Technology rules the roost in modern air transport
The two or three weeks of punishing front-page headlines that Ryanair heaped upon itself because of its recent pilots' holiday roster dilemma has proven at least one thing for certain - the airline business is nothing if not complex and cannot be run these days without bewildering amounts of technology.
The company under the microscope today underlines this particular truth. It is the Spanish-listed company Amadeus IT, regarded as the 'middle man' for a very large section of the world's travel industry. It links travel agents, airlines, airports and hotels and acts as an intermediary providing prices, bookings and ticketing. It also employs as many as 13,000 people and trades in 190 countries.
Its ownership history tells some of the story of how the big airlines have had to tack and adjust in recent times. Amadeus was formed 30 years ago by Air France, Iberia, Lufthansa and SAS with the objective of developing a standard system for connecting airlines, travel agents and customers in real time. It mimicked an existing US system. Some years later it was listed on the Paris and Madrid stock exchanges, but was delisted after private equity groups bought out the original founders. Meanwhile, it changed its focus, expanded to include hotels, railways, airport management and ferries, moving to being a technology provider and was relisted in 2010 as Amadeus IT.
The company's international network gathers flight information and prices from airlines and travel agents use the system to find and book a flight. Amadeus receives a fee when the booking is made, part of which goes to the ticket seller. The Spanish group has over the years expanded to developing an IT solution business, and software systems for merchandising, stock management and departure control. It also has data centres globally and can provide user information and customer behaviour to airlines, allowing them to tailor products to customers.
Amadeus is one of three global companies providing the technology behind airline bookings. The others are Sabre of the US and UK operator Travelport. Amadeus is the market leader and its technology is used by 124 airlines, countless travel agents and 11,000 corporations ranging from Philip Morris to Nordea Bank. Last year the Spanish group booked 600 million journeys, which translated to 1.38 billion passengers.
Europe is its largest market with half of all bookings; volumes last year had a healthy growth. Asia Pacific has almost one-fifth but has the fastest growth, while North America is slightly behind. The recent acquisition of US competitor Navitaire, a company focused on low-cost airlines including Ryanair and Southwest Airlines, could change this.
The Spanish technology group faces challenges not only from its competitors but from airlines. With continuous cost pressure, airlines want low fees and ticket sellers want higher incentives. Two years ago one of its founder airlines, Lufthansa, lashed out at the Amadeus business model. It stated it would impose a charge on tickets not booked on its website.
Other airlines fancied they might do something similar, but nothing harmful came out of the threat - so far.
The company has capitalised on the rise of global travel and, while the business is competitive, last year saw growth in revenues, profits and cash flow. Revenues at €4.5bn are above the previous year driven by the booking and IT business. The booking business generates two-thirds of all revenue, but IT is growing at a faster rate. Pre-tax profits reached €1bn and its share price at €60 is a record high. Interestingly, a measure of the rapidly changing fortunes is that the market value of Amadeus is currently close to €24bn; double that of Lufthansa, way ahead of Air France at €5bn, SAS at €1bn and the fourth founder airline Iberia has been absorbed in BA. Maybe it is better buying Amadeus shares than airline ones.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.