?
Barney Harford
Sure, yes, I mean its still pretty early days for looking at the actual impact on our results. There is obviously a number of different factors that have been kind of a player over the last couple of weeks. So trends are not completely easy to notice. However, we have certainly seen a great deal of press interest, and we think that the Total Price hotel search results is really striking a chord with customers, as we think about it is a, it is remarkable that it's 2009 the online travel industry has been around for over 10 years. Yet now consumers still have to click, click through and select their hotel before knowing how it's going to cost.
Michael Millman - Millman Research
Okay. I guess two other questions. One is kind of interested in your comment as that you’d had higher net revenue for air ticker at least in the first quarter, can you discuss that? And also on car rentals that you had at lower car volume in the first quarter whereas Expedia specifically said that they had higher car volume. I was wondering if you can discuss the dynamics of what's going on between you and Expedia and the industry in car rental? Thank you.
Barney Harford
Sure, let me take that the kind of question on car rental first then Marsha can talk about the particular air revenues. I think it is important distinction to be made between the kind of mix of our car business and that our competitor. Our car business is primarily retail car selling a retail comforts on the car park. We also sell some car rentals as part of that the dynamic packages. Expedia has a significant component of its business which is in the form of opaque car through its Hotwire business, and in the current market environment, I think it’s the car, the car industry is seeing a situation where the opaque business is, it is seeing strong growth trends down the retail business. Marsha?
Marsha Williams
In terms of the airfare, as you recall in the first quarter we continue to have our booking fee on and so that's one of the primary drivers provide air with up on a per transaction basis year-over-year.
Michael Millman - Millman Research
But did you have that air net fee on last year?
Marsha Williams
We did have it on last year, but as you may recall the entire industry have a little bit an upward adjustment in the fee last year.
Michael Millman - Millman Research
So that was from $5 to $7 you are talking about?
Marsha Williams
Correct.
Michael Millman - Millman Research
Thank you.
Barney Harford
Let me just clarify one point regarding car revenue as well. I think that the car revenue that we breakout is the standalone car revenue. So, the opaque component of our car transactions well is actually within the dynamic packaging line item and so the lower results you are seeing the car is specific to retail.
Michael Millman - Millman Research
Great, thank you very much.
Operator
One moment please for a next question. Our next question comes from Jen Watson. Sir your line is open.
Fred Krom - Goldman Sachs
Hi, it's Fred Krom on for Jennifer Watson. Can you just talk a little bit about what drove higher net revenue rate near this quarter? Or this is the timing mentioned last year, or is it something else? Thank you.
Marsha Williams
Our air net revenue was actually down. If you take a look at press release, air net revenue was down about 14% in the quarter.
Fred Krom - Goldman Sachs
Okay. Thank you. And to the extent that you make your bookings fee reductions permanent, how will you avoid tripping your debt covenants. I know you guys mentioned that for the rest of 2009, you should be able to cover your debt covenant. Can you just talk a little bit more about that?
Marsha Williams
Sure, there are really a number of areas. As you may recall, we said that we are taking $40 million to $45 million out of our cash and capital operating cost this year. We also anticipate that we will continue to get good leverage from our e-marketing spend. As you may have noticed in our first quarter numbers are marketing expenses were down significantly and we would expect that trend to continue. And we are also really focused on continuing to skiver our operating base to see where else we can save cost. And finally, we have seen a fairly significant volume increases as there is air ticket volume increase as a result of the fee cut. So, we anticipate, if we were to make the fee cut permanent that those would help.
Fred Krom - Goldman Sachs
Great, thank you.
Operator
Our next question comes from Mr. Mark Mahaney from Citi.
Mark Mahaney - Citigroup
Thank you, Barney. You talked about building at the hotel offering as the biggest priority now that it would take time in investments. Could you give a little bit more detail on that how long you think that will be, what type of investments is this in sales forces, is this in marketing to consumers, and any quantification of the type of investments that would be required it would be great? Thank you, Barney.
Barney Harford
Sure, yes. So, I think that a couple of points of here. I don’t want to get into too much kind of detail on the specifics of the hotel strategy, just with the competitive reasons. But this is a broad range of things that we are intending to do from kind of building out our, the range of inventory that we have available on our sites around the world to developing ways in which we are able to harness a low cost transaction sources be they CRM generated or search engine optimization, generated transactions, either transactions that the revenues for which will drop straight to the bottom-line.
Or be at building out the proprietary content that we have about our hotel offering on the website. We have recently unveiled an internal strategy here in the company, which involves us, looking at order on our next especially through our hotel land. We believe that the hotel business is the long-term area of focus for us and we are committed to making the appropriate investments behind that.
Now, ask kind of question of what is the level of investment, and how long will it take, or in terms of what the level investment is. We are intending these investments to be basically a reposting of existing resources. So we will take our existing technology teams for example and refocus the efforts towards building out a key hotel infrastructure and this means being play and tell you about some of the things that we are not going to go do, and instead being clear about what we are going to focus on which is anything that can of help us drive and build this hotel business.
As to how long it take, now this is the hotel, the global hotel distribution opportunity is a massive opportunity. And so we see many years of opportunity ahead of us, as we look at the opportunity to got and connect hotels around the world, bring them into the marketplace and make them available to consumers in a compiling way. We have a strong starting point from where we are today. But it will take time for us to achieve the full level of our aspiration. However, we firmly believe that the price is large enough and important enough and frankly has significant enough impact on transfer in the way the consumers’ travel that it is eminently worthwhile.
Mark Mahaney - Citigroup
And then, Barney, if I could ask one follow-up question, you talked about a reacceleration and acceleration in air transactions opposed to fee cuts. We think we, it seems like we have seen that with one of your competitor so far. Where do you think, what do you think happening with share shifts and particular do you think that there is likely to be with all of these fee reductions, fee eliminations on the air side, a material share shift from suppliers back to OTAs of this year that in also I think focus right it’s a very good survey work on demographic and economic trends that would cause that share shift, do you think that’s what’s happening now, is there any evidence you have from the survey you have done with your new users, incremental new users, about where these new transactions are coming from? Thank you.
Barney Harford
Sure, yes, I think there is a number of different sources of these transactions coming from. On the one hand, I think we are seeing a migration from offline travel agents to online travel agents. I think that we have a seen a somewhat of a shift since the flight booking fees came off in that regard. I think there probably is some shift in transactions from supply direct to OTA sites in particular as price discrepancy between the two, the two offering is lined up and obviously with offerings like flight price assurance. Where the customer books flight on Orbitz and another customer books same flight at lower price we will send out of check to different dramatically. That type of benefit I think is meaningful to consumers and we are seeing an impact of that.
I think broadly the ability to stimulate demand through taking off fees and making it more affordable for consumers to travel, I think is something that generates at same levels some stimulation in overall travel demand.
Mark Mahaney - Citigroup
Thank you very much, Barney.
Barney Harford
Yes.
Operator
Our next question comes from Mr. Imran Khan of JPMorgan.
Imran Khan - JPMorgan
Hi, thank you for taking my question. I have couple of questions. In international markets it seems like the growth rate decelerated, I think local currency was down 20% on year-over-year basis. Could you give us some sense in terms of what are you seeing in international markets in terms of transaction growth or and that average prices for airlines and room nights?
And so that's the first question and secondly, on the marketing cost side where you are seeing lot of efficiencies on the e-marketing site. I am trying to drill down a little bit it seems like in Q1 overall ad rate came down and that's positively impacted customer acquisition cost. Can you give you us some sense how much is your e-marketing efficiency because of ad rate coming down and how sustainable that you think that Ad rate will be down? Thank you.
Barney Harford
Sure. Let me take the marketing question first. The major effect that we are seeing here is our focus on the spend ratio targets of various different distribution partners. We historically, had an e-marketing strategy that was somewhat more oriented towards driving top line growth without as much focus on driving bottom line profitability.
In the context of the current economic environment, and various different economic factors that we are facing, we made a strategic call early in the first quarter to rationalize our e-marketing strategy and to focus more on the bottom-line on driving efficiency in the bottom-line.
As a result we have been successfully renegotiating our relationships with a number of our e-marketing partners. And at the same time, in certain cases we have determined that as of right now it does not make, there is no relationship for us to enter in to.
In each of those cases, however, that process has allowed us to yield bottom-line savings which has factored into the overall e-marketing savings that we called out. So, it is really about rationalization of travel specific traffic acquisition rather than broad ad rates. I do not think, most of our e-marketing is associated with buying clicks from either the search engine on travel-related keywords or working with travel, research-type partners who are very much deep into travel category. Marsha?
Marsha Williams
I will take the international question. And I think it’s fair to say that our international business has been impacted primarily by our international hotel business. You will see that our, in general our hotel revenues were down 29% in the quarter. And you know I think we mentioned earlier that we have seen some continuing softness issues at the HotelClub brand. So in terms of and that was the largest driver of our international revenue decline.
Imran Khan - JPMorgan
Can I ask a follow-up question, can you give us some sense the HotelClubs' geographic concentration, is it primarily a UK business or can you give us some sense on what kind of daily rate decline you saw on that business?
Barney Harford
Can you repeat the second part of the question?
Imran Khan - JPMorgan
Can you give us some sense of a geographic concentration of HotelClub, is it primarily an UK business and what kind of average room night daily rate decline you saw in that business?
Barney Harford
Sure in terms of the geographic mix the HotelClub is actually pretty geographically diversified both across the points of origin where the customers are booking and then the points of destination where the customers are booking too. But I think it will be fair to say that Australia, and then Europe are important components, significant components both at the origin and destination level. Marsha can you comment on the ADR options.
Marsha Williams
Yeah I think the ADR trends in the hotel cover similar to what we have seen in our businesses which is that the ADRs are down on a year-over-year basis.
Imran Khan - JPMorgan
Okay thank you.
Operator
Our next question comes from Mr. Doug Anmuth from Barclays Capital.
Ron Josey - Barclays Capital
Hi this is actually Ron Josey calling in for Doug two quick questions the first is can you provide some additional detail on why you decided to lower hotel fees and really what will determine if you make the reduction or elimination of the hotel fees and air fees permanent? And then finally, in terms of the cost associated with these fees, can you provide little more information in terms of what the cost Orbitz would be? I believe you originally said that the cost was about $3 million per month in both air or air as well as hotel fees? Thank you.
Barney Harford
Sure, well, I think one of the, in terms of the rationale for taking the hotel booking fee cut that we did. We believe partially at Orbitz that the writings we are doing is to be trying to find a best that help our consumers find the best possible values available. And so as part of our focus on finding values for consumers. We thought that we are very clear that it was important for us in this economic climate to be making our hotel offering as competitive as possible. And so with the dramatic cut in hotel booking fees that we introduced combined with the launch of the Total Price hotel search results, we were really one shining a light on relative pricing. Introducing transparency into the industry and driving some real savings for consumers.
As for the impact of the kind of fee cuts, we are not breaking out the specific impact on air or hotel basis. But what we have been clear about is that we feel confident that most of the impact of the flight hotel booking fee reductions are being offset by significant increases in volume and particular in air as a result of taking off the flight booking fee by the e-marketing spend rationalization that we have embarked upon in the first quarter which we expect to continue with, on a go-forward basis.
In the incremental medium as additional bookings we have through finding ways to show more in a way of that non-transactional media advertising to consumers on our website as they look to transact.
Obviously those three factors layer on top of the $40 million to $45 million of expense reductions that we identified. And in net we believe that most of the impact of the fees can be offset.
Ron Josey - Barclays Capital
Great, thank you. And one other, one quick follow-up sort of changing topics a little bit. Can you provide some additional details based on the mandatory prepayments associated with the term loan. I think they were delayed in 1Q. But we are looking out for the remainder of 2009?
Marsha Williams
The way that our loan agreement works is, we are required to repay $1.5 million per quarter. And we have a mandatory cash flow recapture test, that we test at the end of every year. So we test it on our 12/31 balance cash flow statement. If we generate excess cash flow as defined under the loan agreement and it's a fairly complicated definition.
We are required to repay half of that excess free cash flow by March 31st the following year. It is an annual test during 2009 we did not make any free cash flow repayments. And its probably too early to speculate about 2010 and beyond.
Ron Josey - Barclays Capital
Very helpful thank you. I'm sorry.
Barney Harford
I will just make one additional clarifications in terms of offsets that are helping those be comfortable that we are able to offset the majority of the, most of the cost of the fee cuts, the one of the area is the fee revenue associated with intra line and foreign point of origin, transactions that we are still charging which in additional somewhere significant offset.
Ron Josey - Barclays Capital
Thank you very much, very helpful.
Operator
Our next question comes from Mr. Mike Olson from Piper Jaffray.
Michael Olson - Piper Jaffray
All right, thanks good morning, couple of quick questions, what are the additional new media monetization initiative that you are taking about? And I guess really allude my question if you are going to be doing more advertising on this site are you worried about it potentially being less clean experience and what customers are seeing on other side?
Barney Harford
You know, there is different things we are looking at doing. A lot of the stuff that we do on our website actually links back into the website and allows some of our supply power or destination marketing organization partners, to promote transactional opportunities on the website.
We are definitely very focused on making sure that we have a clean user experience and that we have this our website to fast away to customers to search. So as we look at different opportunities first to explore we are certainly taking that into account. We are also taking into account potential cannibalization.
So to the extent we add additional media placements we want to make sure that those offset by reductions in transaction profitability. So in transaction conversion that we would otherwise expect. But we are very much kind of, we believe on top of that and as we consider these opportunities. We believe that there is incremental revenue associated with them.
Michael Olson - Piper Jaffray
Okay, and then different topic, is there any outlook you could provide on just ability to generate free cash flow in '09?
Marsha Williams
Again, I think its probably too early to speculate on that, as I answered the prior question, in terms of having a payment required under our excess free cash flow, recapture test I can not say however that, we anticipate with all of the changes that we are making in the business that we do expect to be able to largely fill the gap that is being caused by the fee cuts that we have taken.
Michael Olson - Piper Jaffray
Okay thanks.
Operator
Our next question comes from Mr. Michael Millman, Millman Research.
Michael Millman - Millman Research
Thank you. in the past one of your initiatives was to grow internationally, we haven’t talked about that. Wondering where that stands also given all the publicity about the fee eliminations and price lines fee eliminations. Do you think its likely or recent acceptation of that booking fess will return and than regarding marketing I believe at least in the first quarter you were the largest advertiser on travels zoo its part of the your strategy on marketing to promote specific deals?
Barney Harford
Sure, so let me handle those so regarding international, we got a couple of main businesses there, the ebooker, sites and the HotelClub sites as Marsha said, here we saw some considerable weakness in the HotelClub business in the quarter. On the ebookers site we completed in Q4 of last year the migration of the last of our ebookers sites on to our new global platform.
And this gives those sites access to additional functionality and capabilities and we believes that those websites now offer very competitive functionality in their respective markets. Over the course of this year we will be working on a number of operating improvements to those websites to continue to deliver meaningful improvements to the capabilities of those websites. Clearly, the economic situation in Europe is challenging, but we believe we are well positioned for rebound in the European economic situation.
With regard to fees we do not want to get into too much speculation about what we are going to do, what some of our competitors might do in the fee scenario, but as we said we have been very pleased with the significant uptick in flight volumes that we have seen associated with our air booking fee removal. But that's all I would like to say.
Frank Petito
With regard to I think your specific question about Travelzoo and our e-marketing strategy and rationalization. In general as a matter of policy we do not talk about the relationships that we have with individual problems on supply side or on demand side. I mean clearly you can see from visiting some of the websites that we used to generate transactions you can see the type of placement that we have and you can draw your inferences what that indicates about our relationship that we have.
But other than that I certainly wouldn’t want to comment on any specifics of our relationships. But we do, as I talk about our e-marketing rationalization and focusing on the efficiency level and spend ratio of various different distribution sources. Yes, it's exactly this type of travel research and search engine marketing type partner that we are talking about here.
Operator
Our next question comes from Mr. Robert Hopper from UBS.
Robert Hopper - UBS
Hi, guys. There are couple question. I know, first one, I know you don’t want to give too much detail on the booking fee issue. But can you give some idea what percent of your transaction, the air transactions are actually effected by the booking fee change in the air going to change to certain number of certain particular type of transactions.
Secondly, on the cost savings, how much of cost savings were actually realized in the quarter and can you talk a little bit about when you expect to fully realize 40 to 45 and what cash costs were in the quarter to realize those cost savings? And then lastly, on the cash here you sit with $173 million, what are your thoughts on use of that cash, anything you can do to either hold back your leverage profile or just general expectations which you are doing with in the course of the year? Thanks.
Marsha Williams
Why do not I start with the cash question, the 173 represents primarily two things, three things really, I guess, the first is just our normal operating cash. The second is we did borrow on to the revolver during the first quarter and as I said. We did that primarily because we have concerns about the financial industry and wanted to make sure we had sufficient liquidity.
And thirdly, I think one of things that people need to keep in mind is that our customers work and pay for their travel during the spring season and then travel during the spring and summer season. And then we settle up our bills in the fall season. So, some portion of the cash on our balance sheet represents customer prepayments that we will need to use that cash later on in the year to settle up with the hotels for the stays that our customers have booked.
So, you know as we look at the cash position we are obviously very comfortable with where we are now but and would anticipate using certainly some portion of that cash to continue to settle up with our hotel customers.
In terms of the status of the cost cuts. You will notice that our SG&A declined by $10 million on a year-over-year basis in the first quarter. So we are well on our way to achieving the cash the annualized cash savings that we expect in respect to have accomplished most of those.
We've accomplished a lot of cuts already so you will see them flow through the income statement for the remainder of the year and we expect by December to have recognized all of those savings.
Barney Harford
Yeah with regard to the question on air booking fees. It’s certainly the case that most of the tickets that we sell in CheapTickets and Orbitz are now fee-free. The foreign point of origin and interline tickets are a minority of the tickets that we sell. One other point I would make we talked about some of the quick wind projects that we launched over the last couple of months. Just an example one of the quick wind projects that we launched was to significantly expand the number of foreign points of origin and countries for whom we accept credit cards on our website and that’s what we have seen a nice uptick in some of our air transaction bookings associated with those types of tickets.
Operator
Our next question comes from Scott Hamann, Keybanc Capital Markets
Scott Hamann - KeyBanc Capital Markets
Good morning just in terms of your marketing spend, how much of that would historically have been online versus offline and kind of what's the expectation going forward and looking at the marketing leverage that you’ve experience in the first quarter, you said it was going to continue. It was going to be better through the rest of the year as well, but if the magnitude is it fair to assume that could come in a little bit?
Barney Harford
It's certainly kick in, most of our marketing investment is, the majority of the marketing investment is online. How we do, we are making significant investments in building our offline brand in fact, we are just launching today a new marketing campaign that is designed to emphasize the value proposition that we are offering to consumers in hotel with the launch of Hotel Price Assurance combine with the dramatic of the target hotel booking fees. It's the other one two punch, and you will find our spokesman give you couple of punches that if you catch the 30 seconds as well. But it is the case that the majority of spend is online. If you could just repeat the second component of question is pending.
Scott Hamann - KeyBanc Capital Markets
Well, Marsha had indicated that, that you expected to continue to leverage marketing through the balance of the year and I was just wondering that if there would be significantly less than deleverage you experienced in the first quarter?
Barney Harford
Yeah, I think what I was talking about was the eMarketing rationalization, and we expect this rationalization of eMarketing spend to continue going forward. This is basically I was saying that if you look at the total mix of transactions that we’re acquiring through various different partners, there was some transactions that we’re acquiring on a loss making basis. And the other transactions that we may have been acquiring it didn’t meet our spend ratio targets. We are now adjusting our strategy to focus on generating bottom-line contribution from those eMarketing partners and therefore getting rid of the transactions, stopping acquiring transactions that were loss making.
In many cases we are successfully negotiating with our partners to modify in terms of our relationships in such a way we continue to be able to work with them to drive upon transactions from their websites. In some cases, that may not be possible in which case we would stop acquiring transactions from that particular channel.
Scott Hamann - KeyBanc Capital Markets
Okay. Thank you very much.
Operator
Our next question comes from Mr. George Askew with Stifel Nicolaus.
George Askew - Stifel Nicolaus
Thank you, George Askew at Stifel Nicolaus. Many of my questions have been asked, but two remain. If you back out the expenses that associated with the ebookers we designed last year. What kind of trend are you seeing in your product development technology innovation spending year-over-year, is it up down flat, how is that changing?
Marsha Williams
Yes, George, many of those expenses frankly were capitalized. So, what you would see is that our capital expenditures in this quarter were roughly flat with where they were last year, and part of that reflex that some of the reductions that we've talked about in capital spending will actually come later in the year. And we have reallocated resources from working on the ebookers platform to working on a number of the hotel initiatives that Barney has talked about.
George Askew - Stifel Nicolaus and Co.
Right.
Barney Harford
So, what I would say there is that, we certainly did in the $40 million to $45 million of cost that we took out in November and January. We did take out some spend that was dedicated to technology. However as we look forward, Orbitz is a Company that has long history of innovation. We have a very talented product and technology organization full of highly dedicated people who have been, who have track record of delivering real consuming innovation. And we believe that going forward it is vital for us to be able to continue to make these investments. As I said in my prepared remarks, we are refocusing the efforts of this team, to focus on the hotel opportunity. But we do believe that at this stage the level investment behind product and technology is broadly inline with what it should be. And we're committed to maintaining that investment such that we can retain our competitive and innovative edge.
George Askew - Stifel Nicolaus
Okay. Thank you, and a quick follow up, just taking a 30,000 given your unique perspective on the travel industry, what have you seen, just so far in the second quarter as far as consumer and business demand for travel both, domestically, internationally. Any comments you can make there?
Barney Harford
Sure, well, I mean, what I would like to say when I am talking to the media, there is no time to travel, we are seeing some phenomenal deals that are out there for consumers that they are able to travel right now. And as we move into the kind of summer or holiday season we are very encouraged by the trends that we are seeing. We are seeing suppliers across the Board looking to fill gaps in terms of occupancy and in terms of load factor. And they are looking to channels such as our own to deliver incremental consumers by helping us deliver great deals for our customers.
But we launched that the largest booking, the largest hotel sale ever, just a couple months ago offering discounts of 30% or more on thousands of hotels around the world. There is unprecedented level of value in the marketplace right now. And we believe the consumers are responding in particular to our channels and taking that opportunity to travel and to stay in hotels that they remind not otherwise have been able to afford.
George Askew - Stifel Nicolaus
Okay, thank you.
Operator
We show no further questions at this time.
Barney Harford
Great, well, thank you very much for joining us on the call today. And we look forward to updating you again on our results for the second quarter in approximately two months time, thank you.
Marsha Williams
Thanks.
Operator
Thank you for participating. Today's conference has concluded. Please disconnect.
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