Agency Q3s Flag Navigant Fix

The most recent earnings reports from Navigant International and American Express—the two publicly held corporate travel management companies—have called new attention to the uphill battle Navigant faces on the online adoption front and spurred further speculation about its future.

Navigant reported a 14 percent decrease in net income just one day after American Express announced record net income of $879 million for the third quarter, a 14 percent increase over the same period last year. While Amex noted in its earnings statement that the acquisitions of Rosenbluth International and Threadneedle Asset Management contributed approximately two percentage points to the company's overall revenue growth, it did not break out the Rosenbluth acquisition, making it impossible for equity and industry analysts to determine the organic growth of Amex's corporate travel component.

Navigant lowered its guidance one week earlier, citing customer contract renegotiations and faster than anticipated online adoption as contributing factors, and prompting concern from some financial analysts.

"Navigant needs to hit its financial guidance and it needs to have investors understand what its true prospects are," said Tom Underwood, vice president of equity research at Legg Mason. "I am not extraordinarily confident that those estimates will be met or exceeded. There's little clarity, in my opinion, how revenue per transaction will trend into next year and how the cost structure will vary. It's reasonable to expect that Navigant's earnings next year will exceed this year's earnings, but I'm not sure by how much."

Industry experts said Navigant needs to embrace rapid online migration to stay relevant. "The fact that the market environment has been pretty good and Navigant has had a poor performance is surprising," said Ralph Manaker, co-president of WorldTravel BTI, adding neither contract renegotiations nor online adoption "should have been a surprise."

Adoption rates are central to questions about Navigant's third-quarter performance. "The industry as a whole has been touting double digits of adoption relative to the online world," said Mark Walton, principal at Illinois-based Consulting Strategies. Amex claims roughly 30 percent adoption and the agency is integrating corporate online and offline operations.

The most surprising disclosure issued in Navigant's earnings call, Walton said, was "their statement that they had between 2 percent and 3 percent of their overall transactions online. Either Navigant really is behind or the others aren't exactly reporting accurately. There's something amiss."

Analysts agree that Navigant may be lagging. "We were a little surprised that they didn't foresee online migration happening at an accelerated pace," said Apurva Shah, equity research analyst for CIBC World Markets. "The operational issues that were cited have been discussed earlier by management so we've known about this for the past year or so." Shah added that, while it has the infrastructure to move clients online through its Passportal platform, Navigant lacks the proper internal systems to adequately track and report migration. "They're in the process of rolling out internal systems as we speak," he said.

Navigant International chairman and chief executive officer Ed Adams confirmed that he is in the process of reviewing the company's reporting system. "What I'm looking at is the areas where we didn't have the real-time data, whether it was revenue or online adoption or renegotiating customer contracts," he said. "We probably have that data in some form or another, and we should be able to pull that information together. It's probably not so much having to invest in systems, but shifting focus and looking at more than just transaction data."

Speculation about an acquisition of Navigant is nothing new, with German company TUI—half owner of Navigant joint-venture partner TQ3—Cendant and Sabre considered key players, but some in the industry see the potential for an online travel agency to jump quickly into the corporate travel market through such a move. Still, Shah said, players in a potential Navigant acquisition "may just decide to wait on the sidelines until they get their internal reporting system in place. It's really a wait and watch game at this point."