Amadeus's Scale and R&D Drive Dominance in Travel Technology

Key Quotes

"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 structured growing market i e 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."

Ben Needham describes Amadeus as a "gorilla of travel IT," highlighting its dominant market position and ability to grow alongside the travel industry. Needham emphasizes that this growth is achieved in a low-risk manner due to diversification and an inflation-linked revenue model, suggesting a stable and resilient business.

"The air it part 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 d spend across more customers as they grow and that's why airlines which are pre cyclical businesses pre 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."

Needham explains that Amadeus operates on a community-based platform model for its Air IT business, allowing for shared economies of scale. This structure enables Amadeus to amortize research and development costs across a larger customer base, making it attractive for capital-intensive airlines to outsource these operations to a more efficient provider.

"The business has been around for a long time and the history is really important so they actually created by 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 air space was deregulated there was globalization and within that more airlines were created and more agencies were also created the airline 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."

Needham traces Amadeus's origins back to the 1960s and 70s when airlines created distribution systems to manage bookings. He explains that deregulation and globalization led to increased competition, prompting airlines to merge and sell off these systems, ultimately leading to the formation of Amadeus in 1987 through a merger of distribution systems from several European airlines.

"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 are the distribution business even though that gets a lot of the limelight and a lot of the focus and then 10 is hotel it 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 that's scaling very quickly there's a lot of investment to enable the scaling of that business air it businesses 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."

Needham breaks down Amadeus's revenue and profitability by division, noting that Air IT is now the most profitable segment, contributing 50% of group profits, a significant increase from 15 years ago. He contrasts this with the Distribution business, which accounts for 35% of profits despite receiving more attention, and the Hotel IT business, the smallest segment at 10% of profits, which is currently experiencing rapid scaling and investment.

"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 that they are very well placed it's the top of the funnel as travel search becomes ai agentic layers 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 are 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."

Needham dismisses concerns about AI agents disintermediating Amadeus's distribution business, characterizing it as a "storm in a teacup." He argues that Amadeus is well-positioned because its core IT infrastructure, including customer reservation and order management systems, will remain critical even with AI integration, and this segment represents the majority of Amadeus's profits.

"The mark of a good business is whether you would hate to compete with that company 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."

Needham concludes by defining a good business as one that competitors would "hate to compete with" while customers "love to do business with." He applies this to Amadeus, stating that the company is a "channel friend, not a channel foe," and that this combination of being disliked by competitors for its excellence and loved by customers creates a powerful dynamic for value creation.