Amadeus: Fly & Beyond

2022 confirmed the recovery of the travel industry, post Covid. The resumption continued despite the Covid-19 restrictions in China, the war between Russia and Ukraine, and rising inflation. Based on the most recent air passenger market analysis by IATA (International Air Transport Association), the recovery to 2019 levels stood at 68.5% in December 22 (vs 49.6% in January 22) including a greater rebound in domestic than for international traffic. Airlines should recover their 2019 business in 2024 assuming no weakness to come. Amadeus  IT Group has again become attractive since the end of September 2022. Ytd the share is up 21.5% no little helped by hopes of an end to rate hikes. Ytd Amadeus has underperformed the airline sector (+29%) and outperformed both the IT services (+19%) and software sectors (+13%). We have seen a closer correlation with airlines since the start of 2023.

Amadeus flies duo with the airline sector

A step by step recovery

Most of the Amadeus activities are linked to airlines. Some c.80% of revenue relate to air bookings on the Amadeus GDS (49% of revenue in 9m 22) and IT solutions for airlines, primarily the Passenger Service System Altéa used by airline customers (core solution which includes the central reservation system, airline inventory system and departure control system) with the number of passengers boarded being the key metric. Volume improved quarter by quarter in 2022. The trend was better for the number of passengers boarded (-25% in 9m 22/19) than for air bookings (-33% in 9m 22/19) which were impacted in Q3 22 by a high number of cancellations and, to a lesser extent, a negative workday effect.

Source: Amadeus data

According to IATA (International Air Transport Association), passenger traffic should be c.15% below the 2019 level in 2023. Passenger price sensitivity has been low since the resumption of traffic and could increase in a slowing economy and inflationary context. Inversely, the cancellation of anti-Covid-19 border rules by China in early 2023 should improve traffic from/to Asia Pacific. As for Amadeus, Asia Pacific has been largely lagging behind so far (air bookings: -55% in 9m 22/19, number of passengers boarded: -48% in 9m22/19). Commercially, there was positive news recently with the renewal of the distribution agreement by Aeromexico (Air Distribution), the renewal and extension of the Altéa Passenger Service System agreement by TAP (Air IT Solutions) and a contract signed by Wellington airport in New-Zealand for the migration of its passenger services in the cloud (Air IT Solutions).

Beyond airlines

While the recovery in passenger traffic is a short term growth driver, the activities regrouped in the Hospitality & Other Solutions (HOS) division (17% of revenue in 9m 22) are an additional source of growth in the mid-term. In Q3 22, Hospitality & Other Solutions revenue was close to its Q3 19 level (-0.8%) meaning that this division should be the first to regain its 2019 level in 2023 (vs around -7% in 9m 22/19). Amadeus has a medium-term target of double-digit revenue growth (+11% in AV 2023-24 estimates).

Transactional revenues related to the 10-year contract for a central reservation system signed with Marriott International are due in 2024 after the implementation phase in 2021-23. Ranked first world hotel chain with 7,897 hotels (30 brands) and 1.46m rooms in 2022, Marriott International is certainly a prestigious customer for Amadeus. IHG is already a customer as the Amadeus central reservation system was a partnership development. The ambition is to convince other hotel chains. This is a long process.  Hospitality solutions contribute the bulk of the division’s revenue. Besides, hotel business intelligence software (non-transaction-based revenue) is in demand as these solutions provide better insight into markets and improve revenue management.

An eye on the Payment business

Amadeus announced a change in its payment business in November 2022 with its application for an eMoney license from the Bank of Spain. A new subsidiary Outpayce has recently been created to regroup the group’s existing payment business (the B2B Wallet solution for travel agencies to pay travel providers, gateways enabling airlines to receive payments through a wide range of cards and local payment methods on websites, mobiles, etc.) and future payment services to be developed. There has been some shift in the project as the eMoney license was expected in early 2023 and the issuance of a pre-paid virtual card within the B2B Wallet solutions had been planned for the Q3 2023. 

Back to positive free cash flow

Amadeus returned to a normal mode in 2022 following two years of serious  cost cutting (fixed costs in the P&L and capex). At the Q3 22 release, Amadeus reiterated its 2022 expectation of total fixed costs including capex up 10-14% at constant currency. In 9m 22, revenue reached €3.3bn (+78%), EBITDA surged to €1.2bn (>3x) and total fixed cost growth (+14.1%) was towards the high range of expectations. Finally, the FCF improvement has been on track (€628m in 9m 22 o/w €320m in Q3 22).