Business Breakdowns
· Ben Needham, Matt Reustle
This complexity likely means it'd be difficult for AI agents to totally displace corporate travel management businesses and even if they are displaced, eventually the AI agents will need a content aggregator and/or someone to orchestrate the data. And then finally, if AI agents really do lead to chronic intermediation of the distribution business, then peers who are much more distribution heavy with a much smaller IT offering and a lot of operational and financial leverage are in deep trouble. So Amadeus can swoop up even more market share across all areas of its business, air IT included. So all in all I feel pretty good about AI as it relates to the distribution business and the business model as a whole today. [00:00:00] S0: From a revenue perspective, how much of this is per booking based on the amount of air travel versus contracted revenue? What's recurring versus what's exposed to cyclicality? How do you frame that and how does the company frame that? How do you think about that?
· Ben Needham, Matt Reustle
[00:00:00] S1: Amadeus is predominantly a transaction processing business and the way the revenue model works, it's a bit akin to a Visa. They take a cut of the ticket price every time there's a booking made via the indirect channel and it goes through the Amadeus plumbing. They'll take a booking fee from that and every time that there's a booking that's placed on a dot com with the likes of Lufthansa, et cetera, they'll take a very small fee from that and there's pros and cons to that. The con is when air travel volumes fall like they did in the pandemic, Amadeus's revenues really drew down because of that. The pro of it and the positive from the channel's point of view is they become a variable cost for their airlines. So when volumes do fall, there's no cost for the airline. Their take rate from an industry point of view is very low. On the air IT side, the take rate is about 1€ per passenger boarded. On the distribution side, the take rate is about 6€. We think there's a big runway when we look at the ability for that to increase over time as they provide more value for their channel and their customers. There's an enormous untapped pricing opportunity we think over time as Amadeus is sharing the value creation with its customers as it enables more revenue per passenger to come through for their airline customers. [00:00:00] S0: Do you have any sense that 1€ and 6€ per passenger, what the airline would theoretically generate from the passenger in terms of revenue?
· Matt Reustle, Ben Needham
[00:00:00] S0: Do you have any sense that 1€ and 6€ per passenger, what the airline would theoretically generate from the passenger in terms of revenue? [00:00:00] S1: It depends if you're doing short haul or long haul flights. If you're doing long haul ticket prices can be anything north of a 1000€, less than 1% on both sides of the business. If you're doing short haul traveling from London to Edinburgh, then maybe you're a slightly bigger part of the overall cost, but still we think the value proposition's a very good one from an industry point of view. [00:00:00] S0: How are those fees determined? Is it some specific rate per transaction? What's the pricing mechanics of Amadeus selling into the airlines that use them or whoever is the end customer?
· Ben Needham
[00:00:00] S1: On the air IT side, typically they go 10 to 15 year contracts with the airline customer and it's pretty modular how they sell their products. If they're using Amadeus for its passenger service system on the air IT side, you'll be using the departure control system, the inventory management system and then also the reservation management system. You will be using those three modules. They're fixed price in nature and they're inflation linked over time. That has some positives if you do enter a down cycle. Typically what happens in a down cycle pandemic aside, when there's channel weakness, volumes actually go a little bit negative but not too negative because what the airlines do is they lower price. Amadeus don’t suffer with lower ticket pricing because it's fixed price and it's linked to inflation. So at times of industry pain, their revenue streams and the free cash flow streams are very defensive. If we go to the distribution part of the business, it is slightly different. There's something called home bookings and then there's also something called away bookings. When you're doing home bookings via a travel agency, the fees are pretty low. Most people when they're making airline bookings, if they're only traveling locally, they'll typically go direct dot com. That's the reason those prices are low. If you're doing away bookings, so if you're traveling from say the UK to Australia and Qantas want to get their inventory to an agent in the UK to enable them to sell more, Amadeus facilitates that process and they can therefore charge a higher price for enabling that. The distribution business, a key concern with it is that there's disintermediation and more people are booking via dot com, but for those away bookings, the role that Amadeus plays is a really important one to enable inventory to be sold in different countries and that's why they can charge at a higher price for that. And actually the distribution business, the majority of revenues today, not necessarily volumes, but the revenues today are derived from away bookings, which is a bit of a misconception that we think people have on the stock. I'm not sure they're quite aware of that revenue mix being predominantly away bookings.
· Matt Reustle
[00:00:00] S0: Can you talk me through the net fee model in distribution? How exactly does that work?
· Ben Needham
[00:00:00] S1: That's actually a good question Matt, and an important one in the context of the discussion we were just having. An important element of how the distribution business works is the airline will pay, the distribution system company will then actually pay the travel seller. So in effect, this means that the gross fees, i.e. the 6€ which I mentioned earlier are very different to the net fees which are 3€, and therefore the industry take rate is even lower than what I assumed. So again, this is actually a really important point that you're touching on. I think the interesting thing to pull out here is in the evolution to an NDC model, the industry participants first thought that this would be dilutive to the revenue per booking, but actually it wouldn't be diluted at all to the net fee per booking. And if you look at the contribution profit per unit that Amadeus has made over time, which in effect is a proxy net fee per booking derivative, you can see that it's actually steadily increased over time, which is a good sign of system health. And as the NDC model is evolving, actually the actual net fee model that they have in place where the airline pays the distribution company who then pays the travel provider or the travel agent, is actually still remained mostly the case because the airline often does not want a direct relationship with the agency because it creates more of a cumbersome process. So the move to NDC in all likelihood probably won't be diluted to the per revenue economics and definitely should not be diluted to the contribution profit per unit economics. And also I should add this evolution to NDC, it's a gradual process. The airlines have to be ready to service the channel with NDC and particularly for the full service carriers, actually the rollout's been pretty slow so they ensure that the channel's ready for them to provide an efficient service in this NDC switch.