During the past several months the company has been changing from a roll-up to a more balanced operations company. In the last conference call, management said that now that they had put together much of the fabric of national coverage that they would concentrate on knitting the regional agencies and niche market entities into a more cohesive unit with centralized IS and administrative services. While the company grew booking substantially, the reduction in rates and further commission caps imposed by the airlines cut back on the improvement in the sales figure. They are booking much more business but at a lower rate. But looking forward, it is anticipated that the rate reductions should not occur as they have in the past and the company stated that they expect to grow sales about 2X over the next two years.
Another factor affecting sales but that benefits bottom line earnings is the re-negotiation of employment commission contracts. As you can imagine, under more generous airline commission structures of the past, sales agents had grown accustomed to large paychecks. But as the company provides more and better centralized services through automation, etc., the efficiency of workers improves and the ability to cut back the higher employee contracts becomes possible and necessary. But some productive sales agents who won't accept this can be expected to leave, having an acceptable impact on immediate sales. This and the consolidation of services has allowed them to reduce costs significantly and should continue to reap benefits in future quarters. That is why you see the margin improvement despite the rate reductions.
The CFO, Robert Griffith, said this week that they have some "too good too pass up" acquisitions on the way. These are expected to be immediately accretive to earnings. So we will see more growth through acquisitions over the next year. Overseas expansion should also become a larger factor going forward.
Griffith said that the company is considering a spin-off but he would not comment on specifics other than that if they went ahead with it that it would probably not be right away. I advised that they need to get the leisure travel site up and running first. Robert said that they are working to make the leisure and Navigant sites "unique and profitable". They do not see an advantage in building a deep discount travel site that losses lots of money. We discussed a bit the fact that the marketing agreements with the major portals have turned out badly for prominent discount travel sites. Click through rates have declined and buy-through rates have dropped dramatically.
There are two ways of looking at the way they are approaching the Internet, IMO: 1] They don't want to build a "money for nothing" site that builds volume at the sake of huge losses. For investors looking for companies that are mindful of the bottom line, then this is positive. 2] However, this approach doesn't benefit as much from Internet market hype. This is a conservative approach that may not fit with the expectations of many Internet speculators.
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