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Travelport Has Had Mixed Success as a Public Company

Sean O'Neill
Travelport Has Had Mixed Success as a Public Company
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 due to 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. 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 Diversification

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.

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 (hotel, car, rail, mobile, etc.) that delivered $433 million.

Without eNett, Travelport’s effort to diversify beyond plane ticket and air ancillaries is less impressive, critics said.

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.

It’s not clear that the past few years of touting better content and product in all of its hotel, car, and rail aggregation has had enough of an impact.

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.

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

The financiers believe eNett could be valued at $1 billion if sold or listed on the public markets because 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 in so-called attachment rates.

Years ago, the company had made a goal of improving its technology and inventory to make it easier for travel agents to sell other products like hotel rooms. It revamped its reservation system with that purpose.

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 has talked at more than one customer conferences about its aim to boost the attachment rate. But that 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 with the deals it executed with third-party technology partners such as TCS and Cognizant. Their services appear solely as a cost since there is no revenue.

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. Hence the revenues appear as part of Beyond Air within Travel Commerce Platform.

Some Question Marks

On the negative side of the ledger, the company’s efforts to diversify beyond its foundational business of selling airline tickets and ancillaries seems to have stuttered in the past year, as noted above.

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 IT support service for Delta Air Lines.

For now, though, this 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.

A side note: historically, 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 owns, did enough to fix that problem. Travelport has deployed Locomote in a number of countries, but it does not disclose individual revenues. Its competitors do not break out the figures for their comparable tools, to the extent their tools are comparable, and so the issue remains a matter of debate.

Talking Debt

Blackstone bought Travelport for $4.3 billion in 2006 and took it public in 2014.

Blackstone’s purchase price was slightly less than this year’s $4.4 billion buyout price by Siris, a private equity firm, and Evergreen Coast Capital, which is the private equity affiliate of the hedge fund Elliott Management.

Adjusting for inflation, that is not a strong gain.

Travelport’s advocates might say that to compare the Siris deal with Blackstone is comparing an apple with a pear. What Blackstone bought for $4.3 billion when it acquired Travelport from Cendant in 2006 was the Galileo International global distribution business, the online travel agency Orbitz, and the ground product operator, GTA, along with some other smaller businesses which Cendant had acquired in the travel distribution sector.

Subsequent to that transaction, Blackstone in 2007 bought Worldspan, which had already lost the Expedia air business and then sold the Orbitz business through taking it public and then progressively divesting its shares. It sold the GTA business to Kuoni, and disposed of several other smaller businesses.

Hence, to compare what Blackstone paid $4.3 billion for in 2006 with what Siris and Evergreen are paying $4.4 billion for in 2018 and concluding that this is not a strong gain could be rather misleading.

On the other hand, to look at the full picture, Blackstone also layered up Travelport with debt that, Travelport had to later service from its first day as a public company.

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.

Another question to ask: Will the new private equity owners load up Travelport with debt like previous private equity owner Blackstone did? As of the end of 2018, Travelport had $2.036 billion in debt — or 79 percent of the value of the company’s $2.55 billion in revenue last year.

It’s unclear how much more debt the company could take on in a manageable way for the long term, even considering today’s low interest rates. As noted, management’s effort to lower debt the last time may have distracted it from being able to grow the company at the fastest pace possible.

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.

Clarifications: This article originally said, “executives dodged the normal routine of talking to analysts.” In hindsight, the reporter realizes the word “dodged” wasn’t fair to any public company which is in the same sort of acquisition process that Travelport is in at this stage. Such companies cannot engage in the regular analyst calls that follow earnings ordinarily.

Separately, the reporter also wrote, “The adjusted net income for 2018 figure factored out one-time events, such as a $22 million hit due to the company paying off some of its debt faster than expected.” In hindsight, the word “hit” looks misleadingly aggressive. The $22 million represented an accounting, non-cash item and didn’t in any way reflect the costs or performance of the underlying debt nor the success of the refinancing action.

The original article also incorrectly implied that Travelport Digital was accounted for under the technology services business rather than under “beyond air.”

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