A handful of major publicly traded travel distribution companies last month announced they had improved their profitability in the quarter ending Sept. 30—not a difficult task considering what happened during the comparable period last year. Still, the fact that such distributors do business with travel vendors that are losing tons of money right now has generated what one source called, "a fair amount of jealousy." They may be in the black, but distribution companies share with airlines and other suppliers the challenges of lower demand and pricing weakness. Consolidation also appears to be on the horizon, particularly in travel management.
American Express Travel Related Services more than doubled its year-over-year net earnings, though the increase was 28 percent, excluding the year-ago impact of restructuring charges, one-time costs and Sept. 11-related customer fee waivers. Amadeus grew profits 43 percent and Sabre was up 3.3 percent. Expedia, Navigant and Pegasus each had lost money the prior year.
"There has been no real acceleration in business travel," said Moshe Orenbuch, an analyst with Credit Suisse First Boston who covers American Express. "Demand and pricing are difficult, but I think ultimately pricing will be the bigger challenge." Orenbuch was surprised by the ferocity of Amex's response to British Airways' decision to cease paying card merchant fees on its U.K. corporate net-fare business
(BTN, March 4), noting that during the last recession "12 years ago, they had to essentially pay merchants. The interesting thing is, they've gained share. The bank cards are not as effective competitively."
"There still is no visibility on demand," said Paul Keung, analyst with CIBC World Markets who covers GDSs, agencies and hotels. "Almost every category lacks pricing power at the consumer level." Agency consolidation will leave "four or five megas for the Fortune 250. The Internet slowly is taking share from small and midsize players. In the large business, there are too many scenarios, and some question about the future of incentive fees from GDSs."
While Amex has been open to acquiring more travel agencies—largely, agreed Orenbuch, to feed its card business—Navigant is less bullish. "It's still interesting that the top five of us represent 20 percent of the total market," said Ed Adams, chairman and CEO of Navigant International. "There are still opportunities out there, but our main focus is to continue to pay down debt and get back to lower interest rates."
Navigant said 3Q bookings were 80 percent of year 2000 levels, while Expedia reported doubled gross bookings of $1.47 billion and tripled non-U.S. revenues, highlighting a record quarter for both revenues and net earnings. The company said its upcoming corporate offering "will include negotiated airfare management and reporting tools." Baltimore-based Legg Mason analyst Tom Underwood said, "it looks to me as if marketshare may be stabilizing" among Expedia, Orbitz and Travelocity.
Amadeus backs none of those sites, a weakness cited by one analyst for the Madrid-based GDS' 15.7 percent lower North American bookings. Less exposure to the U.S. market, however, is a bright spot for Amadeus, which raised its 2002 forecasts on bookings, revenues and earnings growth. Galileo's U.S. bookings were about flat, while Sabre's fell 8 percent. Globally, Amadeus rose 4.8 percent, while Galileo fell 2 percent to 3 percent and Sabre dropped 4.7 percent.