Why Travelport’s CEO Isn’t Worried About Brexit

Travelport, a Langley, UK-based travel commerce company, sees a stable forecast for its business in 2019, despite uncertainties about Britain’s planned move next year toward formally departing the European Union.

One of the potential perils of Brexit is that the European Union might attempt to strip British airlines of some flying rights to impair their ability to compete across the economic bloc.

Travelport continues to earn a majority of its revenue from the distribution of airline tickets and other content to online travel agencies and travel management companies. That unit saw its revenue increase 9 percent to $638 million in the second quarter of 2018. But the picture might differ a year from now if Brexit, slated for March 2019, goes awry.

In an interview Thursday with Skift, CEO Gordon Wilson waved away Brexit concerns for his company, which has a market capitalization of $2.4 billion.

“The whole nation of the UK is frustrated by the lack of progress and certainty about Brexit,” said Wilson.

“But that said, if you go back in history, any deal done with anyone and the EU ends up being a last-minute, eleventh-hour, compromise. Such is the way the EU operates. When you have 27 nations sitting around the table trying to agree on what day of the week it is, that is not altogether surprising.”

What about the potential impacts on Travelport? “From a business point of view, it’s not a major issue,” Wilson said, looking ahead to next year.

“Even if the UK economy takes a plunge, UK revenues only account for about 9 percent of our overall revenues,” said Wilson. “That said, we’d rather there be a smooth, prolonged transition or some kind of similar agreement that prevents major disruption.”

“Most of our business is knowledge-based, and we’re not exporting goods, so trade barriers are not an issue for us,” Wilson said.

As a technology company, Travelport — which has about 700 of its 4,000 employees based in the UK —competes for technical talent on a global scale.

Wilson said, “In terms of talent coming to work in Britain, I think again that — while there is politics at play — good sense will prevail in the British government. We need talented people who are non-UK nationals to be given work permits. Our economy can’t function without some of the very talented non-British people who choose to live and work here.”

Brexit might even bring some upsides eventually for Travelport. “We pay our taxes in the UK as a company headquartered here,” Wilson said. “Taxes might become more favorable [over time, in response to Brexit].”

Respectable Performance

On Thursday, Travelport reported its second-quarter 2018 earnings.

In the second quarter, Travelport’s net revenue increased 8 percent, year-over-year, to $662 million.

Net income for the period decreased 80 percent to $7 million, which the company said was “primarily driven by unfavorable movements on foreign currency derivative contracts.”

The results were enough in line with investor expectations that the stock price remained stable after the earnings release.

The company expected its outlook to remain growth-oriented.

In February, the company announced its product roadmap for its distribution business. That included plans for making content that is distributed according to the next-generation technical standards championed by airlines and called the New Distribution Capability (NDC) to appear alongside content using the traditional global distribution system desktop experience in the company’s reservation system for agents. (For a backgrounder, see Skift’s earlier deep dive, “Channel Shock.”)

Traveport’s new product would represent the industry’s first industrial-scale effort to get NDC-based content into travel agents hands in a thorough and easily accessed way.

Travelport said Thursday that it is still on track to deploy this project in the second half of 2018. It did not disclose which airlines are ready and willing to send their content through this channel.

Watching Commissions

In May, Bank of America Merrill Lynch analyst John King downgraded Travelport’s stock to a “neutral” rating, partly out of concern over “commission inflation.” In the first quarter, commissions to online and offline travel agencies had risen by 16 percent to $350 million, year-over-year.

The second-quarter numbers continued a trend of apparent commission inflation. Travelport spent $349 million on commissions to agencies, up 21 percent, year-over-year.

In an interview Thursday, Wilson countered that there is no significant commission inflation as an ongoing trend and that one-off exceptions explain the numbers.

He said that of the second-quarter numbers, half the $60 million spike was attributable to the company’s payments division, eNett, which gives rebates to agencies. With eNett growing 82 percent year-over-year in this quarter and up 59 percent in the first quarter, commission volumes are escalating in absolute dollar amounts.

Wilson said that in the second quarter the company terminated a contract with an undisclosed European online travel agency “due to their contract breach.” That resulted in an approximately $10 million one-off charge. About 2 percent of the $60 million increase in commissions was due to foreign exchange differentials.

On balance, Wilson argued, commission levels for air and hotel distribution remain in line with past trends and industry peers at about 4 percent, year-over-year. That is slower than the pace at which the distribution business is growing, which was 9 percent to $638 million in the second quarter.

Overall, Travelport’s performance was strong and stable.

News like that from British-based companies may be reassuring to hear in a time when Brexit talk between now and March 2019 threatens to veer into unknown territory.