Business Breakdowns
· 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?
· Matt Reustle, Ben Needham
[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? [00:00:00] S1: Competition is broadly similar, so within the air IT business, Amadeus has 50% market share and then there's Sabre which is just under 20% market share and then smaller operators, the airlines themselves who in-house the technology. And then if you look at the distribution business, it's a similar type of shape in that Amadeus has about 50% of market share and then there's Sabre who's a clear number two with about 30% market share and then there's also Travelport with 20% market share today. It's important to know that Amadeus does have a lot more scale than the nearest competitors versus the likes of Travelport. They don't actually have an air IT business, they're just a distribution player. The advantage of having both is enormous. [00:00:00] S0: I have a sense of what's going on with the buying an airline ticket accounting for that in terms of the transaction and how that's actually working through the system. In terms of IT, does it get into accounting? I think, I read something about the dynamic pricing, which can always drive me crazy in terms of seeing what flight costs do from this week to the next week, but a little more in terms of different ways that Amadeus is serving their customers, whether it's value add versus housekeeping.
· Ben Needham, Matt Reustle
[00:00:00] S1: Depending on which division we're talking about. They do slightly different things. The distribution business is a network business and they're playing a role of content aggregation where they're taking inventory from the airlines and that can be in traditional EDIFACT form or NDC form and they provide that inventory or supply that inventory to the travel agents, so that's serving the indirect channel. That indirect channel is approximately 1 billion bookings per annum. And then on the air IT side they're doing the reservation management for the airline, they're doing the inventory control for the airline, they're doing the departure control system as well for the airline. They also have revenue optimization tools. They do have revenue accounting tools, fare optimizer tools. Really what they're trying to do there is enable their customers, their airlines, to generate more revenue per passenger, make smart offers to the passenger which are personalized. Airline customers can benefit from those initiatives and that's clearly key in an industry which as I said before is pretty cyclical, quite cap intensive, very competitive. Generating that revenue from say an ancillary income is really key and Amadeus enables for that to take place. [00:00:00] S0: When they are taking the inventory and bringing it to the travel agents, they're not actually owning or having that risk sit on their balance sheet in any way. Is that correct? Just in terms of the process?
· Matt Reustle, Ben Needham
[00:00:00] S0: When they are taking the inventory and bringing it to the travel agents, they're not actually owning or having that risk sit on their balance sheet in any way. Is that correct? Just in terms of the process? [00:00:00] S1: That's absolutely true. They'll create offers in the distribution channel via the global distribution system that they have and they'll basically package those offers up and provide them to the agencies, but there's nothing on balance sheet. [00:00:00] S0: AI is something that comes up when talking about any space, particularly within any IT system. What would you say are the implications of AI for Amadeus and for the broader travel vertical?