Skift Take

Lousy economies in key markets have hurt Despegar's profit. But deft management during the recent storms suggests the online travel agency has a promising future.

What investors focus on and what the travel industry cares about aren’t always the same thing.

Investors chasing near-term opportunities are now balking at the deteriorating economic outlooks for Argentina and Brazil — key markets for Despegar, South America’s largest online travel agency.

Worried about a drop in demand for travel, investors recently knocked more than half off Despegar’s stock price, compared with the stock’s peak prices of last spring and fall.

Earlier this year, Argentina’s peso collapsed in value against the dollar while inflation rose at an annualized pace of about 30 percent. That set off a series of knock-on problems. International travel became pricier. So the Buenos Aires-based Despegar sold fewer high-margin trips in the second quarter.

The travel industry will be more interested in how well the company’s management is weathering the storm.

On the management front, the news looks promising. The company reported Thursday that it had gained a percentage point of market share against its competitors in Argentina during the second quarter of 2018 while nearly breaking even. The resilience suggests that the company has what it takes to grow into a robust industry force in the region in the next five years.

Speaking on a call with investors, executives said they had coped with falling demand by reducing their spending on paid online search ads. They used the savings to afford to offer more discounts on their vacation package products.

They created the discounts by lowering their fees, negotiating fatter discounts with suppliers, and offering more generous terms for consumers who wanted to pay for their trips in installments.

Executives said their offers became more attractive in the marketplace relative to competitors, and that they had seen some rivals pull back on discounting at the same time. Those claims suggest that Despegar can gain share without the risk of sparking a price war of unknown length.

In June, the International Monetary Fund came to the aid of Argentina with a $50 billion bailout. But the country still faced an uncertain path to renewed growth.

Brazil, another key market for Despegar, also recently saw its expected growth in gross domestic product for the year be trimmed by a percentage point. The news suggested that travel sales for the rest of the year will be weaker than had been forecast.

On Thursday Despegar reported that the recent Argentine currency crisis had trimmed its growth. Despegar’s revenue rose only 4 percent, year-over-year, to $128.3 million in the three months to June 30. Its net income declined 57 percent year-over-year to $1.2 million.

Acquisition Talk

Some investors were disappointed to hear that Despegar’s chief financial officer Mike Doyle was leaving the company after five years to join an unnamed “non-competing U.S.-based company.” Despegar has not yet named a replacement.

Doyle had attracted investor interest because he had previously been a manager of corporate development and a top financial executive at Expedia. Some investors speculated that Expedia considers Despegar to be a desirable acquisition target.

Expedia Group owns about 14 percent of the company’s shares. It provides Despegar with hotel and other lodging inventory for all countries outside Latin America.

Doyle is not fully out of the picture, though. He will join Despegar’s board of directors.

In the meantime, Despegar itself will consider an acquisition of a smaller player because economic conditions may have weakened some of its targets.

“Our appetite is even stronger than before,” said CEO Damian Scokin on a call with investors.

However, the company also announced a plan to buy back up to $75 million of its shares within the next year. It’s hard to see how the company could afford to pursue share buybacks and acquire another company at the same time.

Putting the Pieces in Place

Despegar said it had signed deals with financial firms Visa and Mastercard to create co-branded credit cards soon.

It also plans to roll out a loyalty program this winter, which could increase its customer retention rate.

The company pledged to continue to invest in its technology team rather than to try to trim costs.

Some other online travel companies in so-called frontier and emerging markets depend heavily on sales of airline tickets, which are less profitable for travel agencies than hotels and other types of lodging.

Despegar stands apart from this trend by having the majority of its bookings come through higher-margin products. Packages, hotels, and other travel products accounted for 59 percent of the company’s total revenue in the second quarter of 2018 — up from 51 percent in the year-ago period.

Despegar is two decades old and has seen its share of South American financial crises. It appeared to successfully manage payments and cash flow during the second quarter despite high volatility in currency values among the countries where its travelers were visiting and its employees were working. So the company seemed credibly positioned to weather future storms.

Despegar’s name comes from the Spanish verb that means “to take off.” While it may be taking longer than some investors had hoped, it does appear the company itself will take off.


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Tags: despegar, earnings, online travel agencies

Photo credit: The waterfalls of Iguazú on the border of Argentina and Brazil are a popular destination spot. Argentina and Brazil have lousy economies, but as critical markets for online travel agency Despegar, they are headwinds for growth. Despegar

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