Business Breakdowns
· 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.
· Matt Reustle, Ben Needham
[00:00:00] S0: You mentioned that there is a concern about disintermediation or maybe less use of agents, more direct bookings. Is there any data that shows that piece of the market has shrunk materially over time or where does it stand today? Just in terms of percentage of the market and if you have historical reference, that would be notable too. [00:00:00] S1: I think approximately 25% of bookings are done in the indirect channel. If you look at Amadeus's booking trends in the distribution business over time, typically they've grown slightly below global passenger volumes. That's because of the prolific growth in low cost carriers, which are a cheap form of travel and the fact that you go direct to dot com typically when you're making those bookings. The other aspect here is there is something called direct connects. Sometimes agents are directly linking APIs with the airlines. That process typically only happens in the home markets where there's a lot of volume going through that channel. When the volume's a bit more fragmented and when you're having to include small inventory loads from airlines in a different country, it becomes very difficult to manage tons of APIs and that's why you go through the distribution system that Amadeus, Sabre, Travelport provides as opposed to disintermediating them and having direct connects. But that's another aspect to think about. [00:00:00] S0: Should I assume that there's a lot of overlap in the distribution and air IT customer base in terms of those that use one are usually using both?
· Matt Reustle, Ben Needham
[00:00:00] S0: Should I assume that there's a lot of overlap in the distribution and air IT customer base in terms of those that use one are usually using both? [00:00:00] S1: I think that's right. Having both an air IT and distribution business is a commercial advantage for Amadeus and to a degree Sabre in that you have more revenue to spread across similar customers so you can therefore charge lower prices arguably for one or the other. And the other aspect of this is there's a slight halo effect in terms of bookability. If you are the air IT provider as well as a distribution provider, you know that that inventory's live, it's real. The bookability therefore can be better for the channel. If your distribution system and your air IT system are the same, there's a commercial advantage and there's also a potential customer advantage in that you don't get catch data which is wrong and you go to buy an airline flight and it's actually not there, which can happen. [00:00:00] S0: On the hospitality business, you mentioned air IT was a much smaller percentage of overall revenue years ago versus where it is today. That has been something that has taken up more revenue mix, positive mix shift seen from that business. Is the hospitality business a similar growth engine for them? Is that a target market? I think you mentioned it's 10% fairly small today, but would you expect that to be materially higher in the future?
· Ben Needham, Matt Reustle
[00:00:00] S1: It's 10% of group profits, 15% of group revenues. They're providing similar services to what they are to their airlines in the air IT business. They've essentially created a customer reservation system which is a community-based platform. They're trying to win more and more contracts with large scale hotels similar to the air IT business. You can amortize costs across more customers and you get an economies of scale shared model. So more customers want to come to you and it becomes a self-fulfilling process as the air IT air proposition has been over time. The good news is it's scaling very well. They won a landmark contract with InterContinental Hotel Group in 2015. Since then they've recently won contracts with both Accor, and Marriott, and Ascott Limited. They really have established a scale position within that customer reservation proposition and they are now the leading hotel IT company globally. Competition's very fragmented. Their nearest peer was Sabre. They actually were a full seller of their hotel IT business because they have balance sheet issues to address. One of the nearest competitors selling their businesses is great for Amadeus because they're retreating from the market. [00:00:00] S0: Do they take inventory in a similar way and bring it to travel agents? Is it a similar model in terms of that being a core piece of what they're doing in the hospitality business?