The pandemic dealt travel distribution companies a weak hand. Given that it's the third-largest player, Travelport has to play every card right in the recovery. So far, it appears to have done that.
Travelport’s business used to be predictable and low stakes. The transaction processor — which acts as a distribution middleman between travel agencies and airlines — consistently squeezed out modest revenue growth while routinely rolling over and whittling down about $2 billion in debt. Yet the pandemic strained its model, and the management team led by CEO Greg Webb must sail through a narrow passage and across turbulent waters.
The pandemic caused business travel to crater, slashing Travelport’s revenue by 70 percent in 2020, according to Fitch Ratings. Net debt ballooned to about ten times earnings, and Fitch has forecast that the debt ratio may last until “at least 2023.”
Travelport’s financial shock absorbers lack vital padding. As of the end of March 2021, cash on its balance sheet stood at $114 million, after a total cash burn of $131 million in the first three months of the year, Fitch said. The second quarter was tracking to be better, however.
The debt problem isn’t management’s fault. The pandemic wrong-footed Travelport’s financial sponsors. When activist investor Elliott Management and private equity firm Siris Capital bought Travelport for $4.3 billion in 2019, they planned to generate significant cash by selling the company’s majority stake in eNett, a business-to-business payments company.
But the pandemic crushed eNett’s value. Travelport had to sell its stake in the subsidiary and a sister company to Wex for $577.5 million in cash — far less than the $1.7 billion that Travelport had agreed on as a price before the crisis.
Signs of Optimism
Vaccinations may be bringing leisure travel back sooner than expected in some markets. Rival Sabre said on Wednesday it forecast its second-quarter revenue to be between $400 million and $420 million, which is higher than analyst estimates had been, thanks to “higher travel volumes.” Travelport may similarly be seeing better-than-expected leisure travel.
In a ray of sunshine after months of gloom, business travel may also rebound faster than expected in key markets. JP Morgan Research this month published a survey of 1,000 European travelers. The results suggested that, by 2022, European business travel patterns could be back to 2019 levels as companies race to reconnect with their customers, partners, and suppliers. That’s a more optimistic take than the conventional wisdom.
A quicker business travel rebound would be welcome news to Travelport, the third-largest global distribution system company. According to analysts at Moody’s, another ratings firm, it has key assets in a diversified customer base with a balanced geographical diversification.
“This position provides the company with an advantage to further develop technology and data solutions to travel buyers and providers,” Moody’s said.
Watching Market Share Closely
Webb’s ongoing reset of the company’s strategy and operations appears to be keeping its most loyal and profitable customers onside.
One positive sign is that the decline in Travelport’s booking revenues had been broadly commensurate with its direct peers, Amadeus and Sabre, with no current indications of Travelport losing market share, Fitch Ratings said.
Travelport has a well-established position in the travel industry, with an approximately 21 percent market share in the travel distribution segment, according to Moody’s.
To be sure, the market share picture is murky. Sabre has been touting market share gains, claiming it most recently had a 40.9 percent share in bookings of air bookings in the travel agency market, up from 38.3 percent before the pandemic. Meanwhile, Amadeus has not reported a share loss.
Travelport, the third major competitor and the only one focused only on distribution, is a private company and doesn’t disclose market share estimates. Each company uses its own methods to calculate market share, making comparisons difficult.
Some analysts for investment banks covering rival, publicly held players said Travelport would likely have to accept some market share loss. A mix of factors may be beyond management’s control, such as if some agencies fail because of their own financial problems.
Travelport Assertiveness on Pricing?
Some analysts believe Travelport plans to cope with some “inevitable” short-term market share loss by developing a strategy to stabilize its distribution profits regardless.
The company has been showing more ingenuity than its rivals in managing its relationships with airlines, travel agencies, and corporate travel managers, according to some analysts.
All three tech players (Travelport, Sabre, and Amadeus) earned as much as 90 percent of their gross profits in their distribution businesses from the tickets for long-distance trips, categorized as “away” and “regional” in SpreadSheetLand.
All three companies have also been accepting contract renegotiations with airlines that appear to be roughly based on a concept of “value-based pricing” — meaning that airlines pay the tech companies more if the companies and agencies sell more. (See the recent Lufthansa and Sabre deal as an example.)
The tech companies have been separately updating many of their contracts with travel agencies. The firms put a fee structure into these contracts that will protect their profits on average during the recovery, sources said.
The distribution companies charge agencies more for helping to process transactions that are for so-called “away” itineraries (meaning long-distance trips, often internationally) rather than short, domestic flights (categorized as “home” itineraries in the contract lingo) sources said.
So while some airlines, such as Delta earlier this month, have implied that they’ve driven hard bargains in their contract talks with the distribution companies, those tech companies haven’t been worried, analysts said. The tech players can reassure their investors that they’ve structured the fees with travel agencies in a way to protect their profits and ensure they have enough money for product development costs to keep their travel agency customers up-to-date.
During the crisis, it has been cleverly negotiated contracts that have kept the distribution companies afloat rather than any other factor, analysts said. These contract negotiations are arcane, nuanced, and shrouded in secrecy. But it’s worth summarizing in broad brushstrokes what some analysts and travel agency sources believe to be happening.
Travelport is said by some investment analysts to have been more aggressive than its two main rivals on expanding the gap between fees for air tickets for “away” itineraries versus “home,” or domestic, itineraries to protect its net margin per transaction.
Travelport’s assertiveness on fees is surprising because it has the least market share of the three distribution companies. But a strong negotiating stance by any one of the three players inevitably helps the negotiating and pricing power of the others.
Travelport’s management is said to have had its teams concentrate on winning and keeping the travel agencies they have assessed as having a decent mix of so-called “away” bookings. The company believes these agencies will be more profitable partners during an eventual broad travel recovery. This approach has been a more cost-efficient way to handle agency retention and acquisition when budgets are tight.
Skift heard from one travel agency in North America that has switched to Travelport from Sabre thanks to tantalizing incentive payments. But once they migrated, Travelport then raised the “away” fees, according to our source, who asked to remain anonymous given the sensitivity of commercial relationships.
If true, Travelport presumably raised “away” fees to cover the costs of the higher incentive payments to the agency. In this move, Travelport’s absolute gross profit per booking probably will remain flat if the agency eventually produces many “away” bookings once international and long-distance business travel rebounds.
That dynamic is likely because of Travelport’s “value-based” contract with airlines for those bookings — even though its margin “on average” per passenger flown may be technically lower overall because of the higher incentive payments.
Here’s a key point. Our agency source didn’t mind this change overall. They said they had been impressed by the speed and relative painlessness of the migration to Travelport. They also said they believed Travelport’s technology would enhance their revenue-making over time.
“We had to lay off some staff during the crisis, and our remaining team is averaging 12 minutes per itinerary,” said this agency source. “Our team needs to process bookings more quickly than that. We need to increase the average transaction value once international travel comes back. Those are the two metrics I’m watching, and Travelport looks like it can help on both.”
Other corporate travel companies may not notice the impact of the new contracting maneuvering. For now, their spending on high-cost trips has been almost nonexistent.
After business travel spending does recover, it will likely have a different mix than it did in 2019. It may come with either a surge past 2019 levels as JP Morgan is forecasting or a failure to return to 2019 levels for years, as Microsoft founder Bill Gates predicted.
So it may never be obvious to many corporate travel managers how the contracts between airlines and distribution companies have changed because comparisons and analysis will be impractical to make.
Travelport’s Tech Investments
Travelport has been leveling up its tech game by streamlining and upgrading the reservation systems used by travel agencies. For instance, it has recently been switching to new data exchange methods that it said provide “up to 68 percent faster average transactions and a faster shopping and booking experience for travelers.”
This month Travelport announced it would migrate many of its systems to cloud-based provider Amazon Web Services (AWS). Among other benefits, the move promises faster systems and better analytics.
“Travelport+ will leverage AWS’s global networks to cache content at the edge, speeding up content delivery by bringing it closer to users,” said David Peller, who leads AWS Travel and Hospitality, the global industry practice for Amazon Web Services, during a webinar on Thursday.
“Travelport’s migration to AWS will also enable Travelport+ to improve personalization thanks to AWS’s machine learning,” Peller said.
To make sure it’s prioritizing the right investments, the company has been hosting “NDC Leadership Council” virtual meetings. These survey a couple of dozen airlines, travel agencies, corporate travel managers, and corporate booking tool providers to get feedback.
Barcelona-based online travel agency Atrápalo had recently faced a problem that it believes Travelport has addressed. The agency’s highest-selling airlines in Europe and Latin America have been increasingly unbundling their fares (such as charging an extra fee to check a bag), and they’ve been making some of these upsells only available through separate workflows from the traditional reservation system model.
In Latin America, unbundled travel options are still relatively new, so Atrápalo wanted to make it clear in its display for consumers to compare flight options on the total price. It adopted Travelport’s “branded fares” product for its first airline in three months and has added other carriers since. In an agency world, that counts as a fast implementation. The agency said that, since the change, it has seen fewer online shoppers abandon its price-comparison results page on its website. Once the pandemic eases, it hopes to see customers book more of the higher-value tickets.
Travelport has also been working as a consultant to help travel agencies rebound after the crisis.
This month it has begun sharing with agencies consumer trust survey data it commissioned from Edelman that suggest that agencies will lose customers if they aren’t upfront about all fees and costs, whether its resort fees or an agency’s fees. In some markets, hitting customers with add-on surprises at the end has been a legacy strategy, and Travelport has encouraged agents to drop it for long-term gain in average customer lifetime value.
In a similar move, Travelport has provided Webjet, an Australia-based online travel agency, with detailed weekly reports that pair data on market pricing from a third-party provider with Travelport’s market data on volumes. Travelport created a dashboard for Webjet that showed trends in flight prices for major “origins and destinations” by flight type, lead time, and airline across airlines. This intelligence has helped Webjet market fares better to consumers and check how competitive its fares compare with rival online channels.
Travelport has also been touting third-party tools that can help agencies streamline their operations. In the past year, it has been making it easy for travel management companies to adopt an email automation service from the Canadian startup Amgine.
Altour, for example, is the largest, full-service travel management company in the U.S., and it has adopted Amgine’s automation in sync with Travelport’s technology to answer a growing number of itinerary and change requests in much less time.
Travelport has sped up its own automation tools for agent tasks, too, such as for handling ticket exchanges.
Travelport says that its current tech platform overhaul will continually bring more “personalized selling,” or offers created due to specific information about individual travelers, to agencies.
“Agents can now pass frequent flier information to Qantas during the shopping process, enabling Qantas to provide the best offers to specific travelers, including things like 20 percent off platinum discounts, extra miles, seat waivers, and more,” said Kyle Moore, global head of customer strategy and marketing for Travelport during a webinar for agents this week.
Some airlines also seem to like Travelport’s new metabolism under Webb, a turnaround artist who previously revamped Oracle Hospitality.
“I’ve seen it since you started that it’s a renewed focus on partnership,” said Alison Taylor, chief customer officer for American Airlines, to Travelport CEO Greg Webb during a webinar on Thursday. “That means a lot to us.”
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Photo credit: An aircraft that is flown by American Airlines, which is a partner with Travelport. Travelport, a travel technology company, has shown ingenuity in managing the pandemic and its relations with airlines and agencies. American Airlines