Travel IT Disruption

You have recently been retained by an American private equity firm to assess the attractiveness of the travel IT space. Specifically, they want to know whether or not it would make sense to enter. What factors would you consider when evaluating this industry?

You have recently been retained by an American private equity firm to assess the attractiveness of the travel IT space. Specifically, they want to know whether or not it would make sense to enter. What factors would you consider when evaluating this industry?

This question is highly structure driven, as there are virtually zero quantitative components to consider. A strong framework will consider competitors, customers, regulations, technology, and inventory owners (airlines and hoteliers). • There are over 800 passenger airlines and 10,000 hotel chains globally; nearly all major airlines and hoteliers circulate inventory on GDS • There are approximately 4 billion passengers boarded and more than 10 billion hotel night occupancies each year globally • Business model: inventory owners will pay a fee to the global distribution networks for each piece of inventory sold. The networks will then provide a commission to travel agents (in person or online entities, such as Expedia) for selling a unit of inventory. [We do not know the exact fee amounts] • There are over a dozen major online vendors in each market (North America, Latin America, Europe, Middle East & Africa, and Asia-Pacific) and tens of thousands of travel agents globally • While in person travel agents have declined in usage in NAM and EU, they are still widely used in ME&A and LATAM • The North American and European markets are stagnant in growth, while Asia-Pacific is growing in high single digits consistently. APAC is expected to pass NAM for largest market by booking volume by year’s end. LATAM and ME&A are growing at low double digit rates but are 10-20% NAM market size currently. Information on Airlines and Hoteliers: • Airlines and Hoteliers strongly dislike giving a % of sales to GDS and prefer sales through their own sites which are more profitable • In the mid-2000s, American Airlines removed itself from all external GDS. Sales fell more than 15%. Several years later, they quietly rejoined. • In 2016, Lufthansa airlines began charging higher rates for fares sold through external agents (and thus GDS) vs. their direct site. Lufthansa’s sales declined several percent. End Users: • Primarily leisure and small business travel in developed markets, as many corporate customers negotiate deals directly with airlines and hoteliers (more mixed in less developed markets) • Relatively price sensitive; customers will typically use 1-2 virtual or in-person agents to gather information and then make a purchase. Only 20% visit dedicated airline sites regularly. Market: • Sabre and Amadeus EBIDTA margins average 30-35%; Net Income margins average approximately 15%; they receive similar reimbursement rates from inventory owners and provide similar compensation rates to agents. • Smaller competitors typically offer lower priced products relative to the market leaders • Sabre dominates in North America while Amadeus dominates in EU • TravelSky exists only in China and is indirectly state-owned • Revenue is modestly impacted by macro economic factors but generally stable YoY Technology: • Sabre and Amadeus regularly spend $300M-400M on CAPEX each year and have spent over $3B each over the past decade in building out their infrastructure • Each has higher coverage in certain regions, and each holds a mix of patents, trade secrets, and code copyrights • Support for over 30 languages in 180 countries is provided by each company • There is a relatively steep learning curve for travel agents to use a GDS, but experienced users are extremely efficient and entirely resistant to any interface change • 5 years ago, Sabre tried to relaunch with a less cryptic interface and received immense pushback; they changed course within 6 months Other Information: • The Chinese government heavily regulates the GDS market • Several years ago, Google purchased ITA Matrix, essentially a fares search engine with no sales component, and has not entered either the GDS market or the inventory selling market • Sabre and Amadeus combine for approximately $800M a year in net income; the various travel sites in the US, EU, and ME earn approximately $1B a year. Google earns roughly $2B a year in advertising from the travel industry in the U.S. alone. • The PE firm has previously assessed the travel site market and determined it is not attractive Recommendation Ask the candidate for a final recommendation. He should recognize this is an industry that is not compatible with PE investment for several reasons, such as entrenched market leaders, material government interference in the one major growth market, a highly complex technology with massive network effects, and the requirement of very large initial investments. He may also note the malcontent inventory owners as a negative (though they are currently unable to escape the system).