Business Breakdowns
· 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?
· Matt Reustle, Ben Needham
[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? [00:00:00] S1: So they do also do distribution, but that's only a small part really for the hotel business. It's mainly the reservation system managing inventory and enabling their customers to generate more revenue per room. So if you go onto InterContinental Hotel Group website and you're making a booking in one of their hotels, you get offers of a marble bath, do you a PlayStation and that wasn't there before. What they're doing is enabling their customer to generate more revenue per room and then Amadeus can share in that value creation with the channel. [00:00:00] S0: I'm sure they've pushed the travel insurance option as well. Is that a piece of their offering? [00:00:00] S1: As part of their distribution business, they do have partnerships with travel insurance but it's only a small part of the business. [00:00:00] S0: In terms of the revenue trajectory, do I assume this is volumes based on air travel plus some pricing mechanism? You're kind of seeing that as the top line growth rate. Is there anything else that goes into it and what does revenue growth tend to look like in a mid-cycle or normalized environment?
· Ben Needham
[00:00:00] S1: Typically travel grows at one and a half to two times GDP. So if you look at the volume growth that they're able to achieve without winning new contracts, it's typically in the 3% to 4.5 percent range. Now I'm being guarded with that. Geopolitical risk, I think you have to guard for that. American shutdowns recently, the war in the Middle East, in today's world that's just pragmatic. Then there's inflation linked contracts on all sides of the business. If global inflation rates are 2% to 3%, you should see that come through in the top line. There is also an upselling process here in that with their air IT business, they're about to embark upon a potential massive structural growth change in that part of the business. Their airlines want to modernize their retailing platforms and move to order management systems away from legacy passenger service systems. Why the airlines want to do that is because they want to provide a better service for their passengers. So if there's disruption on their journey, they are able to reach out to their customers and tell them that there's gonna be disruption and flight's gonna be delayed actually before they get to the airport, which currently because of the cumbersome nature of how the tech stack works for airlines, that's not possible. But also they want to sell smarter. They want to personalize the sales process to the customer in order to generate more ancillary income and basically drive higher revenue per booking. If and as Amadeus can facilitate that transition, they have a product called Nevio, which is in its early innings. It's got four customers currently signed up to it, which are Finnair, Saudia Airways, Air France-KLM. They're gonna be able to charge a higher revenue per booking and we should see that come through in a better top line as well. And it's also important to note that industry experts think that this transition to order management systems will be a mid-teen uplift in revenue per booking if they get it right and they can generate a 5% to 7% revenue uplift per passenger with these new order management systems, which is what the early look is for the airlines that are using Nevio. Arguably that's low-balling it, particularly in the context of only taking 1€ per passenger boarded today. That's their current rent extraction in the air IT space.
· Ben Needham
So could that be 50% uplift, could that be a 100% uplift in the next five to 10 years? Potentially they deserve to share that value creation with their customer. And then there's the market share dynamic. If you track the distribution business and the air IT business over time, they've constantly taken market share from their nearest competitors. That can give another 1%, 1.5% to 2% to the top line. I take all that together. Air traffic at 3% to 4%, inflation that gets you to 5% to 6%. Revenue per passenger in air IT can get you another couple of percent, that can get you 7% to 8% and then market share I think can get you to 8% to 9%. I think it's a high single digit top line business and within that distribution should remain pretty tepid, keep growing at 4% to 5% grow volumes a little bit less than air traffic volumes but with a little bit of price and then hotel IT because it's a lot more embryonic and they're currently got Marriott, Accor, Ascott Limited migrating onto their platforms in the next year and a half to two years and that business should grow at 15% to 20% probably for the next couple of years. There's a lot of growth opportunity ahead of it.
· Matt Reustle
[00:00:00] S0: Based on my own personal experiences and the amount of altercations that I see on my social media feed happening at airports dealing with the inventory systems, it certainly seems like that's an area that these airlines could benefit from upgrading. What does the timeline look like for something like that and from an execution perspective, where does the confidence lie in their ability to execute on doing that efficiently? Is there a time in history that they've done things like this where the execution has been on par with what's needed?