In announcing the restructuring of its upcoming PIK loans – Travelport looked like it had dodged a bullet. In many of these sort of arrangements the loading of junk debt that has been the staple of VCs. In general it has a natural set of consequences IE the VC or PE firm tries to make its money early. That concept has been predicated on the exit of the VC before the big debts become due. Well Travelport was not able to complete its IPO after several attempts and any such future attempt looks like it could be a long way off.
However debt doesn’t just disappear. Someone has to get paid. While in general the stock market's volatility has seen shareholders have their values plummet during crises such as the GFC. Bond holders too have had their fair share of ups and downs.
Bloomberg in reporting the Travelport PIK restructuring headlined with the fact that this was the highest premium being paid thus far in 2011. In the very week when the Federal Reserve Bank moved to lower interest rates Blackstone (ultimate owner of the Travelport businesses) was going the other way. Indeed the debt swap rate has been set at 13% which was certainly an eye opener for many.
At the same time Blackstone made it clear that it would be quite prepared to bankrupt one of the entities probably Travelport Holdings. Blackstone’s complex ownership in Travelport and Orbitz provides effective control funded by the junk bonds and other high risk financial securities. Of course Blackstone itself has minimal risk as it has already withdrawn its own financial outlays in effect meaning that the VC is playing with OPM (Other People’s Money). I want to point out that this is normal behaviour in Wall Street. The formal filing with the SEC can be found here.
In the document the company cited two major reasons for the loss of Market share. The loss of the Expedia business from Worldspan and the loss of the Arab Carrier NDC business that went to Amadeus. Yet in examining the gradual decline in market share – these drops were single one off events. What we actually see is a consistent reduction in transactions Y/Y over the entire period from 2006 through till today. Market share has fallen by 5 points but transactions are now off by nearly one third during this time period according to my analysis of the Travelport filings.
While CEO of the Travelport operating business was gushing in his position and gratitude for the loan restructuring – there is no doubt this will have a long term impact on the company. The glory days of the unlimited cashflow based on minimal investment in R&D are clearly over. Travelport faces significant obstacles at a time when its direct competitors are spending heavily.
The company now has to contend with the fact that they are still supporting 3 core systems – Apollo, Galileo and Worldspan. The cost savings from the merger between Galileo and Worldspan have now effectively ended. Thus there are strong cost pressures as well as revenue pressures.
The company’s direct market share has continued to fall at a time when general GDS global market share as a category is also falling. At the end of the first quarter 2012, United Airlines is scheduled to exit leaving Travelport with no major airline hosting business. Thus a number of synergies will be lost. The roll out of their hoped for blockbuster product - the “almost ready” Universal Desktop is stalled.
Perhaps somewhat interesting is that the company faces a conundrum over its battle in Direct Connect. It has two airline distribution deals that would seem to be supporting the Direct Connect model. Southwest in the USA market and Air Canada in the Canadian market where Travelport connects to the Air Canada host via the Farelogix system. At the same time it is embroiled in a lengthy legal battle with American Airlines (it recently won another round in retaining AA's participation in Orbitz) and is subject - as is Sabre - to a formal investigation by the US Dept of Justice.
With its ability to raise money at all this has to attract funds for hard development. This means that development efforts will be impacted even curtailed as a result of the debt restructuring. Travelport will therefore continue to struggle for the foreseeable future. Something that has not gone unnoticed by Travelport’s competitors and of course their airline suppliers. Travelport’s options don’t look as rosy as they did 5 years ago when the company was effectively formed from the ashes of the now defunct Cendant.
The extent of Travelport's financial weakness comes at a bad time for the company when demands for change and attention to the sea change that Technology is driving are rising rapidly.
These are testing times for the legacy GDS model.
Cheers
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