On the heels of Expedia Worldwide president Scott Durchslag exiting the company in January, CEO Dara Khosrowshahi used words such as “unsatisfactory” to describe “the overall Expedia brand performance,” and “poorly” to characterize how airline ticket sales and vacation packages fared in the fourth quarter of 2011.

Expedia Inc.’s revenue increased 7% to $787.1 million on a 19% increase in hotel room nights in the fourth quarter, although a decrease in revenue per room night put a damper on things.

Adjusted EBITDA fell 4% in the quarter to $162.1 million, and content and technology costs, including monies allocated to the tech platform, rose 29% to $98.6 million.

Hotels.com and the Expedia hotel product have been migrated to the new tech platform, the air product will be on board by the end of the first quarter, but vacation packages aren’t expected to be transitioned “until the back half of 2012,” Khosrowshahi told financial analysts during the company’s fourth quarter conference call yesterday.

Khosrowshahi expressed confidence that the new platform will increase conversions and enable Expedia to innovate faster, but he conceded that the company has something to prove and “there are a lot of ifs at this point.” He said:

Listen, all other things being equal, when E3 is complete, I would expect to see room night growth accelerate for Expedia, not only standalone room nights but especially packaged room nights that have been a negative factor. And I would hope to see that in the second half of the year. Again, we haven’t done it. But that’s why we’re investing the way that we are on the technology side.

The company says subsidiary Hotels.com, which transitioned to the E3 technology platform in early 2010, “experienced healthy room night growth across all regions during the fourth quarter.”

Khosrowshahi added:

And Hotels.com has continued to maintain … high room night growth. And hopefully, with execution, we’d expect to see that continue on a go-forward basis. But again, we know that we have to prove that out to you. I think the Q4 room night number was really healthy, and I think it was really healthy without Expedia hitting on all cylinders. So if we can hit on all cylinders, we could see things get better. But those are a lot of ifs at this point.

There were bright spots in the earnings announcement.

Expedia is bullish on its 50-50 AirAsia joint venture, which chipped in with healthy room night and hotel revenue growth in the fourth quarter.

And, Expedia CFO Mark Okerstrom says the company is not feeling any impact from Booking.com’s share gains in the US market, where Expedia’s hotel share likewise is growing.

Financial analysts offered varying views about Expedia’s prospects following the earnings release.

Tom White, an analyst for Macquarie Capital, has a “neutral” rating on Expedia and wonders about the cost of the technology upgrades. White says:

The main question for the stock in our view is not whether the Expedia brand’s tech re-platforming will yield improved conversion rates but when and how much the initiative will ultimately cost. This limited visibility, coupled with the potential for y/y EBITDA declines in 1Q given EXPE’s increased seasonality post the TRIP spin is enough to keep us on the sidelines near-term despite EXPE’s appealing relative valuation. Add to this EXPE’s larger relative exposure to the slower-growth/supplier-friendly U.S. market, and we still view PCLN as the preferred way to play the secular shift of global travel bookings moving online.

And, Mark Mahaney, an analyst for Citi Investment Research & Analysis, also has a “neutral” rating on Expedia’s stock, but says the “soft” results for Expedia in the fourth quarter sets the company up for “an excellent 2013.”

Either way, with Booking.com growing its hotel business, Expedia has something to prove.

The apparently sudden exit of Durschslag, who focused on expanding Expedia Inc.’s global marketshare as president of Expedia Worldwide, is the second high-profile departure from the company in the past few months.

Expedia Inc. CFO Michael Adler resigned recently and was replaced by Mark Okerstrom. Adler’s exit was widely seen as related to the TripAdvisor spinoff and the prospect of his heading up the fiscal responsibilities of a downsized company — Expedia without TripAdvisor.

An Expedia Inc. spokeswoman provided few details about Duschslag’s departure other than confirming he resigned and noting that Khosrowshahi will assume Durschslag’s duties as president of Expedia Worldwide while retaining his CEO role, as well.

Durschslag’s departure comes as Expedia prepares to report its 2011 earnings within a few weeks.

One wonders if Durschslag’s resignation is related to Expedia Inc.’s international performance as it chases Priceline and its Booking.com unit in the global hotel business.

But, that is speculation for now.

There have been rumors of a reorganization of sorts in the works at the company and perhaps Durschslag’s resignation is part of that effort.

And, is Expedia chairman Barry Diller sending a message by putting Khosrowshahi directly in charge of the company’s international expansion effort?

Durschslag’s LinkedIn profile says he joined Expedia in December 2010, while the Expedia website says he was hired in early 2011.

Durschslag most previously was COO at Skype.

As the Justice Dept. reviews the proposed transaction, Tnooz conducted the following interview with Expedia Inc. President and CEO Dara Khosrowshahi about Expedia’s role in the regulatory review.

Tnooz: Is Expedia pushing the Justice Dept. to block the Google-ITA deal?

Khosrowshahi: “The DOJ contacted us for our thoughts about the deal . We are not pushing them one way or the other. So, obviously we’ve got some concerns about the potential transaction. We shared our views with them. But, it is not up to us to push the DOJ one way or the other. They will make up their own minds.”

Tnooz: What kinds of concerns are you expressing to them?

Khosrowshahi: “I don’t want to get into specifics. I think in general, you have two pretty dominant services. Obviously, Google is the dominant search provider in the U.S. and in Europe that extends to travel, which is our category. And, then you got ITA which is arguably the dominant flight search technology that is selling to third parties. To the extent those two come together, there are some potential concerns about what that combined company can do. And the DOJ asked us various questions. We answered the questions …”

Tnooz: So, in your talks with the DOJ you are not advocating a position one way or the other? Are you asking that any conditions be put on the deal like the DOJ did recently with its review of the United-Continental merger?

Khosrowshahi: “We haven’t had discussions about conditions etc. with the DOJ at this point. From my understanding, the DOJ is in fact-finding mode and obviously a lot of people in this industry are concerned about this deal and, based on both Google’s and ITA’s market position,  I don’t blame anyone for their concern. But I think the DOJ generally is in fact-finding mode and that’s where we stand right now.”

Tnooz: So you don’t anticipate being more forceful in your opinions about what should happen?

Khosrowshahi: “I think at this point we haven’t determined what we are going to do. Obviously, we want to talk to Google and have discussions with them about what their intentions are etc. But it is pretty early in the process. You know, I think we haven’t fully fleshed out what our intentions are at this point.”

Tnooz: Google is saying this deal could close in a couple of months, but you are saying these are the early days of the DOJ process?

Khosrowshahi: “At this point they asked us some questions and we shared some concerns with them. That’s where our discussions with the DOJ are now. It may change early enough.”

Tnooz: There’s been talk that Expedia is playing an active role in the industry in rallying the troops against this deal.  Are you talking to the GDSs and other online travel agencies in trying to get their support  to get this deal stopped?

Khosrowshahi: “Obviously because of our position in the industry, we talk to the GDSs and we talk to suppliers on a daily basis and, as you might expect, in the more recent discussions this potential transaction has come up. It’s just something that you talk about. It’s a big deal. So we talk to other players in the industry about it. The DOJ has reached out to a number of folks and at this point  we haven’t determined whether we are going to move in an active direction or not. At this point, we are talking to people, we talked with the DOJ and that’s where we stand.”

Tnooz: You said you will talk to Google. So you haven’t talked to Google yet about the deal and how it might play out?

Khosrowshahi: “We talk to them [Google] all the time. They are a great partner of ours and we work with them quite well on a daily, weekly, monthly basis, and again, the subject comes up. They let us know about the transaction signing pretty early on and the discussions with Google are ongoing, just as our relationship is ongoing.

Tnooz: Expedia’s public statements about the deal seem to have changed since you first talked about it, saying Expedia would not be overly exposed to this deal. Chairman Barry Diller made some strong statements about how this would be a dangerous move. So, your position seems to have changed a bit, right?

Khosrowshahi: “I think it’s consistent in that from a short-term perspective we are not an ITA consumer. As a result, the near-term consequences for us are not significant. Hotwire and TripAdvisor use ITA and obviously the concern there is to  ITA’s availability to them on a long-term basis. I think when you step back, I think what Barry was talking about is that strategically you are combining the dominant search provider and the dominant air search service provider and from that standpoint we don’t think it is a good thing. We talked to the DOJ about that. Now Google is a great partner and they are telling us the right things, but structurally, we don’t think this deal’s a good thing for the industry. We’ll see how it plays out.”

Tnooz: Are there any thoughts about dropping ITA for Hotwire and TripAdvisor?

Khosrowshahi: “Again, we are in wait and see mode. Google has told us nothing will change and for now we’ll take their word for it. And, If something changes, we’ll evaluate ITA based on  the product. … There are no specific plans changing based on this transaction, at least not yet.”

Tnooz: Are there any plans to commercialize your own air-search product, Best Fare Search, and to market it to third parties, now that there is a lot of concern about ITA in the industry?

Khosrowshahi: “We have no specific plans at this point. It is theoretically possible. But there are a number of hurdles there, and it would be pretty costly to do so for us. We have to find customers etc. We’ve had some discussions about it. It is a bit of leap taking BFS from an internal technology to a technology that’s consumable by third parties. “

Tnooz: There’s been a lot of talk about leading up to the Google-ITA deal that Expedia sought to invest in Kayak and in some kind of way to keep ITA out of Google’s hands. Can you explain what happened there and are you still considering taking a stake in or buying Kayak?

Khosrowshahi: “I don’t want to comment on deal talk. Obviously what happened is that Google and ITA came to an agreement. But I don’t  want to comment specifically on what could have happened or what you read about what happened.”

Tnooz: Is the $750 million you recently raised in a debt sale related to the Google-ITA deal and the fallout?

Khosrowshahi: “Unrelated. The cost of debt capital right now is at historical lows. We thought it was a great time right now to go to market and raise some capital.”

“I think it was [White House Chief-of-Staff] Rahm Emanuel who said, ‘Never let a good crisis go to waste,’” Khosrowshahi says, drawing some laughs from the crowd at Citi’s 20th Annual Global Entertainment, Media & Telecommunications Conference in San Francisco Jan. 5.

The end result was Expedia eliminated air and reduced hotel booking fees and took a pretty good whack at Orbitz and Travelocity. As Khosrowshahi describes it: “I do think that from a philosophical standpoint, as we scale, we do want, to some extent, to take the air out of the competition. Our cutting air fees hurt some of our competititive brethren in Orbitz or Travelocity a heck of a lot more than it hurt us because of our scale, because of our hotel business. And that allowed us, we think, to gain scale pretty significantly, at least on the hotel side of the business.”

The Expedia CEO provided a lot more color than I’ve heard him give before on what led to the decisions.

Prior to the fee cuts, Khosrowshahi explains, air capacity had come out of the system and there were no assurances that it would expand in the future. Thus, Expedia was losing share to airline websites in a contracting market.

And, although losing share in a growing market might not be great, dropping share in a declining market was “unacceptable,” Khosrowshahi says.

The product wasn’t good enough, he says, in part because of the fees, and the strategy wasn’t working.

Thus, Expedia had to spend more on marketing to get consumers to buy airline tickets and book hotels, and at the same time, with the economy hitting the skids, consumers were getting more price sensitive, he adds.

At the same time, as Expedia was mulling its options, it knew that its competitors’ balance sheets were weak and that eliminating or reducing fees would hurt them more than Expedia, Khosrowshahi says.

So Expedia cut its fees, and is still in the process of trimming more internationally, and dealt a setback to its rivals.

But, it is also taking steps to limit future competitors.

“From a philosophy standpoint,” Khosrowshahi says, “I do think that we have a management team that is very focused on building a business that leverages, that scales and makes entrée into this business on a scale basis very, very difficult.”

Expedia has rolled out a series of fee cuts and that’s in line with its new-found philosophy, he says.

The company wants to eliminate any impediment — any “friction,” as Khosrowshahi calls it — that gets in the way of consumers completing a transaction.

And, he vows Expedia will get there by any means necessary, including by eliminating costs or changing the business model.

Flexibility — and hardball — apparently rule the day.

“We’ll play in metasearch and we think metasearch will be around forever,” Khosrowshahi told attendees at Citi’s 20th Annual Global Entertainment, Media & Telecommunications Conference in San Francisco Jan. 5.

At the advent of travel metasearch several years ago, the channel was widely seen as a supplier medium that might bring the OTAs to their knees, but much has changed since then.

Khosrowshahi says metasearch is not one of Expedia’s top 3 channels, but it’s an important one.

And, he doesn’t view metasearch as competition, although he’d rather, of course, get direct traffic.

Expedia’s TripAdvisor launched flight metasearch early in 2009, and Khosrowshahi says he forsees “quite significant growth” from the metasearch channel — not just from TripAdvisor’s flight metasearch — in 2010 and 2011.

Khosrowshahi says metasearch has been a “fairly efficient” channel for Expedia, and the OTA will take advantage of it, partipating up to the level that the company’s efficiency metrics allow.

When Expedia eliminated air booking fees and other OTAs followed, there was a school of thought that flight metasearch was dead because there now was parity with airline websites and not much differentiation.

But, if you listen to Khosrowshahi, then the Kayaks and Travelsupermarkets of this world have a few good days ahead of them.

I asked Khosrowshahi, who was decked out in a pinstripe suit as we sat outdoors in the Florida sun, whether he expected to be breaking any news in his “executive interview” with PhoCusWright President and CEO Philip Wolf later in the afternoon.

Referring to a recent contract battle with Choice Hotels, Khosrowshahi said he didn’t think so because “we’ve made enough news lately.”

Khosrowshahi declined to get into any of the contract details, but said the Choice contract is similar to deals with other chains, adding, “I was confident we’d get it done.”

Looking to upcoming deals with major chains, Khosrowshahi said typically renewals with large chains are almost prenegotiated in the months leading up to contract expirations.

“I certainly don’t see any big disruptions coming up,” Khosrowshahi said.

Then, we turned our attention to the strides being made by Priceline’s Booking.com and the prospects for Expedia’s Venere hotel business in Europe and Asia.

I asked him if he’s nervous about Booking.com and I got a surprise answer.

“Of course, I’m nervous about Booking.com,” Khosrowshahi said, adding that Booking.com’s trajectory is encouraging because it shows that there is plenty of room for growth if a company “executes well.”

Khosrowshahi noted that Expedia’s Easy Manage program, which uses the agency model for small and independent hotels in Europe and Asia-Pacific, has signed some 6,500 properties.

He said the merchant model is most appropriate in large tourist destinations, and having both models at the company’s disposal is advantageous.

The Expedia CEO also said the company would monitor the tack that Orbitz Worldwide is taking with a modified agency model in Asia-Pacific to see if would be worth adopting or not.

In response to a question, Khosrowshahi said Priceline’s exploding market cap, which recently surpassed Expedia’s, is another “encouraging sign” because it shows how the market is growing.

“Priceline’s market cap didn’t come at anyone else’s expense,” Khosrowshai said, noting that Expedia’s market cap has tripled this year.

There have been numerous rumors over the last year about online travel agency consolidation, but Khosrowshahi discounts the buzz, saying he doesn’t expect large-scale consolidation in the short term because you usually don’t see such consolidation in a growth market.

Depending on the number of small and independent hotels that sign on, Khosrowshahi believes TripAdvisor’s new Business Listings product, where hotels on TripAdvisor can display their URLs for direct bookings, could be a significant revenue stream for the Expedia Inc. unit.

“It looks good on paper,” he says, adding that theoretically there is always the possibility when you introduce a new advertising product that it could cannibalize other advertising.

“If we don’t build a good product,” Khosrowshai said, referring to Business Listings, “then someone else will.”

Looking into his crystal ball, Khosrowshahi said he believes the advertising/media business will be “the most significant mover” over the next few years.

Media revenue, including that from Expedia Inc.’s TripAdvisor business, accounted for some $300 million, or roughly 10%, of Expedia Inc.’s $2.9 billion in revenue in 2008.

It wasn’t exactly a headline, but Khosrowshahi said he believes that percentage will grow.

He said there is a huge opportunity in the media business, but it hasn’t scaled yet and there has been no product out there “to move the needle.”

Khosrowshahi expects that needle-mover in the media business will emerge over the next five years.