Travelocity, AOL Revise Marketing Pact

AOL has revised the financial terms of its existing marketing relationship with longtime partner Travelocity, and extended the agreement to March 2006. The deal was previously scheduled to expire in 2005’s second quarter.

Few details were released, other than that Travelocity will experience significant savings under the arrangement, while AOL will benefit from a reduction in the amount of ad revenue it shares with Travelocity.

“To reach a new accord more than a year ahead of schedule is a testament to the strong links we’ve forged with AOL,” said Travelocity president and CEO Michelle Peluso.

It’s also a testament to AOL’s desperation in the face of steadily declining ad revenues and the death of a string of once-lucrative contracts signed during the boom era. AOL was no doubt eager to hold onto its relationship with the online travel services company, and therefore willing to negotiate.

The deal is also crucial for Travelocity, which today reported lower-than-expected results for the fourth quarter and is under pressure from investors to reduce costs. During the Q4 call this morning, the company said while its distribution relationships with portals AOL and Yahoo are integral to its revenue model, they are also expensive — in the case of AOL, too expensive.

“Portals were a significant portion of our losses in 2003 and were out of proportion” with the state of the industry, Peluso said. “These revised economics will play a vital role in our profitability in 2004.”

In recent years, AOL has been forced to grant revised terms to many partners with whom it had signed significant advertising and distribution deals during the bubble years. No longer willing to pay high prices in a bargain shopper’s market, companies such as eBay, 1-800-Flowers and SportsLine.com have renegotiated their agreements with the online unit of Time Warner, obtaining more favorable terms.

The revision of its arrangement with Travelocity can therefore be considered a win for AOL, even though it will result in lower billings. Specifically, the companies said Travelocity will benefit from significant savings beginning in the second quarter of 2004, a year before the previous agreement is due to expire.