IPO-Bound eDreams Odigeo Wants to Be the Booking.com of Flights

While Booking.com has become a category leader through its sole focus on hotels, albeit with a smattering of other lodging types thrown in, eDreams Odigeo, which announced plans for an IPO in Spain, plans to make a go of it basically as a pure-play collection of flight-booking sites.

That’s right, flights. Huh?

eDreams Odigeo, owned by private equity firms Ardian and Permira and management, is a roll-up of eDreams, Go Voyages, Opodo, Travellink and metasearch site Liligo. Although travelers can book hotels from Booking.com, and vacation packages and car rentals on eDreams Odigeo sites, the group’s main business is flights, with particular strength in France, Germany, Spain, Italy, the UK and the Nordics.

While companies diverse as Orbitz Worldwide, Skyscanner and Travelzoo are scurrying to diversify into hotels and are following conventional wisdom that lodging is where all the money is in the travel industry, eDreams Odigeo claims to be the “world’s largest online travel company in the flight sector,” and is building a business around that monolithic approach.

The company’s “revenue margin” (defined as revenue minus supplies) increased 14% to $431.6 million in the 9 months ending December 31, 2013.

Lorraine Sileo, PhoCusWright’s senior vice president of research, says eDreams has the largest air ticket sales in Europe among online travel agencies, and it is the third largest OTA overall in gross bookings in Europe, with 17% market share, behind Priceline/Booking.com and Expedia/Hotels.com.

European Online Travel Agency Gross Bookings Market Share, 2012

Source: PhoCusWright, European Online Travel Overview Ninth Edition

However, it should be pointed out that PhoCusWright’s gross bookings tallies show that eDreams Odigeo had a larger share (20%) of the overall European online travel agency market a year earlier, in 2011, and that it lost share in 2012 to Booking.com and Expedia.

Investors will have to gauge whether they want to buy shares in such a relatively low-margin and commission-stingy business centered on flights.

eDreams Odigeo argues that it has a competitive advantage in its focus on flights, which are becoming increasingly complex with the unbundling of ancillary products and the rise of low cost carriers.

“We believe online travel product distribution will increasingly be dominated by ‘pure play’ category leaders who focus their investment, know-how, resources and technology to build scale on a worldwide basis in a particular category (e.g. flight products instead of flight and hotel products) and that such category leaders will be better positioned to extract superior margins than online travel companies that spread their resources across different product categories seeking to become leaders in multiple categories,” eDreams Odigeo states.

eDreams Odigeo has lots of parallels with U.S.-based CheapOair, which likewise is going against the grain and focusing on flights. In fact, a future combination of the two rivals wouldn’t be far-fetched.

Sileo of PhoCusWright acknowledges that the larger margins are in hotels, but flight-oriented companies such as eDreams Odigeo can be viable if they drive big volumes. eDreams Odigeo did 7.3 million transactions, a 15.9% increase, in the 9 months ending December 31, 2013.

eDreams Odigeo, which saw its EBITDA rise 10.6% to $123.16 million in the nine months ending December 31, 2013, argues that it can extract superior margins than multipurpose online travel agencies because of its focus on flights, and that its technology enables it to combine products from its various holdings in a proprietary way so it can dynamically “charge higher service fees than for individual products.”

In fact, the company estimates that some two-thirds of its bookings “are ‘custom made’ (which we regard as inventory not directly available from our default global distribution system providers and where certain of our inventory and content are combined to create a proprietary offering for customers…”

In fact, eDreams Odigeo generated 71% of its revenue in the 12 months that ended March 31, 2013, from service fees, and it isn’t overly transparent about these fees. In a few flights that I researched, the service fees appeared for the first time on a checkout page, although the initial search results page indicated that the ticket price included taxes, but not fees.

So here you have it: an IPO that is based on what many consider to be a low-margin business, and the company relies on booking fees for the vast majority of its revenue.

Can a company make a business out of service fees when airlines are stingy about commissions, and when travelers may resent the tacked-on charges?

Sileo points out that in many of the markets where eDreams Odigeo operates, it competes against traditional travel agencies that may be charging even higher fees.

And, eDreams Odigeo argues that travelers are less concerned about paying service fees than receiving an attractive total price.

eDreams Odigeo is looking to expand “in less mature markets” over the long term where Internet adoption is just building up and where competition may be less intense.

However, the eDreams Odigeo IPO, if it comes to fruition, would mostly go toward reducing the company’s indebtedness, and it would receive no proceeds from a secondary offering mounted by existing shareholders.

The transaction should give eDreams Odigeo additional flexibility as it goes against the grain and tries to become the Booking.com of the European flight business.