Travelport Has Had Mixed Success as a Public Company

Travelport, the travel distribution tech company, remains on track to go private before June, which means its financial inner workings will soon be off limits to the public.

On Friday, the Langley, U.K.-based company reported its earnings, which showed Travelport had a mixed performance last year.

In 2018, Travelport’s full-year net revenue rose 4 percent to $2.55 billion. That was at the low end of the 4 to 6 percent range of guidance for the year, but still in range.

The company suffered the loss of travel agency Flight Centre. In a smaller blow, Tripsta, one of its partner online travel agencies in Greece, went bankrupt.

Travelport balanced its losses with better-than-expected gains in Asia, which had 10 percent year-over-year growth thanks partly to a recent series of client wins in India.

Sabre, Travelport’s larger rival, reported that its revenue last year grew at a faster rate of 7.5 percent, to $3.87 billion. Sabre said its growth for the year partly reflected stronger-than-expected industrywide spending on travel in Europe and North America. Sabre’s growth in revenue terms in 2018 in distribution was at a faster pace than Travelport’s, not least due to Sabre’s win of Flight Centre. However, Sabre’s growth may be slower in 2019 unless it has another comparable travel agency win.

The other leading peer technology company, Amadeus, reports its earnings next Thursday. Amadeus has had losses in the distribution business in India relative to Travelport, and these losses may continue in 2019, though the Indian airline industry is quite uncertain overall.

Travelport’s net income for 2018 decreased by 46 percent, year-over-year, to $75 million. The company’s adjusted net income of $186 million, however, represents a 3 percent gain for the year. The adjusted net income factored out one-time events, such as subtracting $22 million in a non-cash accounting manuever due to the positive news of the company paying off some of its debt faster than expected.

Notable Wins

Friday’s earnings report might be one of the company’s last public financial disclosures before going private.

The report suggested that the company’s management broadly met its promised goals to investors since going public in 2014 of reducing debt while maintaining steady revenue growth and investing in its core technology to become more efficient and nimble. The company’s operating cost performance as a business has been the source of much improvement over the period since it has been public, too.

Most dramatically, Travelport helped to grow revenue for its majority-owned payments tech unit eNett from $67 million in 2014 to $315 million last year. In 2018, eNett soared 63 percent, year-over-year. That was a faster growth rate than its 29 percent pace in 2017.

The company embraced airline merchandising technology by debuting the ability to offer agencies rich content and branded fares from airlines using the latest digital means. It kept pace with industry changes in distribution and by some measures surpassed the pace of innovation of its rivals Sabre and Amadeus.

It has broadly led in airline merchandising since 2014.

At the end of 2014, it had 51 airlines in production with its updated merchandising capabilities. By the end of 2018, it had 272 airlines implemented (and another 21 in implementation), representing 76 of its top 100 carriers, as measured by volume of transactions, the company has said.

Comparisons are difficult, but it seems probable that this amount is some four times more than its major competitors have implemented.

Travelport has said it believes that its capital expenditure on distribution has exceeded its nearest competitors in recent years, having invested about $850 million on developing its technology in the past five years.

President and CEO Gordon Wilson highlighted how much Travelport had deployed this at Skift Tech Forum last June. He claimed the effort had given Travelport a lead in content, merchandising, and technology.

For example, while roughly half of Sabre’s systems are not yet on the cloud, Travelport distributes tailored and branded airline offers for more than 260 carriers through the Microsoft Azure Cloud, with fare caching, or temporary storage of data, to follow shortly. It uses Amazon Web Services for mobile services and air data products.

Weakness at Rebalancing

Since becoming a public company, Travelport articulated that its strategy was to pour investment into distribution tech for its travel partners and agencies, as opposed into information technology services characterized by multi-airline inventory hosting, crew management systems, or hotel inventory management systems — which account for a great deal of the investment funds of its leading competitors. 

The company’s strategy has been to address an imbalance of air distribution revenue compared to other distribution revenues.

Travelport struggled to make profits with its corporate booking tool. It remains unclear if its 2014 investment in Locomote, a corporate booking startup that it now majority owns, did enough to fix that problem.

Out of its total revenue last year, 96 percent, or $2.45 billion, came from its core distribution business.

Its “beyond air” sales represented 30 percent of its e-commerce distribution revenue in 2018, up from 15 percent in 2011.

Looking at last year alone, the rebalancing has continued. While its majority air business was essentially flat, its revenue for “beyond air” grew 17 percent for the year — a faster pace than the 11 percent growth rate a year prior.

The catch is that the company’s payments business drove a significant chunk of that “beyond air” growth. Taking just 2018, eNett delivered $315 million of “beyond air” revenue, compared with the other elements of “beyond air,” such as hotel, car, and rail aggregation, that delivered $433 million.

Without eNett, Travelport’s effort to re-balance beyond plane ticket and air ancillaries is less impressive, critics might say.

In 2018, Travelport sold 66.76 million hotel room nights, down 2 percent year-over-year. It barely moved the needle on car rental bookings.

Looking at the longer picture, things are a bit better. On hotels specifically, in 2014, hotel room nights booked were 63 million, compared to about 67 million in 2018. That is growth, albeit not at eNett-type levels, though this is a much more mature business.

Still, it’s not clear that the past few years of touting better content and product in its hotel, car, and rail aggregation had enough of an impact, critics might argue.

Why does factoring out eNett from “beyond air” revenue matter? Because eNett may be sold some day. The company’s incoming new owners, Siris and Evergreen Coast Capital, strongly signaled last year that they would consider selling eNett.

The financiers believe eNett could be valued at $1 billion if sold or listed on the public markets. They think investors are not valuing Travelport on a sum-of-the-parts basis, meaning its share price doesn’t give credit for eNett’s accelerated growth. (For details, see Skift’s piece on “The Inside Story of an Activist Investor’s Fight for Travelport.”)

Another way of looking at the issue of “beyond air” is by looking at so-called attachment rates, or how often an agency adds, say, a hotel booking to a flight ticket.

Years ago, the company partly advertised its enhancements in its technology and inventory as ways to make it easier for travel agents to sell other products beyond air, like hotel rooms. It revamped its reservation system with that purpose, among other ones.

However, last year the company’s rate of “attaching” hotel rooms, car, rail, or other additional items dropped 100 basis points, to 45 percent. That meant that about 55 out of every 100 air bookings didn’t result in an upsell to a non-air product.

Since going public, Travelport executives have mentioned at two customer conferences their expectation that the attachment rate would rise over time. But the rate seems to have peaked at 50 percent in one quarter in late 2015.

One reason attachment rates have not grown markedly may be a function of the company adding more new agency customers, especially among online travel agencies, that are “air only.” If such agencies do sell hotel and car services, it tends to be more through the white-label brands of companies, such as Booking.com or Expedia. However, one-step removed, Travelport picks up a slice of this business by providing hotel and car services to major operators like Booking.com and Expedia for onward sale.

Travelport still retains a lead over its rivals Sabre and Amadeus on a related score. It says it’s the fourth-largest player worldwide after Priceline, Expedia, and Ctrip in third-party hotel distribution.

Travelport’s technology services business saw revenue decline by 9 percent to $97 million last year. That wasn’t a one-off. The technology services unit declined by 12 percent in 2017. The company chalked up the losses as primarily due to the sale of software hosting service IGT Solutions in April 2017. On selling it, Travelport replaced the services it provided by hiring third-party vendors, such as TCS and Cognizant.

What about the company’s other sideline in technology services, represented by its 2015 acquisition of Mobile Travel Technologies at a price of about $64 million (€55 million). The company later folded that unit into a new organization, Travelport Digital, “as part of its strategic focus on the fast-growing digital economy and with the aim of growing Travelport’s range of digital services” — to quote Travelport’s words at the time.

Travelport’s Digital Services income, including for mobile, goes through its Travel Commerce Platform revenue line under “beyond air,” and not under Technology Services. It is unclear what the growth has been.

As noted above, in 2014, the company had a goal of re-balancing its mix beyond its foundational business of selling airline tickets and ancillaries. The company has achieved some gains, but the efforts may have stuttered in the past year and not met the hopes of some executives.

What’s Next?

Perhaps the biggest question mark is around the company’s strategy moving forward.

A possible eNett sale would likely leave Travelport at least 80 percent dependent on its air distribution business.

Rivals Sabre and Amadeus have made side bets on airline information technology, which refers to providing carriers with passenger service systems and other operational tools such as for flight management and scheduling.

The competitors are gambling that, as airlines increasingly want to take control of how they price and position their products, more of the computing work will take place in the airline’s operational systems rather than on the distribution side. If true, they argue they will gain. Travelport, in contrast, only has a residual information technology support service for Delta Air Lines.

For now, though, this bet by Sabre, at least, appears to be a bet on the future. Last year, Sabre’s airline IT business only grew 0.8 percent for the year, to $822 million.

Talking Debt

In 2012, Travelport’s leverage ratio was 8 (on $3.86 billion in debt), compared to today’s roughly 3.5. In comparison, Siris and Evergreen Coast are not significantly adding to Travelport’s debt burden as an instrument thus far, making a comparison in total purchase prices between the deals to be slightly more relevant.

Travelport’s success at reducing its debt load as a public company while boosting its investment and maintaining a smoothed out cycle of growth is remarkable among enterprise software companies generally. While not “sexy” like airline retailing or new reservation desktop upgrades, it was a vital management success.

In March 2018, Travelport successfully refinanced all of its $2.15 billion in debt, at improved conditions that extended the maturity of the debt from 2021 to 2025-26.

Prospective new owner Siris Capital has a stated strategy of “helping mature businesses through industry transition” by using the cash thrown off by low-growing legacy businesses to fund investments into promising new growth lines. In theory, that’s exactly the help that Travelport needs.

Correction: The original article wrongly implied that Travelport Digital was accounted for under the technology services business rather than as an umbrella set of mobile technology services to suppliers that is under “beyond air.”

The original article used an example of how the company adjusted net income by mentioning “a $22 million hit due to the company paying off some of its debt faster than expected.” The word “hit” was misleadingly negative. The “loss on early extinguishment of debt” is purely an accounting, non-cash item and doesn’t in any way reflect the costs or performance of the underlying debt nor the success of the refinancing action.