Interesting times in the Australian online travel space, until now a benign environment where, for many online pioneers, money was made hand over fist. Not anymore. First, there was the collapse of Check-in.com.au. Then came last week’s profit downgrade from industry leader Wotif Group.
Next on the agenda: Webjet’s annual results announcement on August 21, which will hopefully answer the question one international rival asked: “Why would you buy a company that’s losing money? “He’s talking about Zuji, a regional online travel agent that lost an estimated A$3.6m in 2012 and has never, ever made a profit.
In Australia alone, Zuji has accumulated losses of A$33m over the past 10 years, according to documents filed with the ASIC. It has also websites in Singapore and Hong Kong.
Webjet bought these sites from founding owner Travelocity, which is having something of a fire sale, for US$25 million.
It raised the money from eager shareholders who were told that Webjet’s involvement and industry expertise would cut A$9m from Zuji’s bottom line ultimately resulting in a profit.
But will that happen – can Webjet, which it must be said has never let its shareholders down – deliver on by far its biggest challenge?
The full answer probably won’t become clear for a year or two, the purchase was only completed in late March, but it could go either way.
Webjet’s bottom line was already under a bit of pressure before the Zuji acquisition with net profit falling 4% to $5.6m for the first half of this financial year.
Managing Director John Guscic attributed the profit fall to $1.6m in “one-off costs” connected with the Zuji purchase and Webjet’s new Middle East accommodation venture Lots of Hotels.
In the same announcement Mr Gusicic forecast “net profit growth” for the full financial year of 15% on a “normalised basis” (a phrase the airlines have been using for years).
Webjet’s “normalised” forecast excludes the “Zuji transition and transaction costs, trading results for Zuji and start-up costs for Lots of Hotels”.
That’s a lot of exclusions.
Surely any Zuji losses (or profits) are owned 100% by Webjet, now and forever.
And no way can any Zuji loss be classified as a one-off – because losing money is all the company has done since it was founded.
Zuji’s size also presents a major challenge for Webjet.
At the time of its acquisition Zuji employed about 135 staff in Hong Kong, Singapore and Sydney, many more than its new parent company.
Imagine a small creature trying to swallow and digest one much larger than itself.
That’s Webjet and Zuji.
To avoid corporate indigestion, Webjet has changed its operating structure and appointed two new high-ranking executives.
One is leading its Australian operations, the other heads up Singapore, creating new layers where none previously existed.
The new senior hires also add staffing costs and no new revenue.
The increasingly complex Webjet business, must now also take on the added responsibility of dealing direct with hotels through regional sales agreements it acquired in the Zuji transaction.
Previously it had just pulled hotel inventory from a slew of online wholesalers.
It was a hands-off approach that worked fine until Webjet decided to ramp up its accommodation sales by discounting rooms below the rates that hotel were actually selling their product for.
The move created acrimony toward Webjet within the regional hotel community and there’s still plenty of bad blood out there.
At that time (April, 2012) Managing Director John Guscic rejected the concept of rate parity and said Webjet would continue to undercut hoteliers on price – whether they liked it or not.
He declared: “The supplier does not have a monopoly on price. We price our hotels as we see fit. We sell at a price I determine. That’s competition, we love competition.”
But this approach led to significant losses for Webjet’s hotel business.
“Our Hotels business has been revised in pursuit of higher margins,” Mr Guscic said recently.
“The A$1m loss in the first half of 2011/12 has now been turned around to reach break-even levels.
“We continue to target increased margins in this business”
A statement which surely means no more discounting or under-cutting of hoteliers, a move the industry would embrace, and reflects the higher margins directly contracted contracted hotels will bring.
However, perceptions do linger among Asian hoteliers, many of whom have long memories.
So, given all this, “why would you buy a company that’s losing money?”
We are about to find out.