From diversification in distribution to growing its hotel business, is Amadeus looking to insulate itself against Lufthansa moves? Sally White reports

Amadeus has been in the news uncharacteristically often this year. Embedded in the heart of the travel industry, this, its largest transaction processor, normally keeps its head down. Not this year. First there was good publicity for its recent growth numbers. Then a rather less happy event forced it into the headlines. However, so far it is still winning financial market applause.

When Lufthansa announced in June that it would levy a €16 surcharge on tickets not booked through its website, Amadeus’s shares tumbled by 9% on its local Madrid stock exchange. Commercially the levy must be passed on by the travel agents, and this would make their systems less competitive. The option would be to absorb the cost and reduce profit margins. That prospect worried stock markets as around 6% of Amadeus' revenue is derived from Lufthansa.

Analysts at US investment bankers Citi commented that the levy was four times the size of Amadeus’ normal booking fee. This it, said, “could potentially drive up disintermediation”. The analysts also feared that other airlines would follow. This “could potentially hurt Amadeus' GDS business model, offering greater opportunities for metasearch engines offering price comparison services,” they said, marking down Amadeus’ share price.

Of course, the travel booking industry has settled in for a fight over the levy, but meanwhile Amadeus has got on with its business, taking some very practical steps. The analysts, at least, like what it’s doing.

Upping the pace with diversification

What Amadeus has done is to step up the pace on diversification. It agreed this month to buy Accenture’s Navitaire for $830 million. Navitaire’s niche products target low-cost airlines while Amadeus has largely targeted full service carriers. (This currently continues to be a growth market, up 14% for Amadeus in 2015 Q1).

Amadeus says it plans to market and sell the two product portfolios separately, investing in both. The deal is expected to be completed by the end of 2015, over 500 Navitaire employees transferring to Amadeus.

Wall Street liked the deal and the avowed emphasis on developing digital services. The storyline was that itmerged Amadeus’ and Navitaire’s technologies with Accenture’s aviation know-how and worldwide ability in technology, analytics, cloud, mobility and operations.

Analysts saw the acquisition as supporting “long-term growth in a moment of uncertainty for its distribution business,” according to an investment note circulated by brokers Kepler Cheuvreux. It added: “Both companies are complementary from a geographical and customer standpoint.” Another bullish point was that low-cost carriers had been growing much faster in Europe than the full-service airlines.

Oddo Securities’ analysts like the price paid, which values Navitaire at about 4.2 times sales and 13.8 times earnings before interest, taxes, depreciation and amortisation. That is in line with the current valuations for companies in the industry.

Amadeus would not say otherwise, obviously, but they like it too with CEO and President Luis Maroto explaining in a statement that: “We think the price is reasonable, a good price for us and we expect to justify the value of the acquisition.”

Another good part of the deal, he said, was that Accenture will also provide Amadeus with infrastructure outsourcing as well as research and development services.Under an alliance agreement, Accenture will be designated as an Amadeus ‘Strategic Partner’ for its Airline IT business. This will cover for management consulting, technology consulting, systems integration, business process outsourcing and digital services. It will complement Amadeus’ existing in-house consulting and digital services

Amadeus says it will focus on building the commercial passenger operations, “to provide a more seamless traveller experience from door-to-door”.

A sizeable group

The deal creates a sizeable group. Amadeus has a market cap of over €16 billion and serves in over 195 countries and bills getting on for a billion travel transaction. Providers in its system encompass 711 airlines (equating to 95% of the world’s scheduled airline seats), 50 cruise and ferry lines, 207 tour operators, 110,000 hotels, 95 rail companies and 30 car rental companies. More than 92,000 travel agency subscribers access the system. Navitaire works with 50 airlines.

Last year Amadeus grew operating profits by 10% to €1.3 billion on sales up 10% at €3.4 billion. Total air travel bookings grew 5.3% to 567 million and passengers boarded increased by 13% to 695 million.

The increases in the first quarter this year were generally higher, outperforming the industry. Sales up 14%, profit up 11%, air bookings up 11.4%. Drivers of the increases included migration to the Amadeus platform of travel agencies previously connected to Topas in South Korea, and market share gains in North America.

Amadeus’ ambition now is to grow its hotel business. The significant move in Q1 was signing up with InterContinental Hotels to build its Guest Reservation System. The plan is for a ‘revolutionary’ new cloud-based system similar to the Amadeus’ airline model.

That all goes down very well with the analysts. They are backing Amadeus to increase sales by at least 10% this year with profits up 13% or more.