July 2005 – TravelBulletinCyber agencies: end of the cash...

July 2005 – TravelBulletin
Cyber agencies: end of the cash burn?

It is too soon to break out the champagne, but it looks like Australia's cyber agencies are finally on the verge of success. The advent of low cost carriers, improved fare displays and the spread of Broadband have all helped this reversal of fortune.

After burning more than $35million in shareholder's funds, Australia's cyber agencies appear finally to be establishing themselves as viable businesses.

Certainly Webjet, which has lost $6million since its inception six years ago, is now riding high. Eight months of spectacular 400 per cent growth has culminated in the announcement that it will declare a profit between $1.7million and $1.9 million for the past financial year.

But Webject managing director David Clarke is not breaking out the champagne yet. "That won't happen until we pay our shareholders their first dividend," he says.

Rival travel.com.au (TVL), which has lost five times the money spilled by Webjet, is still burning cash, but chairman Roger Sharp is optimistic that the company is headed for a turnaround.

However he is brutal in acknowledging the company's fire past performance.

"It's a business that floated in 1999 and lost $30million in four years. It has continually failed to meet its owners' and the market's expectations," he says.

On the surface, things don't seem to be improving all that much at TVL. The company turned in an operating loss of %600,000 for the first half of the financial year and is expecting to lose $1.35 million for the full year.

But Sharp, who comes to TVL with an investment background, has not put money into the company so it can be burned. Despite his blunt assessment of the company so far he is full of optimism about its prospects.

So what has changed for the cyber agents?

"Aggregator" booking engine technology, which enables the cyber agencies to show all airline fares in one display, has been a key to the upswing in their fortunes.

The advent of the domestic low cost airlines and the uptake of broadband internet capabilities by Australian households have also been crucial.

Virgin Blue and Jetstar have spent millions of dollars persuading broadband enabled Australians to look for fare bargains on the internet.

But once on the web, those Australians are discovering that the cyber agency sites (and indeed the sites of "clicks and mortar" agencies like Flight Centre and Harvey World Travel) allow them to see the fares available from all airlines on a single screen.

Using a cyber agent, they don't have to hop from one airline site to another in their quest for the best fare, and they can easily book round trips combining one way fares from different carriers.

Zuji inherited its aggregator technology from Travelocity.

Webjet developed its own in conjunction with Galileo/Cendant (which funded the development cost in exchange for an equity stake in Webjet and the intellectual property rights to the technology).

And TVL acquired its technology via a reverse takeover by the company which owned Arnold booking engine. This brought investor Roger Sharp to the helm of TVL.

In the wake of the "tech wreck" of late 1999, when the dotcom share bubble burst, Sharp decided there were investment opportunities in small internet companies that had not reached their potential.

His initial investment was in Penzance, owner of Arnold booking engine. Then he and Arnold's Adam Johnson looked for another "building block" to add to the booking engine.

After an unsuccessful bid to "reverse" into Webjet, they succeeded with TVL where Sharp is now chairman and Johnson is chief technology officer and acting chief executive.

"We felt there was so much upside in TVL that we were happy to exchange shares," says Sharp.

TVL's founders David Tonkin and Bill Gair are no longer involved in the management of the company (although Gair retains a significant shareholding) and Sharp, with about 25 percent of the equity finds himself sharing the TVL board table with Daniel Droga of Droga Capital and Tim Russell representing Amadeus - both of whom have 14-15 stakes in the company.

Sharp says it is a united board: "We're all pulling in the same direction, we've all bought into the same strategic plan and we're executing it."

He describes the pre-Arnold TVL as a company "that had zero marketing dollars spent on it and no technology to boast about that's for sure".

Now, he says Arnold has delivered aggregator technology to TVL, the company has a marketing budget and it has slashed costs with big staff cuts.

The next step is for the company to grow its transaction volumes. At TVL's Sydney headquarters, a large sign in Adam Johnson's offices carries the message: "GO FOR GROWTH". A TVL shareholder presentation last month state; "Revenue growth is the key".

Webjet has, of course, surged to profitability on the back of spectacular and sustained month revenue figures which, since November, have been growing around 400 percent over the same time last year.

Annualise Webjet's June total transaction revenue and it has moved well ahead of TVL's.

Even so, the fact remains that the revenues on which Webjet will declare a profit this financial year are about the same as those on which TVL will make a loss.

Some observers explain this by pointing to Webjet's staff levels of 17, about a third of the roughly 50 employed by TVL even after drastic rationalization.

But Sharp denies any suggestion that the Webjet model is inherently more efficient than TVL's explaining the discrepancy in staff levels with the assertion that "Webjet contracts out a lot of the work that we do in-house".

And he points to TVL's superior margin (10-11 percent) over Webjet's (6-7 per cent).

Webjet's David Clarke counters that gross margins are "meaningless" because they don't take the cost base into account. Net margin is the key, he says.

"In an environment where air commissions are disappearing, the absolute imperative is the cost base. We have a competitive advantage as long as we can retain that cost base - and that is our singular intention."

In fact Clarke and Sharp, who have known each other since the abortive negotiations over Arnold, have considerable mutual respect.

Sharp volunteers the statement: "We have a lot of respect for them (Webjet). They've done very, very well."

Suggesting TVL is now making up ground after falling about 12-18 months behind Webjet, he says "We like to see them succeed. If they can do it, so can we."

Webjet's sustained 400 per cent growth rate has confounded industry observers. Theories are rife, including claims that it results from a tie-up with Harvey World Travel (which is a shareholder in Webjet and a user of its aggregator technology) and/or a deal with inbound operator Australian outback Tours (which also has a stake in Webjet).

But Clarke maintains: "To the best of our knowledge, the whole of our volume is coming to us from consumers 'off the street'.

"Certainly there is no arrangement with HWT and, while we have negotiated a tie-up with AOT, this has only just started and will not figure in this financial year's results."

He attributes the company's accelerated growth rates to service back-up which has ensured "massive" repeat business following the introduction of aggregator technology, and to "various advertising strategies - a mix of online and physical advertising which is indivisible, albeit the mix is constantly changing".

On the subject of repeat business, he says: "There is substantial evidence that the internet distribution channel is 'stickier' than the traditional bricks and mortar agency."

He says people will keep coming back to the web agency site where their credit card details are stored "unless we stuff it up".

Another factor in Webjet's growth is the development of add-on hotel, car rental and other land content to supplement air fare sales.

Within two years, Clarke predicts, Webjet's non-airline income including fees will exceed the air component although air will remain the "propellant" for most transactions.

But "a bigger factor" in Webjet's growth is the increased conversion rate of site visits into sales.

Clarke says comparisons are difficult but it appears Webjet's conversion rate, which is still trending upwards, is already higher than the published rates of about four percent achieved by North American sites Travelocity, Expedia and Orbitz.

Meanwhile Clarke sees the loss of air fare commissions, with agents relying on transaction fees for their income, as a further big boost for cyber agencies.

He claims: "the service fee model enhances our competitive position because in a service fee environment, an agent's cost base is crucial.

If Webjet's results in June are annualised, the company is achieving $6 million in transactions for every staff member.

Clarke asserts this is not only way better than the $1million to $1.1million in sales which, he says, is typically achieved per staff member o a traditional bricks and mortar agency, it's also well ahead of the standard of about $4million per staff member which, he says, is the benchmark for cyber agencies around the globe.

"And we have substantially more head room," he adds, asserting that Webjet's technology is comfortably coping with existing business levels.

He is particularly confident of Webjet's technology position, claiming its aggregator will remain "state of the art" well into the future.

He adds Webjet has forged a "unique relationship" with Cendant and is a beta customer for Galileo's web services "so we have a transparent window to a pool of technology".

While acknowledging that the heavily promoted airline sites were the catalyst for the quantum shift to internet booking of airfares, Clarke believes their growth is leveling off while web agents offering a choice of airlines will continue to grow exponentially.

"In the absence of a cataclysmic event, the move to online booking is a tidal wave," he says.