The Significance Of Scale
Corporate Travel Management (ASX: CTD) has discovered a profitable niche in the Australian corporate market, and has grown its Total Transaction Value (TTV) from $316 million to $1.44 billion in five years. To continue this growth, it will need to take on the “mega” travel agencies, but is there room at the top?
It can be cost effective for large organisations to outsource their travel management solutions, and CTD has done very well addressing this need in the Australian corporate travel market by “going above and beyond industry expectations and in setting consistently new standards”. There will always be a niche for high-quality service, but a travel agency’s scale is also an important driver of competitive advantage.
You see, travel agencies primarily coordinate services between airlines, hotel chains and car rental agencies. The more transactions that a business generates, the greater the bargaining power it will have with these parties. This concept is referred to as a “virtuous circle” – greater scale creates greater bargaining power, which leads to more favourable rates, which in turn attracts more customers and generates more scale.
While CTD has been able to considerably increase its scale over its short history, its TTV of $1.44 billion is relatively minor when compared to the “mega” travel agencies. AMEX Travel and Flight Centre are two major global competitors that generate TTV of USD$18.9 billion and AUD$14.3 billion respectively. To be able to compete effectively over the long run, CTD needs to achieve substantial business volume in its overseas divisions, which are largely used to service its domestic clients with international operations.
While there is room for CTD to compete in the global market, it is difficult to see the company maintaining its growth trajectory if the “mega” travel agencies aggressively target market share. Flight Centre has already shifted its focus from the leisure market to the corporate market – corporate travel now comprises 31 per cent of Flight Centre’s TTV, compared to 23 per cent in 2009.
In the short to medium term, CTD has bright prospects; the company is aiming to make an acquisition in Europe and is in a good position to achieve organic growth by cross-selling its services across divisions. But in the long-term, CTD will need to execute its strategy well to match the scale of the “mega” travel agencies.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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mario caruana
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Hi Ben great comment about CTD lucky enough to own part of this business AT A DISCOUNT TO INTRINSIC VALUE ,remember Flight Centre when it first listed at 95 cents you could of picked up those shares back in 1995( showing my age)it too was a small company,CTD IS VERY SIMILAR it will need time it has got a great management team ,one to watch in ten years time my opinon Flight centre will buy it but a great start from Coroprate Travel Management recently purchased WTL part of that business will be still owned by the original owners .