Amadeus’ bet on hotel services begins to bear fruit

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Travel technology group Amadeus has two big stories to tell in 2017: one concerns its key technology services for airlines and the other its new IT services for hotels.

Amadeus ‘biggest airline project this year marks a turning point in May, when Southwest Airlines, America’s largest domestic passenger carrier, switches to Amadeus’ reservation system for domestic reservations. (Southwest has already transitioned for its (smaller) international bookings.) A seamless transition would be used by the Madrid-based company in an attempt to attract other airlines to its system.

In its nascent hotel services business, Amadeus’ biggest effort this year involves InterContinental Hotels Group (IHG), the largest hotel group to join the Amadeus hotel system. If the operation goes well, Amadeus will take the example to attract other large hotel chains.

The two stories fit into a larger narrative that Amadeus told investors on Friday in a call in Q4 2016. The company is trying to reduce its current reliance on its airline distribution business, where earnings are under pressure, and to focus on the hotel business it has developed through a series of recent acquisitions.

HOSPITALITY COMPUTER SERVICES

Looking to the future, Amadeus wants to offer a portfolio of IT services to hotels around the world, which it sees as a multi-billion dollar opportunity.

After acquiring hotel IT company Itesso in 2015, Amadeus is working on launching a property management system for hotels, which would be the primary software used by hotels to manage their digital operations and distribution. The company could sell this cloud-based software product along with its existing central reservation system product.

Maroto said that in the past, the two solutions were products that hotels typically purchased (or developed in-house) separately. “We think there is a big advantage in having a consistent view across all systems.”

If hotels are impressed with the new products, Amadeus may be able to escape its reputation as an airline service company and expand its business to potentially lucrative hotels. The company says early signs point to the strategy’s success.

DEVELOPMENT OF CONTRACTS WITH AIRLINES

In December, Amadeus’ American rival Saber lost a lawsuit against US Airways (a now defunct brand owned by American Airlines). If the courts uphold the verdict on appeal, the ruling will give airlines a stronger grip on the types of contract terms allowed that Saber, Amadeus and similar ticket intermediaries can stipulate.

What is at issue are the terms of the contract that require airline customers to provide the full content of airline tickets and inventory that they sell on their websites or also distribute. to other parties like Amadeus (or Saber or Travelport).

A separate question beyond pricing is how well Amadeus and its competitors can keep pace with technology when it comes to how airlines want to display and distribute their products to travel agencies. United Airlines said last month it wanted a better deal with booking intermediaries, in part because of concerns about the quality of display of its new products, such as Economy Base Fares, with business travel managers and online travel agencies.

Analysts asked Luis Maroto, chief executive of Amadeus, about it. While not addressing the lawsuit itself, Maroto said he expected a variety of factors to lead to an “evolution” in the so-called full content agreements.

“We will support the different business strategies that airlines have in mind. It is also true that as airlines want more merchandising and dynamic pricing, they will try alternatives. [to companies like Amadeus]. Thus, the way “complete content” is defined [in our contracts] will have to evolve…. “

“We will be flexible in the way we deal with the contracts and the agreements we have with them… Today with some airlines we have long term, full content agreements where everything is included. Other airlines have tried in different geographies to have content for the base fare, then merchandising capabilities with alternative systems… This is why we are investing heavily in our merchandising capacity for airlines… to direct and indirect channels.

THE AGENCY’S MARGINS UNDER PRESSURE

Amadeus, like its competitors Saber and Travelport, earns money by charging airlines a fee for distributing their tickets to travel agencies, and then passes a portion of that fee on to its affiliated travel agents as incentives. .

On this point, its biggest rival in this sector, Saber, signaled earlier in February that it would “make cautious and modest tradeoffs on gross margin, with the aim of stimulating growth and increasing the share.”

Analysts asked Amadeus executives about the pressure on its margins.

CFO Ana de Pro said: “Yes, it is true that we are under pressure from our competitors, who are seeing their market share under pressure, so we are seeing a higher cost of the bookings we acquire. “

The company says it has yet to see any spike in pressure on its margins. For about five years, Amadeus has experienced a decline in its margin of half a percentage point per year, on average. (Analysts dispute the degree of the decline, arguing that it can contribute negatively to bottom line by up to 0.60 to 0.80 percentage points per year.) For 2017, executives are not predicting the margin decline , except to say that it will be “a slight decrease” which is “in line with the trend observed in other years”.

So how does Amadeus maintain profits despite pressure on margins?

One is to increase its share of agency distribution activities globally, particularly in Asia, the Middle East and Africa. In 2012, its share of airline bookings from travel agencies worldwide was 39%. In 2016, its share reached 43.2%.

The acceleration in growth is offsetting the drop in margin. “Doing more for airlines and travel agencies has turned out to be a good deal where we continue to grow despite everyone thinking the distribution industry is already mature enough,” said de Pro.

In Asia-Pacific, in particular, Amadeus has found success using its second branch of aeronautics –
which sells IT services to low cost carriers in the region – as a way to gain new customers and sell them in their global distribution services that many have never used before. (Its passenger reservation systems Altéa and New Skies are high-margin businesses in and of themselves, so this is a low-risk strategy.) China Airlines has had Amadeus’ biggest success in Asia on last year.

The company faces some pressure in Asia-Pacific from rival Saber, which in 2015 bought the region’s largest distribution platform, Abacus, for $ 415 million.

Still, investors may question the viability of Amadeus’ model, where the company continues to gain market share to offset falling airline fees. Can it maintain profitability for more than, say, five years?

One avenue it has is to target low cost airlines as new customers. Many of them have never used global distribution system services before. Amadeus now has 90 low cost carriers on its system, a 15% increase in 2016, year over year.

But there is a lot of work to be done in this area. Budget airlines still only make up an undisclosed single-digit percentage of the airline bookings they process.


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