Amadeus Hospitality Is a Tough Sell Despite Progress With InterContinental Hotels Group

Amadeus continues to be powered by its airline distribution business. But the Madrid-based technology giant has been eager for years to diversify its business lines — with hotel software services a top bet.

The company reported second-quarter 2018 earnings Friday. Amadeus netted $1.45 billion (€1.247 billion) in revenue, up 5 percent compared with the same period a year earlier. It booked a profit of about $330 million (€285 million), a 10 percent increase.

Amadeus’s distribution business, its largest unit, earned revenue in the second quarter of about $892.6 million (€767.9 million), up about 3 percent.

Amadeus doesn’t break out the numbers for its hospitality unit.

“We believe the hospitality industry has big potential and we are betting on that by making investments,” said Maroto on a call with investment analysts Friday. “We aim to build a platform that combines different components that address the overall needs of the hotel industry.”

Overall, Amadeus invests above the industry average in research-and-development.

In 2017, the company invested about $865 million (€744 million euro), or roughly 15 percent of its global top-line revenue of $5.67 billion (€4.85 million), into research and development — broadly defined as operating expenses for software development and the depreciation and amortization of related expenses.

For its hospitality unit specifically, the company is spending “much higher than 15 percent” of unit revenue on investment, said Bill Sintiris, chief operating officer for the unit, in an interview.

IHG on Time

By early next year, Amadeus expects to finish the full deployment of its replacement of Holidex, the central reservation system InterContinental Hotels Group (IHG) built in-house and used for decades, with its bespoke new central reservation system. That would be in keeping with the companies’ shared timetable.

On Friday Amadeus said that more than half of IHG’s properties have now been migrated to the new guest reservation system.

First announced in 2015, the project has taken time to match functionalities, add new tools, and have a seamless cutover.

The IHG deal highlights Amadeus’ desire to appeal to full-service hotel groups.

Investors on Friday’s earnings call were eager to hear if any of the 19 of the other top 20 global chains had also decided to make the switch. But executives had no news to report, with no hint of anything coming on the near-term horizon.

One-Off Services

On a call with investors Friday, CEO Luis Maroto said that 28,000 properties now use at least one Amadeus Hospitality product.

Much of that business is for its sales and catering management software and for its hotel operations management software, which are small businesses.

This year Amadeus debuted its first product for limited service properties, namely, a version of its software for managing sales and catering that caters to this market.

In a twist, the product — which originated from an acquisition of Itesso and its Delphi product in 2015 — has been reconfigured to connect seamlessly with Salesforce’s widely used customer relationship management software. That may broaden the product’s appeal.

Limited service and other small hotel companies usually don’t have the labor to manage software tools effectively. The verdict is still out on whether Amadeus has made its tools easy enough for smaller hotel companies to use.

Seeking a Mid-Market Expansion

Perhaps the most lucrative opportunity is mid-market, large regional chains. Many of these hotel companies are potential buyers of a solution that helps them manage inventory coherently, rather than in a scattershot way. The companies often are struggling to figure out how to manage rates and where those rates should be distributed.

Today many mid-market hotels have their customer profiles, rates, inventory, and availability duplicated and separately stored in a property management system, a central reservation system, and an ecommerce system that is used for marketing to customers, such as for a loyalty program.

This duplication can lead to problems with synchronization and data being inefficiently used, Amadeus says. It aims to enable hotels to consolidate the underlying data on its one platform.

While Amadeus’s platform includes a new property management system, that system is mainly for inventory management and nothing else. That’s a challenge to the model of market leader Oracle Hospitality, which makes its widely-used property management the heart of hotel operations and has no plans to change that approach.

In October 2017, the company signed Premier Inn to its central reservation system, its new property management system — which powers hotel front desks, and its payments solution. The UK-based chain instantly became Amadeus’ second-largest customer, and full implementation is due in 2019.

Amadeus’s pitch is that it can build a platform with a centralized inventory database that can handle the pressures of modern computing and that gives hoteliers more targeted control in deciding to, say, let a mobile-only online booking company be able to sell some of a property’s rooms but not others.

The aim is to appeal to hotel groups like Premier Inn and smaller. Many of these hotel companies are used to a simpler era of having just a few types of rooms and seasonal room rates and a central call center along with an interface with travel agencies.

That’s no longer the case. Now many mid-market hotels are developing an ever-more-complicated set of products that they want to sell in a rapidly multiplying number of online and offline places.

Their central reservation systems are groaning under the weight of the challenge and sometimes struggle to play nicely with the couple dozen pieces of third-party software for customer relationship management, revenue management, loyalty programs, group and event management, and so on that act as satellite systems. For more context, subscribe to Skift Research to read The State of the Hotel Tech Stack 2018 report.

Hazem Hussein, who became the hospitality unit’s CEO late last year, believes that mid-market hoteliers don’t have a good tech solution that enables them to drive what they believe would be an optimal amount of direct bookings.

But these hoteliers are often not sure what the problem exactly is. Why is the content not being pushed correctly or to the right mix of channels, such as Google, Trivago, and HotelsCombined? Is the way the hotel descriptions and photos appear effective when viewed on all online channels in all countries?

Given that distribution is at the heart of these challenges, Amadeus believes that, as a distribution specialist, it can address hotelier needs.

Waiting for Mass Adoption

Besides IHG and Premier Inn, Amadeus hasn’t had many takers yet.

It’s not obvious that major hotel groups and management companies would turn to Amadeus or its rival Sabre Hospitality for solutions. Hotels think of third-party distribution, including through Amadeus’ and Sabre’s distribution divisions, as a necessary evil but not their first partner of choice.

In other words, some hotel executives are asking themselves, if you want people to book direct and stop clicking around, do you trust middlemen tech companies to design your tool for both direct and indirect distribution? Those companies have historically been incentivized so that their best interest is to keep processes complicated to make more money on every transaction.

“Hotels want to create a level of loyalty and repeat business with a customer,” Sintiris said. “At heart these are distribution questions. We have expertise with that.”

While it says the right things, Amadeus doesn’t offer a robust upselling tool of its own that would let a hotelier develop, test, and push via mobile upselling offers that are relevant to customers before, during, and after their stays.

In other words, while Amadeus platform today helps hotels put heads in beds, it doesn’t yet help diversify and fine-tune revenue growth further by creatively upselling guests on additional services and by merchandising in a more targeted way based on customer preferences and why they’re taking a particular trip.

Then again, neither do market leaders Oracle and Sabre. Specialist tech players like Cendyn, Oaky, Nor1, and Revinate sell solutions to hotel groups.

IHG, Premier Inn, and other customers have essentially made a bet that Amadeus will either develop, acquire, or partner to develop effective tools on top of the new platform to do that.

Amadeus may need to make an acquisition to get those customers faster. On the earnings call Friday, CEO Luis Maroto reviewed that the company always evaluates potential acquisitions but that there is nothing to report right now.

“Part of what I do day in and day out is I look at our tech stack and the unresolved problems our customers want solutions for and how we can bring solutions from a holistic platform perspective,” Ahmed Youssef, executive vice president, marketing, and corporate development, indirectly acknowledged as much in an interview.

“The answers will vary. Sometimes it will be to build, sometimes it will be to partner, and sometimes it will be to acquire either for a segment acquisition or a technology acquisition to accelerate time-to-market.”

Amadeus’ platform also has gaps in revenue management and digital marketing. Rather than invest in those and other niche functionalities, the company offers integrations with more than 200 third-party vendors. For example, Oaky has integrated itself on Amadeus’s property management system.

Using Price as a Wedge

Cost structure could be a wedge that Amadeus may use to make its platform popular.

COO Sintiris said, “In the last three years we’ve become more flexible in how we structure the commercial terms of our deals to accommodate the preferences of customers.”

He cited as an example that some may want to have the bulk of the early expense be treated as a capital expenditure on their balance sheet as a one-off charge so they can have a smaller recurring operating expense.

The platform model is another key part of Amadeus’ strategy. While other tech companies talk about bringing a platform model to hospitality, Amadeus is the furthermost along in achieving it.

Many non-travel tech companies, whether it’s Salesforce or SAP, make it appealing for third-parties to build solutions on their platforms through an incentive structure or how they work with developers.

That approach is less common in the travel industry, where many vendors and startups gripe about the reigning approach in the travel industry to third-party integrations, a high-cost, high-hurdle approach.

If Amadeus Hospitality shows more flexibility than it has historically and rides a wave of disruption in how connections with third-parties are monetized and in how they bring data into their platform, it might help disrupt the status quo.

Amadeus Hospitality also aims to stand out from other players by having a so-called community model that is new to hospitality.

Once it has multiple hotel groups using its platform, they will be invited to participate in a governance body that decides what are the most pervasive market needs for the industry and what Amadeus should prioritize for investments. Voting rights vary by several factors, such as the size of customers.

Right now, though, there aren’t enough customers for there to be a community. In the meantime, Amadeus has an advisory board that helps to set its product roadmap, executed via agile development of biweekly sprints.

“A year-and-a-half ago, no one was talking about voice as a priority,” Youssef said, citing an example of how these discussions affect Amadeus’ investment. “Now guest engagement and personalization is a priority from hoteliers so it is also a priority for us.”

Business strategy, rather than cost or governance boards, will ultimately be the driving decision factor, though.

“Hoteliers sometimes don’t realize they are creating market competition that undercuts their direct booking offers in the way they distribute their content and rates to online travel agencies and other demand partners,” Sintiris said. “We are providing tools that will get executives visibility into these issues sooner rather than after-the-fact. It’s not an easy thing to do.”

Nor, apparently, is it an easy sell.