Amadeus Makes Gains in Branching Out Into Software Services

Travel technology giant Amadeus is best-known for helping airlines distribute their airfares to travel agencies. However, its newer software services for travel suppliers are growing overall about three times as fast. It looks like 2019 will be the year the newer software services gain nearly equal weight with the classic distributor business in their contributions to the company.

On Thursday, Amadeus reported full-year 2018 revenues of $5.61 billion (€4.93 billion), a rise of 6.4 percent year-over-year. That figure includes the transaction costs and revenue gains related to its buying hotel solutions provider TravelClick last year.

Excluding TravelClick, Amadeus generated $5.53 billion (€4.85 billion) in revenue.
Of that, the company’s information technology business unit, called IT Solutions, generated $2.1 billion (€1.85 billion) in revenue, or 38 percent of total revenue.

The software solutions unit is expected to grow so fast in 2019 — including with the help of TravelClick being added — that it will account for 45 percent of the company’s revenue, according to a forecast by analysts for investment bank Berenberg. That would represent a jump of six basis points, year-over-year, in the size of the IT Solutions unit as a contributor to revenue.

What’s more, 2019 is likely to be the year that IT Solutions contributes at least half of Amadeus’s earnings for the first time.

In 2018, IT Solutions contributed 48 percent to the company’s earnings — before deducting for some company-wide corporate technology and administrative costs. In other words, the company’s IT Solutions unit was more lucrative than the classic distribution business.

Software solutions to travel suppliers is often more lucrative than airline distribution because hosting an airline’s, or a hotel’s, tech stack is more mission-critical for the travel supplier than the traditional distribution business, analysts at Berenberg point out. Once an airline or hotel company chooses a software provider, it is often hesitant to change afterward. A system overhaul can feel comparable to open-heart surgery. So suppliers are willing to pay a premium.

The complexity of the work also raises barriers to entry from outside competitor tech companies.

Amadeus already enjoyed high margins from its distribution business. Its group-wide profit before income taxes last year was $1.5 billion (€1.36 billion), a 7 percent year-over-year rise. As a company based in Madrid, it doesn’t report net income the way many U.S. companies do.

Yellow Flags to Watch

The company’s IT business does face market rivals. For example, Amadeus competes with various vendors to provide information technology to airlines for end-to-end operations. Common components include a reservation system, an inventory system, and a departure control system.

Yet Amadeus is the largest of the few companies that offer services used by the majority of large airlines. Amadeus leads in usage by large carriers, followed by Sabre and Travelsky. Together they account for two-thirds of the passenger service systems used by commercial airlines.

Dozens of tech vendors, including HP and SITA, also provide systems. Plus, Emirates and Delta are airlines that offer some of their systems to other carriers, too.

Amadeus doesn’t have a perfect record. In 2017, Amadeus’s Altea passenger service system had “a network issue” that caused check-in delays for airlines at several airports including London’s Gatwick, Paris’s Charles de Gaulle, and Melbourne (Tullamarine) Airport. So its growth depends on quality control.

Amadeus wants to expand its small sales of airport information technology services.

On an earnings call with analysts on Thursday, president and CEO Luis Maroto implied that his team has recently been evaluating whether Amadeus should acquire a tech company to speed up growth.

However, Maroto said they didn’t have a deal “in the pipeline.”

Today only 115 airport operators and 34 airlines use its airport information technology tools, and many of those only use one of the tools in its portfolio.

The company’s hotel business continues to grow. In late 2018, Amadeus finished the rollout of a guest reservation system for InterContinental Hotels Group, which is now live at more than 5,600 properties across 15 brands. However, the company has not signed a contract for a similar software migration for another major hotel group recently, which disappointed some investors.