Business Breakdowns
· Matt Reustle
[00:00:00] S0: This is Matt Reustle, and today we are breaking down the travel IT giant Amadeus. If you have booked travel with a travel agent or done business travel and used your system, there's a very good chance that was done through Amadeus's plumbing. They are IT for travel and it goes well beyond what you see or interact with as a consumer, doing this within the airlines, within hotels, inventory management, all of the behind the scenes work that make these logistical engines actually flow. My guest is Ben Needham, portfolio manager at Ninety One Asset Management and he joined to cover why Amadeus might have some misconceptions in the market, the business and how it's grown and captured such dominant market share over the years, and what that looks like in terms of a value proposition on all sides of the equation. We also get into the AI debate and what that might mean for Amadeus and what a strong balance sheet could represent for Amadeus relative to some of its peers. So a very interesting niche business, a lot to discuss here and Ben was a great guest to cover it all. Please enjoy this breakdown of Amadeus. Alright Ben, I am excited to have you here to talk about Amadeus and this was admittedly one that took some time for me to wrap my head around as I was doing some initial research on it. So an easy place to start was just to get your overview description, how you would paint the picture of this business to a listener who is vaguely familiar or not familiar at all with this name.
· Ben Needham
[00:00:00] S1: Thanks for having me, Matt. I think the best way of summarizing the business is as the gorilla of travel IT, but a friendly gorilla which is able to grow well ahead of a structurally growing market i.e. travel and importantly this is in a low risk way, given its diversification across geography and travel provider customer, and the inflation linked nature of how the revenue model works. So what do they actually do? They're three main parts of the business to understand. Firstly, they have a distribution business which links up travel sellers with travel providers in the indirect travel channel. It essentially aggregates content from the travel providers, i.e. airlines, hotels, rail companies and supplies that to a pre-fragmented global travel provider ecosystem. This includes corporate travel management companies, online travel agencies, bricks and mortar travel agencies, super apps, meta channels and AI agency perhaps. If you're making a travel booking via a travel agent or your company is booking a business flight for you, there's a good chance Amadeus is the plumbing that enables it, given they have over 50% market share in distribution, which is actually rising. Distribution perhaps only gets a lot of the investor focus as the biggest business by profits is actually now the air IT business. This is predominantly the inventory management, reservation management and departure control system for over 50% of the airlines globally processing over 2 billion passengers boarded per annum. When you're making a booking on say Lufthansa, Amadeus will process that booking and when you're boarding a Lufthansa plane, Amadeus will facilitate the information flow all the way to the travel gate. Then finally, Amadeus also enables travelers to make reservations in hotels by scaling hotel customer reservation business. Amadeus in effect is uniquely positioned right the way across the travel ecosystem enabling the flow of content, bookings, transactions, and ultimately travelers.
· Matt Reustle, Ben Needham
[00:00:00] S0: It's interesting as an industry, I would've previously assumed that most airlines built this system internally or had some type of internal software that would do this for them. Can you frame a little bit the space as a whole, how Amadeus fits into this ecosystem, whether there's competitors, how the technology kind of evolved into a place where there's such a key player in the industry? [00:00:00] S1: The air IT part of Amadeus is a community-based platform and what that means is they're able to share economies of scale with their customers. They can amortize more of their R&D spend across more customers as they grow and that's why airlines, which are pretty cyclical businesses, pretty capital intensive, they outsource these types of operations to people who can do it better than themselves, and that's why typically when you look at the airline space today or the travel IT space today, within that just over 80% of air IT is outsourced to the likes of Amadeus and then only 20% today is actually in-housed. That's the background to the air IT ecosystem and business. When you think about the market shares, Amadeus has over 50% market share within the air IT space, so it processes over 2 billion passengers boarded per annum of a market size of just over 4 billion ex China. The second biggest company is Sabre, which is 600 to 700 million passengers boarded, and then the majority is mom and pop players and/or in-house providers.
· Ben Needham, Matt Reustle
[00:00:00] S1: The air IT part of Amadeus is a community-based platform and what that means is they're able to share economies of scale with their customers. They can amortize more of their R&D spend across more customers as they grow and that's why airlines, which are pretty cyclical businesses, pretty capital intensive, they outsource these types of operations to people who can do it better than themselves, and that's why typically when you look at the airline space today or the travel IT space today, within that just over 80% of air IT is outsourced to the likes of Amadeus and then only 20% today is actually in-housed. That's the background to the air IT ecosystem and business. When you think about the market shares, Amadeus has over 50% market share within the air IT space, so it processes over 2 billion passengers boarded per annum of a market size of just over 4 billion ex China. The second biggest company is Sabre, which is 600 to 700 million passengers boarded, and then the majority is mom and pop players and/or in-house providers. [00:00:00] S0: I think I read an anecdote that Lufthansa had pulled away from Amadeus back in the mid 2000-teens because of their industry power but then quickly reversed that decision and signed up again with them, which is an indication of core competency focus and understanding where you can outsource and make that effective for your own system as well. What is the origin story to Amadeus? How long have they been around? They've clearly built up this advantageous position in the market. What does that trace back to?
· Ben Needham
[00:00:00] S1: The business has been around for a long time and the history is really important. So they actually were created by the airline customers. Distribution systems were created in the 60’s and 70’s and that was to enable airlines to process bookings and get close to their customers in effect, and this was before.com. In the 60’s and 70’s the airspace was deregulated, there was globalization and within that more airlines were created and more agencies were also created. There was a problem with the way the distribution systems worked because they're owned by the airlines gave preference to their own inventory that was anti-competitive, so there was regulation that came in. Following that deregulation, the airlines decided to sell off their distribution systems and they merged, and that's when Amadeus was actually formed, which was in 1987 and that was following the merger of the distribution systems between Lufthansa, SAS, Air France and Iberia at the time that forms a distribution business of Amadeus today. In the early 2000s, they created something called Altea, which was the air IT business and that is the customer reservation system, the inventory control system and the departure control system that sits behind the distribution system as a whole, which enables the orderly processing of bookings and then since then they've created the hotel IT business that was in the 2010s when I actually started covering the stock over a decade ago. They didn't really have much revenue or free cash flow there and that business is going from strength to strength and they also bulked out parts of their air IT and that hotel IT business via M&A.
· Matt Reustle, Ben Needham
[00:00:00] S0: Interesting to hear horizontal expansion across travel. I certainly love businesses that were born from an industry consortium, founding something together and then spinning it out on their own. You often see quite a few success stories in that category. Visa being one of the most obvious ones. I think you've tapped into the segments of the business. Is that how they split out revenue by distribution, IT, and then in the hospitality category, are those the three buckets? [00:00:00] S1: Those are the three main divisions. The main one in terms of profitability is now air IT. 15 years ago that was 20% ish of group profits. Now, it's up to 50%. Distribution is 35% of group profits. So the distribution business, even though that gets a lot of the limelight and a lot of the focus, and then 10% is hotel IT, and other which is 10% of group profits. So the hotel IT business is the most embryonic, it has the lowest margins because of that they're scaling very quickly. There's a lot of investment to enable the scaling of that business. The air IT business is the most profitable, almost 70% contribution profit margins, which are pretty formidable and then the distribution business, its contribution margins are in between hotel IT and air IT. [00:00:00] S0: You mentioned on the air distribution side of things some of their competitors air IT, are those the same competitors? You mentioned Sabre, which is a name I came across quite a bit. Is there more competition in that space, less? Does it look similar to distribution?