The biggest online travel story in Latin America in 2017 was Despegar's IPO. The Expedia-backed booking site raised $332 million to fund its expansion. The company has hinted that it is likely to use some of the cash to make an acquisition in 2018.
Online travel agency Despegar raised $332 million this year, having listed on the New York stock exchange in September.
Along the way, the Argentine company became Latin America’s first unicorn, or start-up worth more than $1 billion, in online travel. As of Friday, the markets placed Despegar’s valuation at $1.86 billion.
Despegar said it plans to use the $332 million it raised to fund its expansion.
Rather than pay a dividend to investors, the company’s executives said they plan to invest the cash in long-term growth opportunities by spending heavily on its marketing and technology platform.
In November, chief financial officer Mike Doyle told investment analysts on the third-quarter call that his company is “very interested in looking at potential mergers and acquisitions opportunities in the region,” though he said at the time that there were no active discussions to report.
Viajanet, Submarino Viagens, Viajala, Voopter, and other companies will be curious to see what moves the regional star makes.
In turn, Expedia has a 14 percent stake in Despegar, and is prohibited from purchasing more than 35 percent of Despegar’s shares within three years of the IPO unless Expedia makes a tender offer. Under the latter scenario, Expedia could acquire Despegar if Expedia agreed to purchase more than a 75 percent stake in the company.
Other big players could take a look at Despegar, as well.
Despegar is one of the leading online travel agencies in the region. In November, it reported its first quarterly results as a public company.
It had $1.12 billion in third quarter gross booking volume, up 32 percent, year over year. Its total transactions of $2.3 billion in the quarter represented a 25 percent jump. Net income, though, fell 22 percent to $11.2 million.
The company also said that its mobile travel app is the most downloaded online travel app in Latin America. More than half of the company’s traffic comes from mobile devices, the company said.
Despegar uses Expedia Inc. exclusively for its hotel inventory outside the continent. The U.S. giant bought a 16.4 percent stake in Despegar in 2015, which it has retained. With the IPO dilution, Expedia now owns 14 percent.
Despegar has a more substantial presence in South America than Expedia and its rivals Priceline Group and Ctrip, on average among the countries. Despegar has operated for18 years, building up local relationships. It now serves 20 Latin American countries.
That matters because South America is a continent with above-average growth prospects, given its low online penetration relative to other regions.
In Latin America, only $22 billion of travel is bought online today, which investment analysts at Citi believe is merely 34 percent of the potential if consumers switch away from bricks-and-mortar agencies. The 34 percent average is well below European and U.S. online travel penetration of 51 percent and 48 percent, respectively, according to Euromonitor estimates.
Despegar’s secret sauce is partnering with local banks to offer installment payment plans, which let credit card holders spread out the payments on a trip. In the first half of 2017, consumers paid for 54 percent of the company’s transactions in this way.
In comparison, foreign-based giants have little-to-no local installment or layaway plan options for consumers.
Positive Market Dynamics
In some developing markets, fierce price wars have broken out as local competitors use discounts to gain market share. But Despegar appears to have escaped that trap.
Despegar’s take rate — or its cut of gross bookings, a metric that investors watch closely — was 11.8 percent, or roughly $130 million. That take rate hews closely to the 12 percent average it had through 2016, making it competitive with the take rates of some of the larger online travel agencies, and comparably sized companies elsewhere, such as MakeMyTrip in India, which has a 13 percent take rate.
The first wave of travel startups in emerging markets also historically have focused on flight sales, which typically generate less profit than hotel sales. But since it ramped up hotels starting in 2009, Despegar has also dodged this dynamic over time.
This year, slightly more than half of the company’s sales were from hotels and vacation packages, while flights took up much of the rest.
What’s more, margin tends to be higher on airline tickets in Latin American than in other parts of the world, and Despegar has successfully trained consumers to accept a booking fee — a model not common in the U.S. or Europe, but one that helps keep margins steady.
The Outlook for 2018
Despegar does face risks. The biggest may be the political and financial instability of Brazil, a market representing about 41 percent of Despegar’s transactions.
But even accounting for the Brazil factor, Citi analyst Mark May forecasts the online travel market in Latin America to grow at least 10 percent a year for the foreseeable future.
The global brands will likely step up their fight to add inventory in Latin America. Despegar currently lists 300,000 hotels in the region but only has about 23,000 of those directly tied into its extranet instead of through a global distribution system connection.
Another risk: While the globals can scoop up hotel and vacation rental listings relatively quickly, they can’t compete at scale as easily with more nuanced products. For example, Despegar has been expanding sales of destination services, such as tour guides, and of travel insurance, partnering with local players.
Despegar generates about 7 percent of cash per dollar of sales from its core operations, compared to Expedia’s comparable 20 percent. Nau Securities analyst Alex Wright forecasts that Despegar will boost that metric in its core online travel business to about 15 percent by 2020.
Once the company is in line with Expedia’s level of performance, perhaps the U.S. giant or its competitors will want to absorb it, experts have speculated.
A third risk is avoiding discounting to gain market share. In 2017 the company selectively reduced air customer fees in certain markets, notably in Mexico and Colombia, to boost cross-selling of hotel stays and ancillary services.
That drove double-digit growth in transactions while keeping commissions stable, the company said. But the fee cuts could pose a challenge if done at scale.
Meanwhile, Despegar may be in a shopping mood in 2018. Expect an acquisition or merger in the New Year. Viajanet, Submarino Viagens, Viajala, Voopter, and other companies will be curious to see what moves the regional star makes.
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Tags: despegar, latin america, otas
Photo credit: Despegar listed on the New York Stock Exchanged, pictured, this autumn. The Argentine company is based in Buenos Aires, which is often described as the Silicon Valley of Latin America. Despegar