Business Breakdowns
· 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?
· Ben Needham
[00:00:00] S1: There's been some industry discussions about the implications to Amadeus of the potential adoption of AI agents at the top of the travel search funnel with question marks on whether this will disintermediate the distribution business. I think this is largely a storm in a teacup and I actually think they're very well placed if the top of the funnel for travel search becomes AI agent-led and I think this for a few reasons. Firstly, you need to remember they are the IT backbone for their customer. The customer reservation system or order management systems are mission critical and will still be required in an all-in AI travel world and this part of Amadeus represents the majority of profit today, so 60% plus of it. Secondly, would AI agents really want the hassle of setting up the infrastructure to aggregate and orchestrate industry content when players like Amadeus already do this in a very economical way with economies of scale enabling a very low industry take rate? My personal view here is AI agents might do things to improve the top of the funnel search, thereby potentially competing with online travel agencies where the industry take rate is instantly also much higher, but the agents will still need an aggregator to pull together disparate data from the travel ecosystem with many different technology standards at play between NDC and EDIFACT for example. Thirdly, there's also an airline push to dynamic and real time pricing essentially enabling them to generate more revenue per booking. This will put more demand on AI agents to get the right offers to the customer. With the move to NDC, there's actually been a big increase in something called the look-to-book ratios on the airline websites which can get expensive and Amadeus has helped to solve that problem. Fourth, one could argue the great thing about AI will be more personalization alongside the use of dynamic pricing for the airline, which could lead to a snowball effect for their offer and order management system, i.e. Nevio as well as many other products. Fifth, a big part of indirect channel and distribution revenues is for corporate travel management companies where the complexity of booking is high.
· 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?