Amadeus: The IT Backbone of Travel - [Business Breakdowns, EP.237]

Summary

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Business Breakdowns EP.237: Amadeus — The IT Backbone of Travel

Host: Matt Russell
Guest: Ben Needham, Portfolio Manager at Ninety One Asset Management
Date: December 12, 2025

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Episode Overview

This episode explores Amadeus, a critical, behind-the-scenes player in global travel technology. Host Matt Russell and investment professional Ben Needham break down how Amadeus operates as the "plumbing" of the travel industry, enabling booking, inventory, and information flow for airlines, hotels, and travel agencies around the world. The conversation covers the company’s history, business model, revenue mechanics, competition, prospects for growth, and the potential impact of AI on its competitive position.

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Key Discussion Points & Insights

1. What is Amadeus?

• Industry Role: The “gorilla” of travel IT, but the “friendly gorilla,” underpinning the logistics and transactions that keep airlines, hotels, travel agents, and other travel providers running smoothly.
• Business Segments:
  • Distribution: Aggregates and provides travel provider inventory to agencies and corporate travel managers — over 50% market share and rising.
  • Air IT: Core airline reservation, inventory, and departure control systems — also over 50% global market share, processing 2+ billion passengers annually.
  • Hotel IT: Newer, scaling business providing reservation and inventory systems for hotels, now a scale leader after key contract wins.

Notable Quote:
“We’re talking about the IT that makes travel actually work, far beyond what you see as a consumer — inventory management, logistics, all the behind-the-scenes work.”
— Matt Russell (04:02)

“It’s the gorilla of travel IT, but a friendly gorilla — able to grow ahead of a structurally growing market... in a low-risk way.”
— Ben Needham (04:25)

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2. Origins & Market Dominance

• Origins: Born out of a 1980s airline consortium (Lufthansa, Air France, SAS, Iberia) after the industry moved booking systems from in-house, self-serving silos to an independent company following regulatory changes.
• Strategic Expansion: Early 2000s creation of Altea (airline IT), 2010s push into hotel IT, and various successful M&A moves.
• Competitive Position:
  • Airlines increasingly outsource IT due to high capital intensity and the need to share R&D costs; >80% of air-IT is now outsourced.
  • Main competitors are Sabre (20% market share, more leveraged, less profitable), plus smaller players and in-house tech.
  • Amadeus’s advantage comes from scale, dual presence in both air IT and distribution, and proven execution.

Notable Quote:
“Community-based platform. As airlines grow, Amadeus can amortize more of the R&D spend across more customers.”
— Ben Needham (06:45)

“Regulation meant airlines spun off their booking systems — that’s how Amadeus was actually formed.”
— Ben Needham (08:27)

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3. Revenue Model & Financials

• Transaction-Based Revenues:
  • Distribution: Charges per booking (about €6 gross, ~€3 net after rebates to agencies).
  • Air IT: Roughly €1 per boarded passenger.
• Recurring & Inflation-Linked:
  • Air IT contracts run 10-15 years, are modular, and revenue is largely from fixed, inflation-linked pricing.
• Variable Cost for Airlines:
  • Airlines pay only for usage, making costs flexible during downturns.
• Scale & Margins:
  • Gross margins ~75%, EBITDA margins high 20s, sometimes reaching 30%.
  • R&D spend has grown (now 22% of sales), reinforcing the moat.
• Cash Flow & Capital Returns:
  • Strong free cash flow, leverage <1x, regular dividends (30-40% payout), growing share buybacks.

Notable Quotes:
“Amadeus is predominantly a transaction processing business — a bit akin to Visa.”
— Ben Needham (18:05)

“Their take rate is very low... contributing to a strong value proposition for airlines.”
— Ben Needham (19:41)

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4. AI & Technological Disruption

• AI Agents: May compete at the top of the travel search funnel (vs. OTAs), but still require deep integration (content aggregation, booking logic, standards) that Amadeus provides.
• Core Systems Remain Mission Critical: Even if the search or interface layer changes, the underlying IT plumbing stays.
• Net Benefit to Amadeus:
  • AI increases the need for real-time and dynamic pricing — a strength for Amadeus.
  • Commercial clients (corporate travel, complex itineraries) unlikely to go full-AI soon.
  • If AI does disrupt, less-diversified, more-levered competitors are at greater risk — “Amadeus could actually gain market share.”

Notable Quote:
“This is largely a storm in a teacup... Even in an AI travel world, the backbone — the customer reservation and order systems — will still be required, and this is the majority of profits today.”
— Ben Needham (15:11)

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5. Growth Prospects: Upselling, Pricing, & New Verticals

• Structural Growth:
  • Travel volumes grow 1.5–2x GDP; Amadeus volumes ~3–4.5%/yr, plus inflation-linked pricing.
  • Additional 1–2% p.a. from market share wins.
• Product Innovation:
  • New “Nevio” order management system for airlines expected to deliver mid-teens uplift in revenue per booking, with four early-adopter airlines (Finnair, Saudi, BA, Air France/KLM).
• Hotel IT:
  • 10%+ of group profits but rapid scaling — won deals with IHG, Accor, Marriott; now global leader.
• Historical Consistency:
  • Proven track record with Altea rollout and acquisition integration; cautious, steady execution.

Notable Quote:
“Industry experts think this transition to order management systems... will be a mid-teen uplift in revenue per booking — maybe even more.”
— Ben Needham (33:05)

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6. Resilience & Risks

• Cyclicality: Transaction volume drops are the main risk during black swans (e.g., COVID-19), but otherwise downturns are mild (GFC saw just -2% to -3% volume).
• Technology Change:
  • Innovator’s dilemma always present, but Amadeus reinvests heavily into R&D to “future-proof” business and retain customer loyalty.
  • Large-scale, mission-critical systems make switching difficult — many customers have 10–15+ year contracts.
• Financial & Market Position:
  • Well-capitalized vs. more-levered competitors.
  • If a severe downturn or tech shift hits, Amadeus is positioned to pick up share from weaker rivals.
• Other Risks:
  • A truly left-field technology change.
  • Major, prolonged air traffic shutdowns due to geopolitics, pandemics, etc.

Notable Quotes:
“Technology risk is always large, but I do think they manage it well — and that’s why the gap is increasing between them and their peers.”
— Ben Needham (44:59)

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7. Valuation & Market Perceptions

• Misunderstood by the Market:
  • Often bucketed with airlines/transport despite being a software company.
  • “No man’s land” coverage; not viewed as sufficiently ‘cool’ tech by some analysts, while travel analysts see it as too different.
• Compelling Free Cash Flow Story:
  • Five–six percent free cash flow yield; double-digit growth ahead as innovation is monetized.
• Untapped Pricing Power:
  • Market underestimates future ability to increase price/take rate as value creation for clients increases.

Notable Quote:
“It’s covered by airline analysts... used to horrible cap intensity, cyclicality. For tech analysts, it’s almost not cool enough, not AI enough.”
— Ben Needham (42:07)

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Memorable Moments & Lessons

1. On Competitive Moats

“The mark of a good business is whether you would hate to compete with them — and I’d hate to compete with Amadeus. But customers like to do business with you, and I think they’re a channel friend, not a foe. When those two characteristics combine, that’s a fantastic cocktail for value creation.”
— Ben Needham (48:08)

2. On Execution

“…We just go about their business quietly but brilliantly and very effectively.”
— Ben Needham (34:22)

3. On R&D Investment

“Their R&D spend is equivalent to the total revenues of Travelport and half of Sabre’s — really fortifying the competitive gap.”
— Ben Needham (39:28)

4. On AI and Disruption

“Even in an AI travel world, the backbone — the customer reservation and order systems — will still be required. And this is the majority of profits today.”
— Ben Needham (15:11)

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Key Timestamps

• 04:25 – What Amadeus does, business structure, “the friendly gorilla” analogy
• 06:45 – Why airlines outsource IT; Amadeus’s market share and competitors
• 08:27 – Amadeus origin story, formed via airline consortium and regulatory impetus
• 11:51 – Competitive landscape: Sabre, Travelport, and why Amadeus’s model is superior
• 15:11 – AI implications for Amadeus and the threat of disintermediation
• 18:05 – Revenue model compared to Visa; fixed vs. variable costs for airlines
• 27:35 – Hotel IT strategy, market share, and contract wins
• 33:05 – Revenue growth levers: volumes, pricing, upselling, new product “Nevio”
• 34:22 – Execution history and importance of capital strength
• 37:01 – Margins, R&D, and financials
• 39:28 – Capital allocation, history of disciplined M&A, buybacks, dividends
• 42:07 – Valuation quirks and market misunderstandings
• 44:59 – Technology risk and why Amadeus stays ahead
• 48:08 – Lesson: Value comes from businesses both customers and competitors respect (the “channel friend, not foe” principle)

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Takeaway Lessons

• Durable Competitive Moats: Built on network effects, scale, dual presence, and capital strength.
• Value Creation: Businesses that are both a pleasure for customers and a pain for competitors possess enduring advantages.
• Resilience via Diversification & Investment: Variability in volume, but diversified, inflation-linked, long-term contracts provide ballast; heavy R&D shields against disruption.
• Potential for Harvesting & Growth: Well-positioned to transition from investment to “harvesting” strong returns as new generations of products roll out.
• Look Past Simplistic Buckets: Market still misappraises Amadeus, offering opportunity for investors who understand its true business model and growth levers.

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Transcript

[Host (possibly Matt Russell)]

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[Narrator/Intro Voice]

This is Business Breakdowns. Business Breakdowns is a series of conversations within business investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. We believe every business has lessons and secrets that investors and operators can learn from and we are here to bring them to you. To find more episodes of breakdowns, check out joincolasis.com all opinions expressed by hosts and podcast guests are solely their own opinions. Hosts, podcast guests, their employers or affiliates may maintain positions in the securities discussed in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

[Host (possibly Matt Russell)]

This is Matt Russell and today we.

Are breaking down the travel IT giant Amadeus. If you have booked travel with a travel agent or done business travel and used your system, there's a very good chance that that was done through Amadeus Plumbing. They are IT for travel and it goes well beyond what you see or interact with as a consumer doing this within the airlines, within hotels, inventory management, all of the behind the scenes work that make these logistical engines actually flow. My guest is Ben Needham, Portfolio Manager at ninety one Asset Management and he joined to cover why Amadeus might have some misconceptions in the market, the business and how it's grown and captured such dominant market share over the years and what that looks like in terms of a value proposition on all sides of the equation. We also get into the AI debate and what that might mean for Amadeus and what a strong balance sheet could represent for Amadeus relative to some of its peers. So a very interesting niche business. A lot to discuss here and Ben was a great guest to cover it all. Please enjoy this breakdown of Amadeus. All right Ben, I am excited to have you here to talk about Amadeus.

And this was admittedly one that took.

Some time for me to wrap my head around as I was doing some initial research on it. So easy place to start was just.

To get your overview description how you.

Would paint the picture of this business to a listener who is vaguely familiar or not familiar at all with this name.

[Ben Needham]

Thanks for having me Matt. I think the best way of summarizing the business is as the gorilla of travel it, but a friendly gorilla which is able to grow well ahead of a structurally growing market that is travel. And importantly this is in a low risk way given its diversification across geography and travel provider customer and the inflation linked nature of how the revenue model works. So what do they actually do? There are three main parts of the business to understand. Firstly they have a distribution business which links up travel sellers with travel providers. In the indirect travel channel, it essentially aggregates content from the travel providers I.e. airlines, hotels, rail companies and supplies that to a pre fragmented global travel provider ecosystem. This includes corporate travel management companies, online travel agencies, bricks and mortar travel agencies, super apps, meta channels and AI agents. Soon perhaps if you're making a travel booking via a travel agent or your company is booking a business flight for you, there's a good chance Amadeus is the plumbing that enables it given they have over 50% market share in distribution, which is actually rising distribution perhaps Ronnie gets a lot of the investor focus as the biggest business by profits is actually now the air IT business. This is predominantly the inventory management, reservation management and departure control System for over 50% of the airlines globally, processing over 2 billion passengers boarded per annum. When you're making a booking on say Lufthansa, Amadeus will process that booking and when you're boarding a Lufthansa plane, Amadeus will facilitate the information flow all the way to the travel gate. Then finally, Amadeus also enables travelers to make reservations in hotels via scaling hotel customer reservation business. Amadeus in effect is uniquely positioned right the way across the travel ecosystem, enabling the flow of content, bookings, transactions and ultimately travelers.

[Host (possibly Matt Russell)]

It's interesting as an industry, I would have previously assumed that most airlines built this system internally or had some type of internal software that would do this for them. Can you frame a little bit the space as a whole how Amadeus fits into this ecosystem, Whether there's competitors, how the technology kind of evolved into a place where there's such a key player in the industry.

[Ben Needham]

The air IT part of Amadeus is a community based platform. And what that means is they're able to share economies of scale with their customers. They can amortize more of their R and D spend across more customers as they grow. And that's why airlines, which are pretty cyclical businesses, pretty capital intensive, they outsource these types of operations to people who can do it better than themselves. And that's why typically when you look at the airline space today or the travel it space today, within that just over 80% of air it is outsourced the likes of Amadeus and then only 20% today is actually in housed. That's the background to the air IT ecosystem and business. When you think about the market shares, AMADEUS has over 50% market share within the air IT space. So it processes over 2 billion passengers boarded per annum of a market size of just over 4 billion ex China. The second biggest company is Sabre which is 600 to 700 million passengers boarded. And then the majority is mom and pop players and or in house providers.

[Host (possibly Matt Russell)]

I think I read an anecdote that Lufthansa had pulled away from Amadeus back in the mid 2010s because of their industry power, but then quickly reversed that decision and signed up again with them shows an indication of core competency focus and understanding where you can outsource and make that effective for your own system as well. What is the origin story to Amadeus? How long have they been around? They've clearly built up advantage position in the market. What does that trace back to?

[Ben Needham]

The business has been around for a.

Long time and the history is really important. So they actually created by the airline customers. Distribution systems were created in the 60s and 70s and that was to enable airlines to process bookings and get close to their customers. In effect and this is before.com in the 60s and 70s the airspace was deregulated, there was globalization and within that more airlines were created and more agencies were also created. There was a problem with the way the distribution systems work because they're owned by the airlines, gave preference to their own inventory that was anti competitive. So Then there was regulation that came in. Following that deregulation, the airlines decided to sell off their distribution systems and they merged. And that's when Amadeus was actually formed, which was in 1987. And that was following the merger of the distribution systems between Lufthansa, sas, Air France and Iberia at the time that forms a distribution business of Amadeus today. In the early 2000s, they created something called Altea, which was the air IT business. And that is the customer reservation system, the inventory control system and the departure control system. That sits behind the distribution system as a whole, which enables the orderly processing of bookings. And then since then, they've created the Hotel IT business. That was in the 2010s when I actually started covering the stock over a decade ago. They didn't really have much revenue or free cash flow there. And that business is going from strength to strength. And they also bulked out part of their Air IT and that Hotel IT business via M and A.

[Host (possibly Matt Russell)]

Interesting to hear horizontal expansion across travel. I certainly love businesses that were born from an industry consortium, founding something together and then spinning it out on their own. You often see quite a few success stories in that category. Visa being one of the most obvious ones. I think you've tapped into the segments of the business. Is that how they split out revenue by distribution IT and then in the hospitality category, are those the three buckets?

[Ben Needham]

There's three main divisions. The main one in terms of profitability is now air it. 15 years ago that was 20% ish of group profits. Now it's up to 50%, 35% of group profits. So the distribution business, even though that gets a lot of the limelight and a lot of the focus, and then 10% is hotel it's and other, which is 10% of group profits. So the hotel it business is the most embryonic. IT has the lowest margins. Because of that, they're scaling very quickly. There's a lot of investment to enable the scaling of that business. Air IT business is the most profitable, almost 70% contribution profit margins, which are pretty formidable. And then the distribution business, its contribution margins are in between Hotel IT and Air it.

[Host (possibly Matt Russell)]

You mentioned on the air distribution side of things, some of their competitors in Air it, are those the same competitors you mentioned? Sabre, which is a name I came across quite a bit. Is there more competition in that space? Less. Does it look similar to distribution?

[Ben Needham]

The competition is broadly similar. So within the Air IT business, Amadeus had 50% market share. And then there's Sabre, which is just under 20% market share. And then Smaller operators, the airlines themselves, who in house the technology. And then if you look at the distribution business, it's a similar type of shape in that amadeus have about 50% of market share. And then there's Sabre who's a clear number two with about 30% market share. And then there's also Travelport with 20% market share today. It's important to note that Amades do have a lot more scale than the nearest competitors versus the likes of Travelport. They don't actually have a Air IT.

Business, they're just a distribution player.

The advantage of having both is enormous.

[Host (possibly Matt Russell)]

I have a sense of what's going on with the buying an airline ticket, accounting for that in terms of the transaction and how that's actually working through the system in terms of it, does it get into accounting? I think I read something about the dynamic pricing which can always drive me crazy in terms of seeing what flight costs do from this week to the next week. But a little more in terms of different ways that Amadeus is serving their customers, whether it's value add versus housekeeping.

[Ben Needham]

Depending on which division we're talking about.

They do slightly different things.

The distribution business is a network business and they're playing a role of content aggregation where they're taking inventory from the airlines. And that can be in traditional EDIFACT form or NDC form. And they provide that inventory or supply that inventory to the travel agents. So that's serving the indirect channel. That indirect channel is approximately 1 billion bookings per annum. And then on the air it side, they're doing the reservation management for the airline, they're doing the inventory control for the airline. They're doing the departure control system as well for the airline. They also have revenue optimization tools, they do have revenue accounting tools, fare optimizer tools. Really what they're trying to do there is enable their customers, their airlines to generate more revenue per passenger, make smart offers to the passenger which are personalized. Airline customers can benefit from those initiatives and that's clearly key in an industry which as I said before, is pretty cyclical, quite capital intensive and very competitive. Generating that revenue from say an ancillary income is really key. And Amadeus enable that to take place.

[Host (possibly Matt Russell)]

When they are taking the inventory and bringing it to the travel agents. They're not actually owning or having that risk sit on their balance sheet in any way, is that correct? Just in terms of the process, that's absolutely true.

[Ben Needham]

They will create offers in the distribution.

Channel via the global distribution system that they have and they will basically package those offers up and provide them to the agencies. But there's nothing on balance sheet.

[Host (possibly Matt Russell)]

AI is something that comes up when.

Talking about any space, particularly within any IT system.

What would you say are the implications.

Of AI for Amadeus and for the broader travel vertical?

[Ben Needham]

There's been some industry discussions about the implications to Amadeus of the potential adoption of AI agents at the top of the travel search funnel with question marks on whether this will disintermediate the distribution business. I think this is largely a storm.

In a teacup and I actually think they are very well placed at the.

Top of the funnel for travel search becomes AI agentic led and I think this for a few reasons. Firstly you need to remember they are.

The IT backbone for their customer.

The customer reservation system or order management systems mission critical will still be required.

In an all in AI travel world.

And this part of Amadeus represents the majority of profit today, so 60% plus of it. Secondly, would AI agents really want the hassle of setting up the infrastructure to aggregate and orchestrate industry content when players like Amadeus already do this in a very economical way with economies of scale enabling a very low industry take rate? My personal view here is AI agents might do things to improve the top of the funnel search, thereby potentially competing.

With online travel agencies where the entry.

Take rate is incidentally also much higher. But the agents will still need an aggregator to pull together disparate data from.

The travel ecosystem with many different technology.

Standards at play between NDC and edifact for example. Thirdly, there's also an airline push to dynamic and real time pricing, essentially enabling them to generate more revenue per booking. This will put more demand on AI agents to get the right offers to the customer.

With the move to ndc, there's actually.

Been a big increase in something called the look to book ratios on the airline websites which can get expensive and Amadeus helped to solve this problem. Fourth, one could argue the great thing.

About AI will be more personalization alongside.

The use of dynamic pricing for the airline, which could lead to a snowball.

Effect for their offer and order management system ie nevio as well as many other products.

Fifth, a big part of indirect channel and distribution revenues is for corporate travel management companies where the complexity of booking is high.

This complexity likely means it'd be difficult for AI agents to totally displace corporate.

Management businesses and even if they are.

Displaced, eventually the AI agents will need.

A content aggregator and or someone to orchestrate the data. And then finally, if agents really do lead to chronic disintermediation of the distribution business, then peers who are Much more distribution heavy with a much smaller IT offering and a lot of operational and financial leverage are in deep trouble. So Amadeus can arguably swoop up even more market share across all areas of their business, Air IT included.

So, all in, I feel pretty good about AI as it relates to the.

Distribution business and the business model as a whole today.

[Host (possibly Matt Russell)]

From a revenue perspective, how much of this is per booking based on the amount of air travel versus contracted revenue, what's reoccurring versus what's exposed to cyclicality? How do you frame that? How does the company frame that? How do you think about that?

[Ben Needham]

Amadeus is predominantly a transaction processing business and the way the revenue model works is a bit akin to a visa. They take a cut of the ticket price every time there's a booking made via the indirect channel and it goes through the Amadeus plumbing, they'll take a booking fee from that. And every time that there's a booking that's placed in.com with the likes of Lufthans et cetera, they'll take a very small fee from that. And there's pros and cons to that. The con is when air travel volumes fall like they did in the pandemic. Amadeus revenues really drew down because of that. The pro of it and the positive for the channel's point of view is they become a variable cost for their airlines. So when volumes do fall, there's no cost for the airline. Their take rate from an industry point of view is very low. On the air IT side, the take rate is about €1 per passenger boarded. On the distribution side, the take rate is about €6. We think there's a big Runway when we look at the ability for that to increase over time as they provide more value for their channel and their customers. There's an enormous untapped pricing opportunity, we think over time as Amadeus can share in the value creation with its customers as it enables more revenue per passenger to come through for their airline customers.

[Host (possibly Matt Russell)]

Do you have any sense that €1 and €6 per passenger what the airline would theoretically generate from the passenger in terms of revenue?

[Ben Needham]

It depends if you're doing short haul.

Or long haul flights.

If you're doing long haul, ticket prices can be anything north of €1,000, less than 1% on both sides of the business. If you're doing short haul traveling from London to Edinburgh, then maybe you're a slightly bigger part of the overall cost. But still we think the value proposition is a very good one from an industry point of view.

[Host (possibly Matt Russell)]

How are those fees determined? Is it some Specific rate per transaction. What's the pricing mechanics of Amada selling into the airlines that use them or whoever is the end customer.

[Ben Needham]

On the air IT side, typically they go 10 to 15 year contracts with the airline customer and it's pretty modular how they sell their products. If you're using Amadeus for its passenger service system on the air IT side, you'll be using the departure control system, the inventory management system and then also the reservation management system. You will be using those three modules. They're fixed price in nature, but they're inflation linked over time. That has some positives if you do enter a down cycle. Typically what happens in a down cycle, pandemics aside, when there's channel weakness, volumes actually go a little bit negative and not too negative because what the airlines do is they lower price. Amadeus don't suffer with lower ticket pricing because it's fixed price and it's linked to inflation. So at times of industry pain, where revenue streams and the free cashless streams are very defensive, if we go to the distribution part of the business, it is slightly different. There's something called home bookings and then there's also something called away bookings. When you're doing home bookings via a travel agency, the fees are pretty low. Most people, when they're making airline bookings, if they're only traveling locally, they'll typically go direct to dot com. That's the reason those prices are low if you're doing away booking. So if you're traveling from say the UK to Australia and Qantas want to get their inventory to an agent in the UK to enable them to sell more, Amadeus facilitate that process and they can therefore charge a higher price for enabling that. The distribution business, a key concern with their is that there's disintermediation and more people are booking via.com. but for those away bookings, the role that Amadeus play is a really important one. To enable inventory to be sold in different countries and that's why they can charge a higher price for that. And actually the distribution business, the majority of revenues today, not necessarily volumes, but the revenues today are derived from away bookings, which is a bit of a misconception that we think people have on the stock. I'm not sure they're quite aware of that revenue mix being predominantly away bookings.

[Host (possibly Matt Russell)]

Can you talk me through the net fee model in distribution? How exactly does that work?

[Ben Needham]

That's actually a good question, Matt, and an important one in the context of the discussion we were just having an important element of how the distribution business works is the airline will pay, the distribution system company will then actually pay the travel seller. So in effect this means that the.

Gross fees, that is the six euros which I mentioned earlier, are very different.

To the net fees which are three euros, and therefore the industry take rate is even lower than what I assumed.

So again, this is actually a really important point that you're touching on.

I think the interesting thing to pull.

Out here is in the evolution to.

An NDC model, the industry participants first thought that this would be dilutive to.

The revenue per booking, but actually it wouldn't be dilutive at all to the.

Net fee per booking. And if you look at the contribution.

Profit per unit that Amadeus has made.

Over time, which in effect is a proxy net fee per booking derivative, and.

You can see that it's actually steadily.

Increased over time, which is a good sign of system health. And as the NDC model is evolving, actually the actual net fee model that.

They have in place, where the airline.

Pays the distribution company, who then pays the travel provider, the travel agent actually still remain mostly the case because the.

Airline often does not want a direct.

Relationship with the agency because it creates more of a cumbersome process. So the MU20C in all likelihood probably.

Won'T be diluted to the per revenue.

Economics and definitely should not be diluted to the contribution profit per unit economics. And also I should add this evolution to ndc. It's a gradual process.

The airlines have to be ready to.

Service the channel with ndc and particularly for the full service carriers, actually the rollout's been pretty slow, so they ensure.

That the channel's ready for them to.

Provide an efficient service.

In this NDC switch, you mentioned that.

[Host (possibly Matt Russell)]

There is a concern about disintermediation or maybe less use of agents, more direct bookings. Is there any data that shows that piece of the market has shrunk materially over time or where does it stand today? Just in terms of percentage of the market and if you have historical reference, that would be notable too.

[Ben Needham]

I think approximately 25% of bookings are done in the indirect channel. If you look at Amadeus as booking trends in the distribution business over time, typically they've grown slightly below global passenger volumes. That's because of the prolific growth in low cost carriers, which are a cheap form of travel and the fact that you go direct to.com typically when you're making those bookings. The other aspect here is there is.

Something called direct connects.

Sometimes agents are directly linking APIs with the airlines. That process typically only happens in the home Markets where there's a lot of volume going through that channel. When the volume is a bit more fragmented and when you're having to include small inventory loads from airlines in a different country, it becomes very difficult to manage tons of APIs. And that's why you go through the distribution system that Amadeus, Sabre, Travelport provide as opposed to disintermediating them and having direct connects. That's another aspect to think about.

[Host (possibly Matt Russell)]

Should I assume that there's a lot of overlap in the distribution and Air IT customer base in terms of those that use one are usually using both?

[Ben Needham]

I think that's right.

Having both an Air IT and distribution business is a commercial advantage for Amadeus and to a degree Sabre in that you have more revenue to spread across similar customers. So you can therefore charge lower prices, arguably for one or the other. And the other aspect of this is there's a slight halo effect in terms of bookability. If you are the Air IT provider as well as a distribution provider, you know that that inventory's live, it's real. The bookability therefore can be better for the channel. If your distribution system and your Air IT system are the same, there's a commercial advantage and there's also a potential customer advantage in that you don't get.

Catch data, which is wrong, and you.

Go to buy an airline flight and it's actually not there, which can happen.

[Host (possibly Matt Russell)]

On the hospitality business you mentioned Air IT was a much smaller percentage of overall revenue years ago versus where it is today. That has been something that has taken up more revenue mix, positive mix shift seen from that business. Is the hospitality business a similar growth engine for them? Is that a target market? I think you mentioned it's 10% fairly small today, but would you expect that to be materially higher in the future?

[Ben Needham]

10% of group profits, 15% of group revenues.

They're providing similar services to what they are to their airlines.

In the air IT business, they've essentially.

Created a customer reservation system which is a community based platform. They're trying to win more and more contracts with large scale hotels similar to the Air IT business. You can amortize that cost across more customers and you get an economy as a scale shared model. So more customers want to come to you and it becomes a self fulfilling process as the Air IT Altair proposition has been over time. The good news is it's scaling very well. They won a landmark contract with Intercontinental hotel group in 2015. Since then they've recently won contracts with both Accor and Marriott and Ascot limited. They really have established a scale position within that customer reservation proposition. And they are now the leading hotel IT company globally. Competition is very fragmented. Their nearest peer was Sabre. They actually were a full seller of their hotel IT business because they have balance sheet issues to address. One of the nearest competitors selling their business is great, Amadeus, because they're retrieved from the market.

[Host (possibly Matt Russell)]

Do they take inventory in a similar way and bring it to travel agents? Is it a similar model in terms of that being a core piece of what they're doing in the hospitality business?

[Ben Needham]

So they do also do distribution, but that's only a smaller part really for.

The hotel business, it's mainly the reservation system, managing inventory and enabling their customers to generate more revenue per room. So if you go onto Intercontinental Hotel Group's website and you're making a booking in one of their hotels, you get offers. Do you want a marble bath? Do you want a PlayStation? And that wasn't there before. What they're doing is enabling their customer to generate more revenue per room and then Amadeus can share in that value creation with the channel.

[Host (possibly Matt Russell)]

I'm sure they've pushed the travel insurance option as well. Is that a piece of their offering.

[Ben Needham]

As part of that distribution business?

They do have partnerships with travel insurance, but it's only a small part of the business.

[Host (possibly Matt Russell)]

In terms of the revenue trajectory, do I assume this is volumes based on air travel plus some pricing mechanism? You're kind of seeing that as the top line growth rate. Is there anything else that goes into it? And what does revenue growth tend to look like in a mid cycle or normalized environment?

[Ben Needham]

Typically travel grows at one and a.

Half to two times gdp.

So if you look at the volume growth that they're able to achieve without winning new contracts, it's typically in the three to four and a half percent range. Now I'm being guarded with that geopolitical risk. I think you have to guard for that. American shutdowns recently, the war in the Middle east, in today's world, that's just pragmatic. Then there's inflation linked contracts on all sides of the business. If global inflation rates were 2 to 3%, you should see that come through in the top line. There is also an upselling process here in that with their air IT business, they're about to embark upon a potential massive structural growth change in that part of the business. Their airlines want to modernize their retailing platforms and move to order management systems away from legacy passenger service systems. Why the airlines want to do that is because they want to provide a better service for their passengers. So if there's disruption on their journey. They are able to reach out to their customers and tell them that there's going to be disruption and flight's going to be delayed actually before they get to the airport, which currently, because of the cumbersome nature of how the tech stack works for airlines, that's not possible. But also they want to sell smarter. They want to personalize the sales process to the customer in order to generate more ancillary income and basically drive higher revenue per booking. If and as Amadeus can facilitate that transition, they have a product called Nevio which is in its early innings. It's got four customers currently signed up to it which are Finnair, Saudi British Airways, Air France, klm. They're going to be able to charge a higher revenue per booking and we should see that come through in a better top line as well. And it's also important to note there, industry experts think that this transition to order management systems will be a mid teen uplift in revenue per booking if they get it right. And they can generate a 5 to 7% revenue uplift per passenger with these new order management systems, which is what the early look is for the airlines that are using Nevio. Arguably that's lowballing it, particularly in the context of only taking €1 per passenger boarded today. That's their current rent extraction in the air IT space. So could that be 50% uplift, could that be 100% uplift in the next five to 10 years? Potentially they deserve to share that value creation with their customer. And then there's the market share dynamic. If you track the distribution business and the air IT business over time they've constantly taken market share from their nearest competitors. That can give another 1%, 1 1/2% to 2% to the top line. When I take all that together, air traffic at 3 to 4 inflation, that.

Gets you to 5 to 6 revenue.

Per passenger in air it can get you another couple of percent. That can get you 7 to 8% and then market share I think can get you to 8 to 9%. I think it's a high single digit.

Top line business and within that distribution should remain pretty turgid.

Keep growing at 4 to 5%, grow volumes a little bit less than air traffic volumes, but with a little bit of price and then hotel it because it's a lot more embryonic. And they're currently got Marriott Accor, Ascot Limited migration on their platforms in the next year and a half to two years. And that business should grow at 15 to 20% probably for the next Couple of years. There's a lot of growth opportunity ahead of it.

[Host (possibly Matt Russell)]

Based on my own personal experiences and the amount of altercations that I see on my social media feed happening at airports, dealing with the inventory systems, it certainly seems like that's an area that these airlines could benefit from upgrading. What does the timeline look like for something like that? And from an execution perspective, where does the confidence lie in their ability to execute on doing that efficiently? Is there time in history that they've done things like this where the execution has been on par with what's needed?

[Ben Needham]

I think that executed very well and we just go about their business quietly but brilliantly and very effectively. From a capital allocation point of view, we really admire that. If an airline is going to enter an Air IT contract, they take it seriously because this is the central nervous system of their business. Managing the inventory, managing the reservation systems, managing the departure control systems. That needs to be done properly. And revenue is everything for these companies. Managing that effectively is just key. So the RFP processes take a long time. They can take years to get across the line. The reference contracts that they have on the nevio side of the proposition, they're going to be really key. Listening to what British Airways say and Finnair say on that nevio proposition, they're already wired up to it and how it's actually benefiting the revenue per booking over time, that's going to be key. Obviously the industry will listen to those companies and then you could get a snowball effect because you get FOMO and it's commercially potentially going to really help these companies who are early adopters. It can take a long time, but I think it's a bit of push in terms of Amadeus, selling the proposition properly to the airline customers and a bit of pull. They'll see actually some of the early benefits of those companies who are tapped into Navio and then you can see a big growth phase play out. Altea has already been through this, their original passenger service system that snowballed and scaled from the early 2000s even to today, people are still actually signing up to their Altea proposition, which is their passenger service system. But the more legacy system that airlines hooked onto, and they've done a great job of that and that's why they've got over 50% market share within the air IT space. Just a final point to note is balance sheet considerations are really key when airlines are negotiating with air technology companies. If you are very levered and if you're losing market share in an RFP process, that's A problem. It's an oligopoly within Air it, but the number two player is pretty levered.

[Host (possibly Matt Russell)]

Mission critical. Things like those systems require some thinking around the financial positioning of your counterparts. Taking it down a level on the margin side of things, I have some understanding they are a network business connecting different parties here. What does that look like from a margin perspective? Where have they ranged historically? I know there's differences between the segments, but at a consolidated level and to the extent that the nuances to each segment is relevant, what would you point to there?

[Ben Needham]

The gross margins are very attractive.

They're mid-70s and they've been pretty consistent through time, which is remarkable really given how embryonic the hotel IT businesses within that. They've been scaling that business for 10 years. There's been some dilution there from the scaling of that hotel IT business. EBITA margins are high 20s. They've touched 30% a few times. When you're processing an incremental booking for Lufthansa or Air France or processing an incremental booking on the distribution side of the business, the incremental cost is next to nothing. The business is very scalable. That affords nice economics within the business. They reinvest that when they are scaling and when there is growth in volume with the airlines, they will reinvest it. And so if you look at their R and D spend over time, the R and D to sales has actually reached new highs more recently currently at the 22% level which is very high. If you look back 15 to 20 years ago, that was actually 10%. They've been investing their Nevio proposition in Air IT. They've been investing in NDC. Within the distribution business there's a Microsoft partnership, there's been a re platforming of the business to make it cloud enabled, enable them to sell native products where the cost to serve going to be dramatically improved because of that. Despite all of that and despite an embryonic hotel IT business, they're still almost making peak margins at the 30% level. The financial model is a good one and it's worth just noting as well. The cash conversion is good. So they have a negative working capital balance. They do capitalize customer implementations. So when they're doing a big IT project, if they're installing nevio or installing their hotel IT proposition with the various customers, they take on that cost themselves. Then they capitalize that cost, they make up for it. When the room bookings or the airline bookings come through on a 10 to 15 year view, which is a nice thing for the value chain in that you're only actually spending once bookings are happening, you're not actually spending the money as a hotel provider on that transition. That's also why you need to be well capitalized. And that is a big differentiator of them versus their competition.

[Host (possibly Matt Russell)]

I kind of bucket R and D into capital allocation in a similar vein to Capex. But what do they do with excess capital in terms of distributions? How do you think about them beyond some of the operational needs from a capital allocation standpoint?

[Ben Needham]

First and foremost, they'll reinvest in their business organically and where they think their return on capital stacks up. You can see that, as I said in the R and D spend over time. And an interesting stat there on the R and D spend is their R and D spend is actually equivalent to the total revenues of the number three player within distribution, Travelport, and their R and D spend is equivalent to 50% of the revenues of their second nearest competitor, which is Sabre. They're reinvesting a lot of capital to fortify and differentiate themselves versus the nearest competition. That's a really important point to make. They will also do inorganic spend and I think their track record has been very good here. So they bought a business called Navitaire in 2016 that was a passenger service system in the air IT vertical for overweight, low cost carriers. Amadeus, because of its history with Air France and with Lufthansa, et cetera, was overweight the full scale carriers and the hybrid carriers and it had a gap in its portfolio which was the low cost carriers. Navitaire was a leading business there. It's actually got Ryanair as a major customer and they also bought a business called Travelclick in the hotel IT space and that was to give them more penetration with the independent hotels. So doing exactly what they do with the likes of accor, Marriott, Ascot Ltd. Now or soon to be and Intercontinental Hotel Group in the independent channel. There's larger deals that they've done we think make a lot of strategic sense and the return on capital has been good. Their capital structure is very good. Their leverage is less than one times today. They de gear very quickly because they are very cash generative with high margins and a very good cash conversion. They do have a sensible dividend policy, so pay out today about 30 to 40% of their free cash flow in a dividend which steadily grows over time. Pandemics aside, they're increasingly doing share buybacks. The multiple we think that they trade on is actually pretty low given the growth opportunity. They started to do share buybacks with their excess cash, which we think is a very sensible form of capital allocation.

[Host (possibly Matt Russell)]

On the valuation point, I'm curious to hear how you'd frame it. Much of my research about the business beforehand, it's pretty clear they're in this funny spot where they're grouped in with a lot of the airlines or transportation stocks, despite being more IT software ish in nature. How do you approach valuation? How do you think the market approaches valuation in terms of there being a difference there? Any commentary around that would be interesting to hear.

[Ben Needham]

I absolutely agree with you on that observation. The stock's kind of in no man's land in that it's covered by airline analysts who are used to horrible caps, intensity and cyclicality. And so I think it gets tarred with the wrong brush there. But then for tech analysts, it's almost not cool enough, not AI enough, even though they're doing quite a lot themselves with AI. But I think because of the pandemic as well, the market is absolutely schizophrenic about the cyclicality. But the pandemic is the wrong anchor because in typical travel downturns, the volume headwinds in global traffic are not that bad. They're minus 2, minus 3% is what you saw in the great financial crisis. And that's a very bad recession for kind of those broad reasons. That contains the multiple that Amadeus trades on. When we think about valuation, the qualitative side of things is really important. And we think Amadeus has an abundance of untapped pricing power which it can unleash over time, is extremely well invested as well in that their R and D spend is approaching new highs. And you could argue that they're about to embark in a harvesting phase where they've got their product propositions ready, they're getting commercial gains with those new product propositions. There's increasing evidence of that. And as those gains come through, the R and D spend can start to go down. Over time, they embark on this financial model attractive phase of their history. So we like it from that lens. The cash generation profile of group is very good. Pandemics aside, the free cash flow per share trends have been in the high single digits. We think it can be better than that on a forward basis with buybacks, particularly at the share price and this high teens multiple which it trades on today. And also because of these new propositions that are coming through. And we think Navio is a really interesting angle to the investment case. Free cash yield today is at the five to six percent area. Five and a half percent. You've got a business which has that type of free cash yield which is supported but can grow its free cash flow per share. We think at kind of low double digits on a risk adjusted basis. The expected return is quite juicy. We'd be very disappointed if it was less than low double digits.

[Host (possibly Matt Russell)]

Certainly. I have experienced as a former sell side transportation analyst how any business that gets bucketed in their management teams are not happy if they're not a traditional transportation business and they're covered by those analysts. It seems to be guilty by association. On the risk front, you've detailed competition pretty well in terms of the incumbents. Do they face risks from new technology disintermediating them or some new evolution that would change their positioning? Has that over time popped up in different ways?

[Ben Needham]

This is a technology business so the innovators dilemma is front of mind. I think when you're looking at these types of companies by doing a really good great thing about them is they are willing to reinvest. So when you look at industry changes that have taken place, like the evolution to the new distribution capability which is basically the airlines tried to take control of their own offers as opposed to going through the global distribution systems where the likes Amadeus did the offers themselves. For those airlines, Lamada have actually invested in their own proposition. They now have over 70 airlines hooked up to their NDC proposition and because of their scale position within the channel they're able to offer agents both the traditional form of providing inventory via the edifact GDS type model, but also sell NDC into that channel as well. They're not actually losing share within ndc, they're holding their own. And within air IT there is a potential evolution to new order management systems or offering order management systems, but they have a nevio proposition which they've invested in the last decade so they're ready for that transition. And when airlines are making these transitions it's so mission critical and there's going to have to be smart bridging technology whilst these migrations take place from old passenger service systems to the new. So Amadeus can manage that at a low price for their airline customers. Technology risk is very large but I do think they manage it well. That is a reason that they reinvest so heavily in research and development spend over time and it's also why the gap's increasing between themselves and their peers. Their market position is so much greater now than their nearest two competitors. It's just becoming very hard for them to keep up. If these technology evolutions do take place. It's a really big risk potentially for their peers, but potentially not so much for them.

[Host (possibly Matt Russell)]

Are there other risks that stand out to you? What would you highlight as a risk to the thesis or to the business that stands out the most?

[Ben Needham]

It would have to be something which.

Was very left field, which was a technology evolution that was very hard to foresee. That was always something that's hard to guard against that. But I think that's one of the risks.

A big traffic downturn is a risk.

If there was a war and traffic volumes crashed, obviously being a transaction processing business, being a derivative of traffic volumes, that's going to result in revenue headwinds. But then I could also spin that into a positive because if that happens, arguably they'll take even more market share because they're so well capitalized and you get bankruptcy with their competitors. You would actually take market share even quicker potentially in that SO scenarios. The investment case for a long term investor is hedged to a degree with that risk.

[Host (possibly Matt Russell)]

This has been fascinating. We finished these conversations out with some of the lessons that you can take away. What's been your experience in having broader lessons that you can pull away from Amadeus and potentially apply elsewhere?

[Ben Needham]

The mark of a good business is.

Whether you would hate to compete with.

That company in question.

And I would hate to compete with Amadeus. But customers like to do business with you and I think they're a channel friend, not a channel foe. And when you find those two characteristics together, competitors hate you because you're good and customers love you for the same reason. That's a fantastic cocktail for value creation.

[Host (possibly Matt Russell)]

I like it. That is a new one and I will certainly look for it elsewhere. Ben, this has been a pleasure. Thank you for joining us on Business Breakdowns.

[Ben Needham]

Thanks Matt. Thanks.

[Narrator/Intro Voice]

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