Travel is a pastime that most of us love. It is also an attractive industry to look for investment opportunities. Over decades the global travel industry has grown faster than the world’s economy. In emerging markets, as consumers become richer and wealthier, they have more disposable income to spend on travel. In wealthier developed economies, people are gradually tilting their disposable expenditure towards experiences over material possessions, with travel often top of the bucket list.
The challenge of the travel industry is it can be highly cyclical. Lots of the business models in travel rely on fixed assets to generate their sales and their profits – think planes or hotels. That, combined with fixed cost bases, means that in a downturn, some of these businesses can be severely loss-making. For Ninety One’s Quality team, this is not what we want to hear. However, if we can find a capital-light, less cyclical business model, that sounds like an attractive proposition.
Booking Holdings, the world’s largest online travel agency (OTA), is one such company that possesses the quality characteristics that we look for. The combination of its multi-faceted competitive advantage and the fact that Booking is underpinned by the structural growth within online travel helps mitigate the traditional cyclicality found within the travel industry.
Booking runs a collection of online travel agencies and the strength of its brand and depth of inventory leads to a virtuous network effect. First, it is exposed to the European hotel market, predominantly. This is a very fragmented market with mainly independent hotels that are unlikely to have the resources or be inclined to try and attract customers directly. There are a vast number of hotels on the platform which attract lots of consumers. More consumers make it a highly attractive proposition for hotels, leading to better pricing and availability which in turn allows for a better customer experience. Booking’s brands - Booking.com, Agoda and Priceline – are phenomenal executors, with exceptional data. Booking understands travel patterns, booking patterns and the hotels on their platforms. This helps the company be very efficient at advertising online.
Despite being the world’s largest OTA Booking is not complacent and the company has built on its platform. The company has layered in the ability to book flights. Customers can hire a car. Vacation rentals and other alternative accommodation are also available. Booking calls this a ‘connected trip’ and its vision is for consumers to use its apps, visit its websites and book the entire travel experience within the Booking.com ecosystem. This mitigates the need for Booking to rely on Google and other advertising as a source of consumer traffic.
This self-sufficiency also helps Booking in more difficult times. Nothing could be more difficult than a pandemic shutting down global travel in an instant. Yet Booking navigated COVID and has thrived with greater market share since restrictions were lifted. While such an extreme scenario is unlikely to recur, the point still stands. In a downturn, Booking’s capital light nature and flexible cost base enables it to act swiftly, reduce overheads and protect its capital base. In a cyclical industry, this is very attractive for quality investors. Furthermore, its financial model is very cash generative, delivering very high returns on invested capital, much of which finds its way back to shareholders.
