Business Breakdowns
· 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?
· Ben Needham
[00:00:00] S1: I think they've executed very well. Amadeus go about their business quietly, but brilliantly, and very effectively from a capital allocation point of view, we really admire that. If an airline's going to enter an air IT contract, they take it seriously because this is the central nervous system of their business. Managing the inventory, managing the reservation systems, managing the departure control systems that needs to be done properly and revenue's everything for these companies. Managing that effectively is just key. So the RFP processes take a long time, that can take years to get across the line. The reference contracts that they have on the Nevio side of the proposition, they're gonna be really key. Listening to what British Airways say and Finnair say on that Nevio proposition, they're already wired up to it and how it's actually benefiting the revenue per booking over time. That's gonna be key. Obviously the industry will listen to those companies and then you could get a snowball effect because you get FOMO and it's commercially potentially gonna really help these companies who are early adopters. It can take a long time but I think it's a bit of push in terms of Amadeus selling the proposition properly to the airline customers and a bit of pull, they'll see actually some of the early benefits of those companies who are tapped into Nevio and then you can see a big growth phase play out. Altea has already been through this, their original passenger service system that snowballed and scaled from the early 2000s. Even to today, people are still actually signing up to their Altea proposition, which is their passenger service system but the more legacy system that airlines hooked onto, and they've done a great job of that and that's why they've got to over 50% market share within the air IT space. Just the final point to note is balance sheet considerations are really key when airlines are negotiating with air technology companies. If you are very levered and if you're losing market share in an RFP process, that's a problem. It's an oligopoly within air IT, but the number two player, it's pretty levered.
· Matt Reustle
[00:00:00] S0: Mission critical things like those systems require some thinking around the financial positioning of your counterparties. Taking it down a level on the margin side of things, I have some understanding they are a network business connecting different parties here. What does that look like from a margin perspective? Where have they ranged historically? I know there's differences between the segments but at a consolidated level and to the extent that the nuances to each segment is relevant, what would you point to there?