value and opportunity

Quick Intro:

The idea to look at lastminute.com came from my gocompare post, this is what I wrote back then:

Peter Wood hired the former CEO of lastminute.com, Mathew Crummack.

He seems to be a smart guy, however I haven’t seen anything from him about the future strategy yet. The new CFO of GoCompare ist the old deputy CFO from Esure. So the top managers from Esure seem to have preferred to stay.

I haven’t looked that deeply into LastMinute.com but it seems to do better since he left…(note to myself: check Lastminute.com).

As I have quite a lot of travel related companies on my ToDo list, I decided to start a kind of “mini travel” series, similar to my “Watch series”. As I like to travel myself a lot, I think this should be lots of fun to look into those companies.

The company

Lastminute.com is a company based in Switzerland which initially went public in 2014 under the (strange) name “Bravofly Rumbo”. They started out as a website to offer cheap flights in Italy and Spain.-

In 2015 they acquired lastminute.com and then changed their name. Lastminute.com expanded the reach from pure flights in southern Europe into the UK and France and also to other categories like hotels and rental cars.

The business model

Lastminute.com to a large extent is what is called an “Online Travel Agency” (OTA), selling flights, hotels and rental cars.

In my opinion, the business of a OTA is technically not that different from a “normal” price comparison website (PCW).

Tha “added value” for any user comes from the fact that you only have to enter your information once and then you get offers from all kind of different providers. However, especially with regard to insurance, there are 2 major differences:

1. The information a user has to enter is much simpler (usually date and destination) as well as the product, so the added value is not that big compared for instance to complicated insurance products where a lot of personal data needs to be entered
2. A OTA usually doesn’t connect directly with the “supplier” but through an already existing so-called Global Distribution System (GDS) like Amadeus or Sabre.

So in the end, a OTA is basically something like a relatively simple retail price comparison / marketing platform to sell airline seats, hotels rooms and rental cars.

To say that the sector is highly competitive is maybe an understatement. As it is quite easy to connect to the GDS, it is relatively simple to start a OTA. The trick is to get enough customers with an acceptable amount of cost.

There is pressure from each side. Airlines want people to book directly on their websites. Ryanair is already going one step further with trying to act as an airline cum OTA.with trying to act as an airline cum OTA.

O’Leary told the Financial Times: ‘We now have an opportunity with the new website to build Ryanair.com not just as the airline’s website but as a kind of Amazon for travel in Europe.

‘All the services will be available on Ryanair.com – hotels, TripAdvisor – we want to disintermediate all the disintermediators… We have the scale to do it.’

Also Google itself offers flight  this service, which of course is the 800 pound gorilla in any area they decide to compete in.

Interestingly, lastminute.com did buy the original lastminute.com business from Sabre, one of the GDS providers which seemed to be happy to get out of the OTA space.

At the end of the day, an OTA like lastminute.com is a marketing/user experience business with relatively little technology aspects.

In Lastminute.com case this is clearly reflected in marketing cost which was around 47% of sales in 2015.

“Busted” IPO

When the company IPOed as Bravofly Rumba in April 2014, things looked great. The company was growing and profitable. The IPO was priced at 48 CHF/share. All in all around 250 mn CHF were raised, thereof around 100 mn for the company, the rest from existing shareholders. As we can see in the chart, IPO investors did not get a nice “pop” but a big “dump”:

The stock never saw the 48 CHF again. Net income, which was 12,4 mn in 2013 shrank to 7,3 mn in 2014 and turned into a loss of -18 mn in 2015. What happened ?

Reading thorough the reports, the main explanation seems to be that selling flights online became very quickly less profitable than it was in the past.

However, based on the latest available numbers it looks like they managed to turn around the company in 2016.

Interestingly, the company itself guides to something around 27 mn “adjusted” EBITDA which would translate according to the IR presentation to ~4 x EV/EBITDA which indeed looks very very cheap.

Management / Board / Incentives

Lastminute.com has a combination which I like a lot: The founders are running the company and own around 50% of the company.

Fabio Cannavale is the CEO and seems to be running the show. Hi Co-founder Marco Corradino is now responsible for user experience as “Chief Audience officer”.

What I found interesting is that they seem to have a pretty good ligne up of non-executive directors in their board. There are good summaries of them in the annual report 2015 (page 30). The skills range from Finance, Marketing & brand building and a former Google senior executive. This looks quite impressive and definitely a big plus in my opinion.

Company boards are a feature which I didn’t pay too much attention up until now but if you look deeper into succesful turn around situations, company boards play a pretty significant role.

Finally I also like their incentive system which is described in the annual report:

Cash settled share-based plan

On 26 March 2015, the Group established a new cash-settled share-based payment arrangement. Directors and selected key employees were offered the opportunity to participate. Plan participants are required to make an equity co-investment contribution in cash (“the initial contribution”) as limited partners of a limited

partnership entity (Sealine Investment LP) which is consolidated by the Group (see note 4). Under the terms of the plan, the Group contributes an amount equal to three times the initial contribution (“the LMN contribu-tion”).

In my opinion it really makes a big difference when executives have to come up with own money and buy shares. A share matching plan like this I would consider as “best practice”.

But then the reality: Crappy websites

One of the good thing of researching consumer product companies is that one can check directly how good their products are. To be fair, Germany is not their main market but still, they do some business in Germany. I used the same search for all sites, a flight from Munich to Pisa in early May 2017.

I tried “Jetcost“, their meta search site first. When I pressed the search button, the site directly tried to open up several pop up windows with different ads which I consider as quite unprofessional. The result page shows a lot of poorly formatted Google ads which also looks unprofessional.

The results looked ok and actually very cheap (the cheapest flight was a direct Lufthansa flight at 91 EUR), but when I pressed the cheapest offer and was transferred to the actual offering website, the price directly increased by almost 98 EUR which is again very unprofessional. I did not try to get further.

Next, I tried Bravofly.de. First impression: better layout but crappy translations. In my browser, the navigation buttons did not work (the search button was missing….) so I couldn’t actually check the results.

Then I tried Rumbo. It looked similar to Bravofly but this time with a working search button. The same Lufthansa flight was now 104,40 EUR. This time the “gag” was that this price was only applicable if I pay with Amex or Maestro. Any other payment method would have added 25 EUR, PayPal was not available.

Finally I tried lastminute.de with the same search. This website looked more professional than the others. Again, the Lufthansa flight was the cheapest one but now with a base price of 109. But when I clicked the result, I got the following message:

Achtung: Preisanstieg um 155,90 €

And suddenly the flight  was 265 EUR or more with different payment methods.

So I am not sure if this was an exceptional case but overall my user experience with their websites can be considered a disaster.

I double checked the search with Expedia and there I only got an offer of 260 EUR for the Lufthansa flight.

It would be interesting to see I f I could actually buy the flight at Rumbo for 140 or if I would get charged more (or kicked out) at a later stage of the booking process. A final note: On Lufthansa’s web page the flight would have cost me 400 EUR…..

Time to stop the research ?

So now I am a little bit torn inside. On one side, the company looks like an interesting case. The basic set-up (run by the founders, Board, etc.) looks promising and the valuation looks cheap if the turn around would actually take place.

But at least in my quick self experiment, the products looked really crappy. In this kind of business with little barriers of entry, user experience is clearly as important as cheap prices. Maybe I am not a typical user but I don’t think that people really like to see one price first and then when they click get very different prices.

So for the time being, I think I will put the lastminute.com case “on hold” and look at other companies in that area. Expedia I think would be a good next candidate.

P.S.:  

Looking at what happened after lastminute.com got taken over (firing most of the UK employees, migrating on the Bravofly platform etc.), I don’t think that Mathew Crummack as former lastminute.com CEO will most likely not  reinvent the wheel at gocompare.