Despegar Files for $100 Million IPO and Expedia Could Benefit From Its Growth

Despegar

Damián Scokin, an executive who worked for 11 years at the consulting firm McKinsey, became the new CEO of Despegar in February. He replaces the founding leader of the company, Roberto Souviron, who left the CEO role as the company prepares for an IPO. Despegar

Skift Take: Despegar is on track to attract a $1 billion valuation. That’s impressive. But its newish CEO needs to pivot the business away from a reliance on selling airline tickets, which are becoming less profitable for his firm by the day.

— Sean O’Neill

Online travel agency Despegar — whose name comes from the Spanish verb that means “to take off” — has filed for an initial public offering on the New York Stock Exchange.

Despegar said it hopes to raise $100 million. But Renaissance Capital, an IPO research firm, estimates the company will raise $300 million. This range of estimates suggests that the market will place a $1 billion or greater valuation on Despegar, making it Latin America’s first online travel unicorn.

The company, which claims to be the largest homegrown online travel agency in Latin America, has not set an initial share price or a date for the IPO.

Hedge fund Tiger Global owns 57.3 percent of the company as of Thursday, before the offering. General Atlantic Partners owns 5.4 percent. Expedia is another key holder of equity. The company’s five founders and a few other investors also own shares.

In February Roberto Souviron left his 18-year job as the top boss. He is no longer on the board of directors, either.

Tiger Global has installed a new CEO, Damián Scokin, an executive who worked for 11 years at the consulting firm McKinsey. From 2012 to 2015, Scokin served as CEO for LATAM’s international business unit, where he was in charge of leading the merger and integration process of LAN Airlines, LATAM Airlines Group’s predecessor and the biggest airline in Chile, and TAM Linhas Aereas, one of Brazil leading airlines.

As majority owner, Tiger Global chose to remove the startup’s founding CEO from day-to-day operations. The firm was not happy with the delayed process of ramping up to an IPO, says Argentinan news publication Reportur.

Expedia’s Interest

Despegar has a well-known U.S. investor, Expedia, with a 16.4 percent stake in the business prior to the IPO. The stake represents the online travel giant’s one-time $270 million equity investment in the business in March 2015.

As part of the relationship, Despegar relies exclusively on Expedia for the hotel and other lodging products that it offers for all countries outside of Latin America through at least March 2022.

In the six months ended June 30, 2017, Expedia and its affiliates provided 9.5 percent of Despegar’s gross bookings.

Interestingly, the agreement requires Despegar to reach a threshold of marketing fees — meaning, a percent of gross profit received by Expedia from travel bookings made through the platform — equal to $5 million in any rolling six-month period, or else Expedia may require the company to pay a $125 million termination fee.

The IPO filing reveals that Expedia has agreed not to acquire more than a third of the voting power of Despegar’s outstanding shares within three years post-IPO unless it makes a bid to buy more than three-quarters of the shares.

In brief, the Bellevue-based giant is keeping its options open but shows no signs of being in a rush to acquire the company.

Bumpy Road

Despegar was founded 18 years ago by five entrepreneurs who met at Duke’s Fuqua business school in the U.S. The company had to survive the post-2001 financial crisis, the current recession in Brazil that is almost becoming a depression, and the Argentine financial crisis of 2001-02 and recession of 2016.

Today it has considerable market share. Amadeus, the travel e-commerce vendor, says that approximately 15 percent of all airline tickets purchased through its system in the region during 2016 went through Despegar and sister brand Decolar.

Despite the regional economic turmoil, the company has been recently profitable. In the first half of 2017, it had 2.5 million customers generate $248.5 million in revenue on $2.1 billion in gross bookings.

Looked at another way, in the full year of 2016, the company booked $411 million in revenue and $18 million in net income on $3.3 billion of consumer transactions.

It has more than 2,700 employees —  including more than 800 developers — in offices in 21 countries. But it is having “voluntary” reductions that will eliminate between 60 and 100 positions this year in the run-up to the IPO.

One key to the startup’s success was its decision to move early to offer more flexible payment options. Today half of its transactions are paid on installment plans. This year it will also expand its installment payments plans and add other payment options, such as debit cards and acceptance of multiple credit cards in a single transaction, to attract more customers.

Despegar’s top markets are Argentina, Brazil, and Uruguay. The company holds the top ranking of all online travel agencies in Latin America by desktop traffic, according to SimilarWeb.

Achilles Heel

Despegar’s seeming weakness is its dependence on air. About 60 percent of its revenue comes from selling airline tickets, including the 2.6 million tickets it sold in the first half of 2017.

Its revenue sources include commissions from airlines, incentive payments from reservation tech middlemen like Amadeus, and service fees charged to consumers.

Trends in the U.S. and Europe have seen airline commissions and incentive payments from the tech middlemen decline over time, and that drop may also happen in Latin America. As noted in the company’s IPO filing, Despegar’s contracts with airlines often limit how high of a fee it can charge consumers.

In short, the company’s revenue model may be vulnerable to shocks.

A sign of that vulnerability is revealed in the IPO filing. American Airlines discontinued its access to the airline’s inventory from July 2013 to March 2016 as a hardball negotiation tactic. Since then, American has resumed supplying it with tickets.

There’s a strategic issue here, too. Hotel commissions are more substantial, on average, than airline commissions are. Despegar needs to rebalance to depend more on hotels if it wants to maintain steady growth.

A rebalancing won’t be easy, though. The Latin American hotel market is more fragmented and less eager for online distribution than some other markets. In Latin America, the top ten hotel chains had an estimated 15 percent market share in 2015, compared to 51.8 percent in the U.S. during the same period, according to Euromonitor International.

To encourage more hotels to participate, Despegar plans to invest in its software that offers suppliers tools to manage their inventory better. As of June 30, approximately 23,000 of its hotel suppliers in Latin America were directly connected to its booking system via its extranet or via more than 35 third-party channel managers.

Despegar needs to dramatically boost participation and engagement from tens of thousands of other property owners.

Growth Plans

After the IPO, the company says it may use some of the funds raised to pursue opportunistic acquisitions that enable it to enhance its offerings, build its marketplace, enter new geographies, or enhance its operational infrastructure.

The company also plans to replicate in new markets what it describes as its successful introduction in 2016 of new products, such as bus ticket sales and a local concierge service, in test markets.

Despegar says that its 120-person marketing team will get better at marketing. It plans to expand initiatives like offering exclusive discounts on related products upon a consumer checking out and post-sale emails and personalized in-destination mobile marketing with offers for additional travel products that may be relevant to customers’ initial purchase.

Overall, the move to an IPO suggests the company succeeded in its initiative, begun more than a year ago, to eliminate phone bookings in favor of online bookings only and to rejig its online and offline marketing. (See Skift’s interview with Despegar’s CMO.)

But some criticize the company’s executives for not having led the business to achieve its full potential, especially when compared to how quickly some other online travel companies have grown elsewhere during the same period

While it claims to be online travel’s largest Latin American player, Despegar only takes a slice of the total spent on online travel in Latin America overall. A variety of other small, national players, and global conglomerates like Priceline Group, also take slices of the pie.

Despegar better stay hungry if it wants to live up to its destiny of “taking off.”

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Millennials Aren’t as Bad as You Think — Skift Corporate Travel Innovation Report

ITU Pictures  / Flickr

Millennials usually spend less on business travel than their more experienced colleagues. Pictured are millennials at a meeting.
ITU Pictures / Flickr

Skift Take: Millennials are more frugal when traveling for business than their older coworkers. Who would have thought — and who knows how long that will last?

— Andrew Sheivachman

The Skift Corporate Travel Innovation Report is our weekly newsletter focused on the future of corporate travel, the big fault lines of disruption for travel managers and buyers, the innovations emerging from the sector, and the changing business traveler habits that are upending how corporate travel is packaged, bought, and sold.

Dealing with the habits of millennials, particularly their penchant for ignoring corporate travel policy and booking whatever they want, is a big challenge for travel managers.

New research on business travel spending from Concur, however, shows that millennial travel patterns are actually a bit more conservative than older workers.

Concur’s research shows that younger travelers spend 18 percent less overall than workers aged 35 to 65 on dining, entertainment, and hotel bookings. Millennials spend less, in particular, when traveling to Asia, Europe, and the Middle East.

Strangely, millennials spend 3 percent more than older generations on hotel expenses, but that increase is offset strongly by savings on other aspects of their trips. (Speaking as a millennial who travels for business, I suspect this has something to do with purchasing Wi-Fi access for multiple devices, or high-speed access).

In other news, we got a briefing last week from Uber on their ambitions for a revamped Uber for Business platform. They’ve listened to their customers and created tools for travel managers to better manage business traveler spending.

We also take a look at what recent changes to hotel chain cancellation policies mean for business travel, and why hotel CEOs remain bullish on corporate travel growth.

— Andrew Sheivachman, Senior Writer 

Business of Buying

Uber for Business Got an Update That Gives Companies More Control:  Uber’s refreshed business platform will help streamline corporate rideshare use, especially for unmanaged travel programs.  Read more at Skift

Hotel CEOs Say They’re Cautiously Optimistic About Corporate Travel: But shouldn’t executives be a bit more concerned? At least that’s what one analyst is wondering, and we are too. Read more at Skift

Air Berlin’s Slow Collapse Into Bankruptcy, Explained: Over in Italy, no one wants to let Alitalia go. The Italian national carrier is also bankrupt, but keeping the airline is a matter of national pride. There’s no such love for Air Berlin. It’ll probably disappear, and that’ll be OK. Read more at Skift

Hotel CEOs Discuss Recent Cancellation Policy Changes and Hint at More to Come: As hotels tighten up their revenue management practices, expect more of these cancellation policy changes to take place in the near future. Read more at Skift 

U.S. Government Per Diem Increases Yet Again: Government workers will be allowed to spend $2 more on business travel during the 2018 fiscal year. Read more at Business Travel News

Disruption + Innovation

Hawaiian Airlines Is Handling Customer Service Inquiries Via Text Message: In the not too distant future, we expect bots will be sophisticated enough to handle almost all customer service inquires sent via text message. But we’re not there yet, so it’s refreshing Hawaiian Airlines is going with an all-human approach. Read more at Skift

Hilton CEO Looks to Airbnb as Hedge Against Power of Expedia and Booking.com: In some cases, the hotel-online travel agency relationship is still a tense situation, but for most big hotel companies, it’s still business as usual. Read more at Skift

Hertz and Avis Prep for Future With Self-Driving Car Partnerships: Car rental giants are looking to the future, with the goal of handling logistics for whatever company ends up winning the automated car arms race. If you can’t beat them, join them. Read more at Skift

Meeting Planners Are Struggling With the Fast Evolution of Event Technology: Innovation in event technology today relates as much to how planners use the platforms that already exist, as compared to new advancements in the technology itself. Read more at Skift 

COMMENTS

Skift editors Hannah Sampson [hs@skift.com] and Andrew Sheivachman [as@skift.com] curate the Skift Corporate Travel Innovation Report. Skift emails the newsletter every Thursday.

Subscribe to Skift’s Free Corporate Travel Innovation Report

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Airlines Pack More Seats Onto Each Plane and Manufacturers Try to Make Them Comfortable

Southwest Airlines

Southwest is one of many airlines introducing slimline seats. They allow carriers to pack more passengers in the same space but some travelers find them uncomfortable. Southwest Airlines

Skift Take: Airlines and seat manufacturers do try to make seats comfortable enough. But let’s be clear: Travelers want tight seating. By their actions, most passengers have shown they want cheap prices over anything else. Airlines can only offer bargain fares if they pack planes with seats.

— Brian Sumers

Every so often, officials at Rockwell Collins Inc. pitch a one-day job offer to residents near its Winston-Salem, N.C. design center: Earn $100 for sitting in an airplane seat for eight hours.

Show up for the gig, and there’s nary a drinks cart or flight attendant in sight. The rows of seats are arrayed in a testing area at the company’s design and engineering complex. Even without engine hum or overhead bins, “it’s kind of like they’re on the plane,” says Alex Pozzi, vice president of research and development at the company’s campus here.

Over the years, seat researchers at B/E Aerospace, which Rockwell acquired in April for $8 billion, have gleaned a few insights about life in the air. Most people are just fine for two hours. As the third hour approaches, stiffness increases and comfort declines. At four hours, however, a sort of derièrre detente is achieved, and the levels of discomfort recede. After all, when you’re stuck inside a sealed, speeding tube at 35,000 feet, resistance is truly futile.

There are many reasons to despise flying, from delays, to fees, to overzealous TSA staff. But shrinking seats and the pain, claustrophobia, and rage they can trigger are arguably the biggest reason why travelers loathe airlines. The modern seat, with its power to pack more customers onto any given plane, is at the very heart of the industry’s 21st century economics. Slimmer seats and less legroom between rows—known as pitch—has enabled “cabin densification” across domestic and international fleets. More seats, quite simply, means more money and lower operating costs.

There are limits, however, even beyond physical constraints. Regulators mandate a certain ratio of attendants to seats, and carriers want to keep labor costs down. Still, the trend has clearly been moving toward scrunching you. While 34 to 35 inches of pitch was once common for economy class, the new normal is 30 to 31 inches, with several major carriers deploying 28 inches on short and medium flights. Soon, however, that squeeze-play may come to an end.

The seat factory in Winston-Salem is at the center of testing the physical limits of human tolerance. One part of its live studies involves giving only some participants Wi-Fi access, an exercise that typically reveals a direct relationship between distraction and seat-staying power. “You can easily see the difference in ratings for the exact same seat if you have entertainment,” says Pozzi.

Yes, a good sci-fi flick can ease the harshest heinie-holder, and it’s no coincidence that most seatbacks on long-haul flights have a screen. But this is small compensation for the sacrifices required of air travelers who, having run the gantlet of parking, ticketing, security, and terminal, visibly slump when they find that their assigned seat has gotten even smaller.

Let there be no doubt about the shrinking quarters in economy—space is tight. Reallocation of aircraft real estate has allowed airlines to install new, medium-tier cabins between first class and economy. The front of the plane where the big money sits remains largely unchanged when it comes to space. The shrinkage, unsurprisingly, has been in back.

In recent years, the “slimline” seat has become the de facto standard by which airlines outfit economy cabins. This design is inches thinner than predecessors and markedly lighter, allowing carriers an additional cost-saver by reducing weight and thus fuel burn. Today, an economy seat that tips the scales above 9 kilograms (20 pounds) is, by an airline’s measure, too heavy to fly.

Carriers are “segmenting the economy cabin into two or three buckets,” said John Heimlich, chief economist at Airlines for America, the industry’s U.S. trade group. These efforts help “to minimize the market-share loss to ultra low-cost carriers [ULCC] or to other modes of transport.”

When Boeing Co. introduced the twin-aisle 777 in the mid-1990s, a nine-seat breadth was standard. Now, the aircraft—flown by carriers worldwide—often seats 10 across in economy, making life even more miserable for passengers. Boeing’s 787 Dreamliner has become notorious for its economy-class pinch with nine across-seating—and on some 787s, these seats are only 17 inches wide. (Airbus’s new A350 is also typically configured with nine seats across, but its cabin is about four feet wider, so it could fit 10.)

This cabin squeeze and seat-shrinking has helped increase earnings in an industry that’s gotten used to fiscal stability. But it occasionally results in some bad public relations. Two United passengers got into a kerfuffle in the summer of 2014 when a man stuck a “knee defender” device on the seat in front of him to prevent reclining, causing the seat’s occupant to grow irate. The crew diverted the Denver-bound flight to Chicago to eject both combatants.

In early May, news leaked that the world’s largest airline, American Airlines Group Inc., planned to add three rows of seats separated by only 29 inches of pitch on its new fleet of Boeing 737 Max, which arrives later this year. That arrangement would allow for an additional row of extra-legroom seats, which American calls main cabin extra, between first class and steerage. The move would have broken the current 30-inch pitch limit among the six-biggest U.S. airlines, putting it closer to no-frills carriers such as Spirit Airlines Inc., which offers a mere 28 inches.

Less than six weeks later, American reversed course—not because of passenger outrage, but because of flight attendants. American Chief Executive Officer Doug Parker said on July 28 that employees pushed back at having to be the front-line defender of a new level of cabin-class stratification. Parker said employees were telling him, “‘You’re going to put us in a position where we need to explain to these customers that indeed this is necessary so that we can have one more row of main cabin extra?’”

Parker explained the underlying calculation: “While we could convince ourselves that that might be able to produce somewhat higher revenues on the aircraft, what it was doing to our perception with our team wasn’t worth it.”

No airline has yet edged below 28-inches of legroom, although at least one major seat manufacturer, Zodiac Aerospace, has shown a prototype designed with just 27 inches. Italy-based Aviointeriors SpA gained attention in 2010 with a “standing” perch-style concept called SkyRider. That “seat” hasn’t passed regulatory muster, nor won any orders, although periodically a ULCC will speak favorably about such seating possibilities. Last month, South American carrier VivaColombia was the latest to raise the prospect of standing flights.

This rush to squeeze ever-more money out of passenger posture may soon slow. Carriers such as Delta Air Lines Inc. are looking to exploit this issue by retaining some creature comforts its competitors have ditched. It’s kept nine-across seating on its 777s, “one of the only in the world” to do so, says Joe Kiely, Delta’s managing director of product and customer experience. Delta has also led an industry trend to fly larger aircraft on more routes, reducing the role of regional jets. JetBlue Airways Corp. took pitch into consideration for its Airbus A320 fleet, which will see legroom shrink by more than an inch, to 32 inches, starting this fall. Despite the contraction, JetBlue wanted still to be able to advertise “the most legroom in coach.”

Meanwhile in Europe, low-fare king Ryanair Holdings Plc will pitch its 197 seats on the new 737 Max at 31 inches—one more than American, which plans for 30-inches of legroom in a slightly smaller version of the new 737 it begins flying in November. The battle over comfort, or more accurately less discomfort, is on.

Smaller seats and legroom have come in for scrutiny by a powerful federal appeals court. A three-judge panel recently ruled that regulators must consider setting minimum space standards, agreeing with aspects of a consumer group lawsuit that warned safety is being compromised. In emergencies, the Federal Aviation Administration requires fully loaded planes be emptied in 90 seconds or less.

“This is the Case of the Incredible Shrinking Airline Seat,” U.S. Circuit Judge Patricia Ann Millett wrote in the July 28 ruling. Her court, the U.S. Court of Appeals for the District of Columbia, handles most cases involving federal regulators and rules, a fact that may give airlines pause as they decide whether to shrink seating further.

Flyers Rights, a nonprofit advocacy group, contends that seat space has shrunk at the same time passengers have gotten larger. Those developments could lead to a catastrophic outcome during evacuation, the group warns. It also points to a less dramatic peril exacerbated by tight quarters and longer flights: deep-vein thrombosis, or blood clots in the leg, which can kill.

“Our concern is that it will take a Titanic-type disaster to make a change if we don’t get regulation,” says Paul Hudson, the group’s president. The court decision may “give impetus to getting seats back to where they’re going to be both safe and potentially not unhealthy.”

Bills pending in both houses of Congress would mandate rules on minimum airline seat space. In the past, such efforts have failed; the U.S. Department of Transportation has likewise been reluctant to address the topic. Airlines frequently say that such regulatory moves targeting key revenue centers—baggage fees, seat space, ticket-change fees—could lead to higher fares. Hudson, who previously worked as an aviation attorney, dismissed the industry response as a knee-jerk reaction.

“I’ve never heard that argument not raised,” he says

Airlines offer a few other rejoinders to the chorus of complaints. One is airfare: Faced with a choice between discomfort and higher fares, an overwhelming majority of travelers choose the former. Another is pricing-power. While industry consolidation did allow carriers to cut costs and command higher prices on some routes, average U.S. airfares have been one of the few consistent goods to hold firm against inflation over the past 20 years. Slimming the seats and tightening the space, the airlines argue, is a rational response.

The industry also points out that new seats, while thinner, are far superior to older models. Carriers’ zeal for lighter, durable, ergonomic seating has yielded engineering advances. Body shape and size, along with better materials and design, have become integral to airline seat manufacturing, and all four of the industry’s major players—Recaro GmbH, Thompson Aero Seating,  Zodiac Aerospace, and Rockwell Collins—are fiercely competitive in such areas as materials and ergonomics.

The L-shaped seat of yore has morphed into something more akin to a pivoting cradle-chair, seat designers say. And the once-flat seat pan, the chair’s frame and source of much anguish, is now generally curved. The passenger’s lower back is also finding fresh support in the newer designs.

American noted repeatedly that its seat selection for the 737 Max is a newer Rockwell Collins design, called Meridian, that’s more comfortable than prior economy-class seats. That’s the same seat Southwest Airlines Co. chose for its 200 new Max aircraft and its current 737-800s. United Continental Holdings Inc. is also purchasing the Meridian seat for its Max 9.

During a tour of its Winston-Salem design complex in May, Rockwell Collins officials invited reporters to sit in a variety of newer seats, including the Meridian and Aspire, a model aimed at two-aisle aircraft on long-haul routes. Tom Plant, vice president and general manager of aircraft seating at the company’s Interior Systems unit, asked the “passengers” to guess how much legroom each seat had. The pitch was 29 inches, but all the guesses were too high, mostly 30 to 32 inches.

Designers had managed to create a clever illusion of space. And that illusion means money.

©2017 Bloomberg L.P.

This article was written by Justin Bachman from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

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Airport-Style Body Scanners Tested in Los Angeles Subway System

Mike Balsamo  / Associated Press

A body scanner is tested at Union Station subway station in Los Angeles August 16, 2017. The scanners are aimed to detect firearms and explosives. Mike Balsamo / Associated Press

Skift Take: Officials in Los Angeles say the machines can scan about 600 people per hour in a bid to detect mass casualty threats. It seems like a great move if the system is effective.

— Sean O’Neill

Aiming to stay ahead of an evolving threat against transit systems worldwide, officials in Los Angeles are testing out airport-style body scanners that screen subway passengers for firearms and explosives.

As commuters raced to get on their trains Wednesday, the Los Angeles County Metropolitan Transportation Authority launched a two-day pilot program. But officials quickly experienced a hiccup when a scanner being demonstrated Wednesday morning at Union Station malfunctioned before passengers could be put through the machine.

Metro is conducting the pilot program to evaluate the accuracy and capacity of the portable machines amid the hustle and bustle underground and determine if the scanners could become permanent fixtures in the Los Angeles transit system.

The machines use sensors to scan a person as they walk through, searching for firearms and explosive compounds, said Dave Sotero, a Metro spokesman. Passengers don’t need to unload laptops or take off their jackets or shoes as the radio waves scan them to detect anomalies.

“It is specifically designed to test for mass-casualty threats,” Sotero said. “The technology enables the system to locate on the body where there is a potential threat, and it appears on a video screen.”

Metro is conducting the pilot program to evaluate the accuracy and capacity of the portable machines and determine if the scanners could become permanent fixtures in the Los Angeles transit system.

Each machine is designed to scan about 600 people per hour, Sotero said. About 150,000 passengers ride on Metro’s Red Line daily, he said.

“This is designed so you don’t have to wait,” Sotero said. “The idea is that you have a continuous flow of people through the security system without causing a backlog and causing people to miss their trains.”

Similar to airport checkpoints, when someone passes through the scanner, they are held for a few seconds while law enforcement officers watch a monitor that shows the location on any anomalies the body. Several security officers stood guard at the screening checkpoint at Union Station on Wednesday morning. Large signs advised passengers that the screening is voluntary.

The scanners sell for about $60,000 each, said Chris McLaughlin, a vice president with Evolv Technology, which makes the system.

“I think it is a good idea with everything that has been going on and ISIS,” passenger Jazmin Rosales, 29, said. “As long as it doesn’t take too long, at least you know you can feel safe.”

___

 

This article was written by Michael Balsamo from The Associated Press and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

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Van Plows Into Crowd in Barcelona Tourism Area

Associated Press

A law enforcement official takes charge after a van struck pedestrians in a popular area of the city August 17, 2017. Associated Press

Skift Take: Preliminary reports say the area was crowded with Barcelona residents and tourists at the time of the incident.

— Dennis Schaal

A white van jumped the sidewalk Thursday in Barcelona’s historic Las Ramblas district, crashing into a summer crowd of residents and tourists and injuring several people, police said.

[Update: Police in Spain have confirmed there are fatalities after a van slammed into pedestrians in Barcelona’s historic Las Ramblas district.

Catalan police tweeted that “there are mortal victims and injured from the crash” without specifying numbers. The Barcelona-based La Vanguardia newspaper is reporting at least one dead and 20 injured.

A van jumpted the sidewalk in Barcelona’s iconic Las Ramblas area, slamming into pedestrians. At least five were seen lying on the ground on the popular tourist street.

El Pais newspaper, citing unnamed police sources, says the two perpetrators are holed up in a bar in central Barcelona. Various local media reports have called it a terror attack, but authorities haven’t officially confirmed it.]

In a photograph shown by public broadcaster RTVE, three people were lying on the ground in the street of the northern Spanish city Thursday afternoon, apparently being helped by police and others. Other videos showed five people down and recorded people screaming as they fled the scene.

Police cordoned off the broad, popular street, ordering stores and nearby Metro and train stations to close. They asked people to stay away from the area so as not to get in the way of emergency services. A helicopter hovered over the scene.

[Skift Editor’s Note: CNN is reporting that Barcelona police said this was “most likely” a terrorist attack.]

Las Ramblas, a street of stalls and shops that cuts through the center of Barcelona, is one of the city’s top tourist destinations. People walk down a wide, pedestrianized path in the center of the street, but cars can travel on either side.

The Spanish newspaper El Pais quoted unnamed police sources as saying the perpetrators of the crash were holed up in a bar in Tallers Street. There was no immediate police confirmation of the report.

This article was from The Associated Press and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

Developing story. Check back for updates.

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Cathay Pacific Reports Worst First-Half Loss in Two Decades

Cathay Pacific

Cathay has had to resort to discounts for its premium class tickets, causing passenger yields to decline. Shown is a passenger next to the airline’s logo. Cathay Pacific

Skift Take: Cathay Pacific has too much capacity and too high of a cost structure given dropping fares on many routes. Some analysts float the idea of a takeover by Air China.

— Sean O’Neill

Cathay Pacific Airways Ltd. is slipping in its efforts to get passengers to pay more for its premium services in a test for new Chief Executive Officer Rupert Hogg as the company reported back-to-back losses.

Passenger yields continued to decline in the first half of the year, led by its services to North America and Europe, as discounts to help fill seats took a toll on the key metric of profitability. The measure — the money earned from carrying a passenger for one kilometer — declined 5.2 percent to 51.5 Hong Kong cents, hovering around the lowest level since 2009, Cathay said in a statement Wednesday.

Buffeted by budget carriers and deep-pocketed competitors on the mainland, Cathay is at the crossroads. It risks being eclipsed by Chinese airlines that offer cheaper, direct long-haul flights from cities like Shanghai, Guangzhou and Shenzhen, bypassing Hong Kong, whose prominence as a hub has declined relative to the burgeoning wealth of the surrounding cities in southern China.

The marquee airline reported a net loss of HK$2.05 billion ($262 million) for the six months through June, potentially putting it on course for the first back-to-back annual losses in its 70-year history. The loss compares with the median HK$1.2 billion loss forecast in a Bloomberg survey of three analysts.

Read More: Is Cathay’s Late Show a Final Bow for Independence?: Gadfly

“We do not expect the operating environment in the second half of 2017 to improve materially,” Hong Kong-based Cathay’s Chairman John Slosar said in the statement. “We expect to see the benefits of our transformation in the second half of 2017, and the effects will accelerate in 2018.”

Cathay isn’t the only airline feeling the heat of competition. Singapore Airlines Ltd., under pressure from rivals such as Emirates Airline and Etihad Airways PJSC, said in June jobs are likely to be cut as part of a review it said had started more than six months earlier.

Hogg, who took over as Cathay’s CEO on May 1, announced the elimination of 600 jobs the same month as part of a three-year transformation program Asia’s biggest international airline revealed earlier in the year.

Cathay has had to resort to seasonal discounts for its front seats after saying last year that premium travel was slumping, causing passenger yields to decline.

Cathay has reported losses only for three years since it was founded in 1946 — once in 1998 in the aftermath of the Asian financial crisis; again, in 2008 as the global credit crisis unfolded; and, last year as a result of fuel-hedging bets gone wrong and intensifying competition.

Highlights from the statement:

  • Revenue in 1H rose 0.4% to HK$45.9 billion
  • Passenger load factor rose to 84.7% from 84.5% a year ago
  • Revenue passengers carried declined 0.5%
  • Yield on routes between Hong Kong and mainland China was under pressure because of increased competition, particularly from low-cost carriers
  • Cargo demand was robust in the first half
  • Other major adverse factors were higher fuel prices (including the effect of Cathay’s hedging), the strength of the Hong Kong dollar on revenues denominated in other currencies and higher aircraft maintenance costs

(Updates with highlights from earnings toward the end.)

 

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Barcelona Is Trying to Come to Terms With Its Overtourism Problem

Mathieu Marquer  / Flickr

La Rambla in central Barcelona. The backlash against tourists in the city has been building. Mathieu Marquer / Flickr

Skift Take: The backlash against tourism in Barcelona is building. Authorities in the city are trying to quell the anger by bringing in certain restrictions but at the moment it doesn’t seem to be working.

— Patrick Whyte

When Edgar Torras started leading tours of Barcelona, locals thanked him for bringing in tourists. Seventeen years later, they pelted his customers with eggs and the city has further restricted his route to avoid over-crowding in the historic center.

“Suddenly we seem to be the enemy,” said Torras, founder of Barcelona Segway Glides.

It’s becoming part of the tourist scene not mentioned in the guidebooks. Some Spaniards increasingly view visitors as a burden rather than an economic boon, with a backlash building in Barcelona and other hot spots. Last month, masked youths attacked a tourist bus in the city, and a protest against incomers is set to take place in the Basque resort of San Sebastian on Thursday.

With Spain the world’s biggest tourist destination after France and the U.S., the government is beginning to worry that the unrest could undermine that status. Tourism accounts for about 13 percent of all jobs in Spain. The number of foreign visitors will rise about 12 percent this year to a record 84 million in 2017, according to analysts at CaixaBank SA.

“It’s one of the sectors that is most driving our economy today and we have to look after it and support it,” Prime Minister Mariano Rajoy said this month. “If people come here it is because they like Spain.”

On Aug. 12, about 200 people from the Barceloneta neighborhood took to the city’s beach to protest the proliferation of tourist apartments, the El Pais newspaper reported. Youths targeting a tourist bus in Barcelona last month punctured a tire and sprayed it with a slogan saying “tourism kills neighborhoods.”

Locals object to the hoards of tourists crowding city streets and sometimes their antisocial behavior. Barcelona has cracked down on unlicensed rentals for tourists that residents blame for the surge in tourist numbers.

“If you go to one of the Barcelona neighborhoods affected, you can understand the anger,” said Jordi Alberich, director general of Cercle d’Economia, a Barcelona-based business association. “There has been a lot of complacency about the cost of tourism and now the model is very hard to change.”

If anything, numbers are set to increase, with cruise ships pouring into ports across the nation. As many as 3.6 million cruise passengers disembarked in Spanish ports in the first half of 2017, double the amount of a decade ago, according to the Public Works Ministry.

Fighting Back

As well as restricting Segway tours, Barcelona Mayor Ada Colau has taken more sweeping steps to forbid new hotels to open in the center of the city and clamped down on unlicensed room rentals through platforms such as Airbnb Inc.

For Torras, the latest restriction is a fresh blow to his business after the council stopped him taking tours down the Barcelona beach front last year. Typically, he leads two three-hour tours each day for up to six people who pay 70 euros each to be guided round neighborhoods such as the Gothic Quarter, Ramblas area and old port. He relies on his summer business to get through the winter.

“This is the time when we have to save,” Torras said.

 

©2017 Bloomberg L.P.

 

This article was written by Charles Penty and Maria Tadeo from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

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Air Berlin’s Collapse Gives Lufthansa a Chance to Expand Its Low-Cost Airline

Richard Weiss  / Bloomberg

Lufthansa aircraft. The airline group could use Air Berlin’s collapse to boost its Eurowings low-cost unit. Richard Weiss / Bloomberg

Skift Take: Lufthansa seems to be the obvious suitor for at least some of Air Berlin’s business. Picking up some of the slots from its former rival would give it a chance to really grow its low-cost Eurowings unit, which could lead to the introduction of more routes to North America.

— Patrick Whyte

Air Berlin Plc’s insolvency could open the way for Deutsche Lufthansa AG to add new hubs for inter-continental flights while allowing short-haul discount specialist EasyJet Plc to boost its presence in the German capital.

The ailing carrier’s Berlin and Dusseldorf bases provide Lufthansa’s lower-cost Eurowings arm with a chance to expand a long-haul network currently limited to Cologne-Bonn airport and a fledgling operation in Munich. At the same time, slots in Berlin used for short-haul services could help EasyJet narrow the gap to Ryanair Holdings Plc in Europe’s biggest economy.

Air Berlin filed for insolvency Tuesday as leading shareholder Etihad Airways PJSC of Abu Dhabi pulled the plug on funding the unprofitable carrier, which will rely on a government loan to keep flying for the next three months. Lufthansa, Germany’s biggest airline and the No. 3 in Europe, revealed that it was in talks about buying parts of its national rival, while EasyJet has also expressed an interest, according to people familiar with the matter.

A deal could be “very attractive” for Lufthansa if it can acquire elements of Air Berlin, which has 8,600 workers, without taking on the company’s debt or staff contracts, Sanford C. Bernstein & Co. analysts including Daniel Roeska said in a note. There’s also a “strategic rationale” behind EasyJet making a move, and the U.K. carrier has the business model to make a transaction work, they said.

While the 150 million-euro ($177 million) loan should get Germans home from their summer vacations, Air Berlin will likely run out of cash at the end of the three-month period, setting a deadline for negotiations, Bernstein said.

Antitrust Hurdle

Lufthansa, which is unlikely to be able to buy all of Air Berlin for antitrust reasons, already has strong links to its one-time arch rival following a deal that handed it 38 of the smaller carrier’s Airbus SE A320-series planes plus crews under a six-year lease deal. Some 33 of those aircraft are slated for deployment with Eurowings and five with the group’s Austrian Airlines division.

At the same time, Air Berlin planned to offload its own Austrian unit Niki, which has 21 A321 jets, by combining it with 14 aircraft from TUI AG, Europe’s largest tour operator. Though the plan suffered a setback in June when TUI failed to agree terms with Etihad, it said Tuesday that it’s ready to participate in Air Berlin’s restructuring. Thomas Cook Group Plc’s Condor arm, which books seats on Air Berlin flights, also said it could play an “active role” in a rescue plan.

Air Berlin’s Swiss Belair arm, which has seven A320-family planes, is set to close at the end of the summer, according to an announcement in March, while the company was due to full control of regional affiliate LGW, with 20 Bombardier Inc. Q400 turboprops.

The restructuring steps were designed to trim the Air Berlin fleet to just 75 jets from almost 150, leaving it focused on inter-continental routes from Berlin and Dusseldorf, fed by shorter European flights, plus minor hubs in Munich and Stuttgart. It currently serves about 20 long-haul destinations with 17 Airbus A330 wide-body jets, with the focus on the U.S. and the Caribbean.

Rump Air Berlin ~75 aircraft 17 A330s, 20 Q400s, rest A320 family Main bases Dusseldorf and Berlin Lufthansa and possibly EasyJet interested
Lufthansa lease ~38 aircraft 33 A320-family leased to Eurowings, five to Austrian Airlines Eurowings bases plus Vienna Lufthansa owns some planes; may take over workforce
Leisure
carrier
~35 aircraft 21 A321s at Niki, 14 Boeing 737s leased from TUIfly Vienna-based TUI, Condor have an interest

As Air Berlin’s doesn’t own its aircraft, the main value for suitors may be in its landing rights, which are usually distributed by a national coordinator after airlines apply for them. German Economic Minister Brigitte Zypries, though, said slots may be sold off by the insolvency administrator to raise funds.

Lufthansa’s global strategy is increasingly built around beefing up Eurowings, initially created to defend its European turf against the likes of Ryanair by taking over short-haul routes outside of its Frankfurt and Munich hubs.

While the unit has been swollen by the Air Berlin lease deal and the acquisition of Brussels Airlines, the transfer of existing short-haul routes from the parent airline has been slowed by union opposition, putting new emphasis on expanding long-haul services. By the end of this year Eurowings will have more than 160 aircraft spread across 11 bases, including a fleet of A330s.

At the very least, Lufthansa is likely to want to safeguard the leased Air Berlin planes, which fly mainly on Mediterranean routes, according to Bernstein, and could use that structure to add more operations from the smaller carrier.

Lost Ground

For EasyJet, acquiring parts of the Air Berlin short-haul business would help make up lost ground in Germany, where it lags well behind Ryanair. The Luton, England-based company announced in June that it would shut a base in Hamburg, where it stations four A320-series aircraft, at the end of the summer season, leaving only its Berlin operation, which utilizes 12 planes.

Ryanair locates nine jets in Berlin, but also has eight other bases in Germany including Cologne-Bonn and Hamburg, as well as Frankfurt, where it will station seven planes this winter in a direct challenge to Lufthansa at its primary hub. A 10th base will open in Memmingen, outside Munich, in September.

Complicating matters, EasyJet’s Berlin flights operate out of Schoenefeld airport rather than the main Tegel hub used by Air Berlin. Current thinking calls for Tegel to be closed when the new and long-delayed Berlin Brandenburg hub opens, though those plans are under review.

Whether EasyJet or Ryanair buys Air Berlin assets, both are likely to benefit from the German No. 2’s exit, with one competitor less in the market, Per-Ola Hellgren, an analyst at Landesbank Baden-Wuerttemberg, said in an investor note. Eurowings has a higher cost base than both carriers, he said.

Progress on a carve up of Air Berlin could be rapid, according to Bernstein’s Roeska, with Lufthansa keen to bolster its defenses against low-cost carriers and the German government eager to protect jobs in an election year. The alternative could make Germany “a clear target for imminent attack,” he said.

“If there is no deal, and Air Berlin collapses, Lufthansa will be facing a large capacity gap in the German market at precisely the time Ryanair is looking to make good on its ambitious expansion.”

 

©2017 Bloomberg L.P.

 

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Airline Loyalty Programs Are Losing Their Luster — Even for Frequent Flyers

Associated Press

A travel walks in front of an advertisement for a Delta Air Lines branded credit card. It’s now easier for many travelers to earn miles through credit cards than by flying. Associated Press

Skift Take: Airline miles aren’t worth as much as they once were. But should that come as a surprise? Four airlines control the vast majority of U.S. domestic market share. With less competition, carriers don’t need to be as generous to spur loyalty.

— Brian Sumers

Airline loyalty programs are losing much of their allure even for frequent flyers, and the rules for navigating the system have changed.

Flying is no longer the best way to earn miles or points. The biggest bang for your buck comes from signing up for the right credit card.

And those come-ons from the airline to sell you miles? Ignore them unless you are very close to a qualifying for a big trip.

Frequent-flyer programs get relatively little attention from Wall Street, and their financial importance to the airlines is not widely understood by travelers, who just hope to earn a free flight now and then.

Airline profits are subject to vagaries like the price of fuel, the actions of competitors on key routes, even the weather. Amid all that uncertainty, the airlines have found a reliable source of revenue in selling miles to banks, which then use the miles to persuade consumers to sign up for the cards and use them as much as possible.

“The bottom line is that the business of selling miles is a very profitable one and has proven historically to be far less cyclical than the core airline,” Joseph DeNardi, a Stifel analyst who tracks airlines, said this month in a note to clients.

The downside for airline customers is that the world is awash in frequent-flier miles, and the airlines are constantly making each mile, or point, less valuable. Many trips don’t earn as many miles or points as they once did, and the price for claiming a reward flight keeps going up. In many cases, availability of reward seats on flights has gotten worse.

“It is harder to use miles at the price that people are expecting to pay,” says Gary Leff, who writes the View from the Wing travel blog.

Even for frequent flyers like Leff, a once-cherished benefit of the miles — using them to upgrade to first class — has been diminished because airlines sell more of those upgrades for cash.

That doesn’t mean travelers shouldn’t sign up for the airline programs. After all, there is no charge for joining.

It does require rethinking how to earn, keep and redeem miles. Many of the strategies revolve around credit cards:

— Watch credit card offers for bonuses. Banks often offer the biggest bang. JPMorgan Chase shook up the sector last year with a 100,000-mile bonus for signing up for the Sapphire Reserve card, which came with a hefty annual fee.

— Even if you make purchases with another card, consider getting the card of the airline you usually fly to enjoy benefits such as priority boarding and free bag-checking, even on so-called basic economy tickets. If you check a bag a few times a year, you will more than offset the annual fee.

— To stretch your miles, redeem them to fly midweek. Brian Karimzad of MileCards.com says it takes an average 30,574 miles for a Tuesday flight but 41,332 for a Sunday trip.

— Don’t let miles expire. On American Airlines, which runs the biggest frequent-flyer program, you don’t have to fly, you just have to make a purchase within 18 months on partners that range from other airlines to restaurants and flower shops. Miles on Delta Air Lines and JetBlue Airways don’t expire.

— Ignore your airline when it sends yet another email asking if you’d like to buy miles. The exception is when you are just a few miles short of earning a big trip, says John DiScala, who runs the JohnnyJet.com travel website.

—Use ’em while you’ve got ’em. The value of your miles won’t go up.

Airlines often raise the number of miles needed for certain flights, with United Airlines being the most recent example. Airlines used to announce big mile-price increases once every several years but now make smaller hikes more frequently. “Either way you’re going to pay more three years from now,” says Karimzad.

Over the past several years, American, Delta, United and Southwest have all linked rewards to how much customers spend, not how many miles or flights they take. That means frequent-flyer programs are a better deal now for people who buy expensive tickets, such as business class.

The change has put an end to “mileage runs,” the cheap but long flights that die-hards would take just to puff up their frequent-flyer accounts.

“It has weeded out a lot of people who were gaming it — you can’t blame the airlines for wanting to do that,” DiScala says, “but it stings as a consumer.”

___

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Hotel CEOs Say They’re Cautiously Optimistic About Corporate Travel

Abel Uribe  / Chicago Tribune

A guest checks in at a Le Meridien hotel. Hotels are still seeing weakness in their corporate and group business, even though occupancy rates are at all-time highs. Abel Uribe / Chicago Tribune

Skift Take: But shouldn’t hotel executives be a bit more concerned? At least that’s what one analyst is wondering, and we are too.

— Deanna Ting

Hotel occupancy in the U.S. was the highest it’s ever been during a second quarter — 69.5 percent, according to STR in 2017. Unemployment is at a record low of 4.3 percent. The gross domestic product, or GDP, is sluggishly moving up.

But you wouldn’t know it if you were to examine the major hotel companies’ revenue per available room (RevPAR) indices, or their average daily rates for the most recent quarter, says Michael Bellisario, senior research analyst for Baird Equity Research.

“Consumer confidence is at near all-time highs,” he said. “Almost any macro indicator we’ve looked at would say the setup for 2017 would be a lot better, election and improved sentiment aside. Why isn’t RevPAR better?”

While domestic RevPAR was up for most major hotel companies in the second quarter, it wasn’t quite as high as you might expect given the current economic indicators. The second quarter was also, generally, still weak in the areas of corporate and group travel, as noted by the CEOs of Hilton and Marriott International.

Hilton CEO Christopher Nassetta described the corporate travel environment as “cautiously optimistic” and said he hoped there would be more activity in terms of tax reform to “help change the psychology with our corporate customers.”

He noted: “The impact of it would be positive in the sense of driving more free cash flow into people’s businesses, so they’d have more to play with to hire and invest.” Nasetta also noted that group business at his hotels was “weaker.”

Marriott CEO Arne Sorenson echoed similar sentiments, saying “companies…are being very cautious about travel and very cautious about managing expenses, and [there are] others which seem to be spending as if they’re having a great party.”

He described corporate transient travel — or business travel that doesn’t include conferences or meetings — as being “anemic” and said Marriott’s group business was also “weaker” in the second quarter. Sorenson believes the best indicator of the health of the economy is the GDP, and he said that too “has been quite anemic.”

Many hotel company executives noted weakness in their group business, primarily due to calendar shifts: Easter moved into April during the second quarter and because Jewish holidays are shifting into late September this year, companies anticipate the third quarter will also be weaker for group business, said Bellisario.

Even so, Bellisario said, “We don’t want calendar shifts to be an excuse for weakness. Ninety days later, we might find some weakness. It does feel like there’s something else going on out there that’s not just calendar shifts that are impacting weaker near-term results.”

Mitigating Factors

What might be causing this softness? Bellisario isn’t sure, and it seems like the industry doesn’t quite know yet, either. The early optimism we saw from the hotel industry at the beginning of the year, post-election, hasn’t quite played out the way we thought it would, even though consumer sentiment has improved and the stock market is doing well.

He said that while demand for corporate travel is still there, “it’s really a price sensitivity issue” whereby “big companies are cutting costs and watching them very closely.” He said companies are having their employees travel for fewer days, and staying at select-service brands versus full-service ones. “It’s a combination of new supply and customers having a lot more options, so they’re being more price sensitive and not paying up for the better room.”

Bellisario also said that real estate investment trusts — also known as REITs, which usually fund the development for and often own the hotel properties consumers stay in — are suffering in big cities because so much of their business is skewed toward corporate travel. Those REITs, he noted, were “more negative and pessimistic” in their second-quarter earnings calls than the hotel management companies.

Another factor that may be coming more into play is what many in the industry refer to as “shadow supply,” the result of the growing popularity of alternative accommodations platforms like Airbnb. These are situations during which extra accommodations become available during high-demand times like a city-wide event, making it harder for hotels to raise their rates as much as before.

“That average daily rate pop is what’s missing in hotels today,” Bellisario said. “That has structurally changed because of all these home sharing options.”

Still, some CEOs aren’t so convinced that alternative accommodations are having an impact on their corporate travel business.

“It’s easy to get caught up in these big shifts that are going on, quarter to quarter. If you cleanse [that data], there’s really not that much going on quarter to quarter,” Nassetta told analysts. “You can’t say, when you sit where I sit, that the factors you just described — or heaven forbid I talk about the other things I know that are on your mind for fear of going into the black hole of Airbnb — but that some of those things don’t have some impact. But here’s the thing…nothing that we’re looking at suggests any of those things are having a material impact. It really is the economy. It really is that you’ve got growth, but it’s fairly anemic, broader growth.”

In fact, Nassetta also noted he thinks competition from Airbnb may actually be assisting hotel companies, at least in terms of their distribution agreements with the online travel agencies such as Booking.com and Expedia.

Sorenson, who also noted that his company had a system-wide occupancy rate of nearly 80 percent for the second quarter in North America, said “you would expect a little bit more pricing movement. But I think underneath that, you’ve got relatively more strength in leisure, which is more price-sensitive than corporate business is.”

He added that because the lodging industry has “thousands of franchisees who are pricing their own hotels on a day-to-day basis” and there is “radical transparency in pricing” thanks to online travel agencies and metasearch sites, “that may have some impact on our ability to move rates in this cycle compared to prior cycles.”

Whatever the reasons for this weakness in corporate and group travel, it will be interesting to see how the Marriott and Hilton’s recent cancellation policy changes also have an impact on their ability to keep average daily rates high. Those moves are signs that the hotels are trying to find other ways to keep revenues up, and to keep hotel owners happy.

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