- Orbitz operates in the competitive online travel industry and has a moderate business risk profile.
- However, its financial risk profile is more aggressive, with high leverage of 3.3x debt-to-EBITDA compared to industry peers.
- An optimal capital structure would reduce leverage to around 3.5x debt-to-EBITDA, lowering costs while maintaining financial flexibility. This could potentially position Orbitz for a credit rating upgrade.
Marketing Management Business Plan_My Sweet Creations
Capital Structure of Orbitz
1.
2. Agenda
• Orbitz and the Travel Services Industry
• Firm Operating Strategy
• Business/Operating Risks
• Financial Structure
• Competing Firms
• Optimizing Capital Structure
• Recommendation
page 1
3. About the Travel Services Industry
This industry comprises businesses primarily engaged in selling,
booking and arranging travel, tour and accommodation services
to the general public and commercial clients.
Key US Indicators:
Revenue Annual Growth (‘11-’16)
$21.6bn 1.7%
Profit Wages
$992.4m $5.0bn
page 2
4. Industry Tied to Economic Recovery
Online Travel Industry • Worldwide travel industry large and
dynamic with rapid and significant
Penetration Rate change
• Significantly impacted by prolonged
recession 2008-2009 and tight
credit markets
• Business travel bouncing back due
to higher than anticipated GDP,
54% more robust export and corporate
profits in 2010
37%
• US most mature market where
21% bookings have slowed
• Europe, Asia Pacific highly
United Europe Asia Pacific fragmented but growing
States and ROW
5. About Orbitz
• Launched in 2001 by group of U.S. airlines
• Now 56% owned by Travelport and The
Blackstone Group
• Leading global online travel company
• Provides customers access to travel
products from over 80,000 suppliers
worldwide
• Generates revenue through:
– Agency model: similar to traditional
travel agencies, earning fees and
commissions from travel suppliers for
products/services booked through its
website
– Merchant model: fees based on
difference consumer pays and
negotiated net rate charged by supplier
• #1 in air travel and # 2 online US travel
agency
7. Orbitz: Firm Operating Strategy
• Strong portfolio of global brands
• One of the most recognized in the US
Powerful Brands • Difficult for new competitors to create strong online travel
brands given existing marketplace
• US brands alone attract 48 million registered users and
Large and Loyal Customer more than 25 million unique visitors
Base • Loyal base of repeat customers
• Most comprehensive set of supplier relationships across
Broad and Diverse all travel categories
Supplier Relationship • Long-term agreements with suppliers
• Track record of pioneering travel technologies that deliver
superior user experience and repeat sales
Technology Leadership • Moderately heavy investment spending on technology and
fulfillment will remain limiting factors to earnings growth
• Economies of scale as technology and marketing
expenses can be leveraged across brands and
Economies of Scale geographies
• Structural advantage against new competitors
8. Online Segmentation
Orbitz operates a number of sites targeting specific market segments:
ORBITZ CHEAPTICKETS HOTELCLUB EBOOKERS CHEAPTICKETS
U.S. full service U.S. full service International European full U.S. full service
online travel online travel hotel-focused service online online travel
agency targeting agency targeting online travel and offline travel agency targeting
experience- price-sensitive agency agency, targeting price-sensitive
driven travelers travelers Access to experience- travelers
extensive driven travelers
proprietary global Presence in 13
hotel inventory in European
over 120 countries
countries with
high margins
through affiliation
with GTA
page 7
9. Orbitz Business Overview
Total 2010 Revenue by Category
Advertising Other
2010 2009 2008 & Media 15%
Air
7% 36%
Revenue ($Mil.) 757 738 870 Vacation
Packages
15%
% growth 3% -15% 1%
Hotel
27%
EBITDA ($Mil.) 142 128 125
% margin 19% 17% 14%
Consolidated Gross Total 2010 Revenue by Geography
Bookings
Gross Bookings % growth
ROW
24%
11,370 10,615 Domestic
9,942
76%
2010 2009 2008
10. Direct Competitors
The online travel distribution industry consists of few large global players
and many smaller regional firms
Gross Bookings
Expedia, 25,962
Sabre Priceline.com, 13,
646
Orbitz, 11,370
0 0.5 1 1.5 2 2.5 3 3.5
page 9
11. Direct Competitor Comparison
The online travel industry is bifurcated into ‘B/B+’ and ‘BBB-’ firms, where firm
size is the driving force behind ratings.
Orbitz Sabre Expedia Priceline.com Allegiant CTrip.co
Travel m
Corporate Credit Rating B/Neg B/Stable BBB-/Stable BBB-/Stable NR [B+] NR [B+]
Market Cap 238.7 Private 7,480.0 23,350.0 907.3 4,470.0
Revenue 757.5 NA 3,348.1 3,084.9 663.6 499.32
EBITDA 157.6 NA 964.8 909.9 139.6 189.2
EBITDA Interest Coverage 3.4x 3.0x 6.5x 26.2x 55.4 NA
Debt to EBITDA 3.3x 6.0x 1.9x 0.6x 0.2x 0.0x
Debt to Capitalization 73% NA 40% 22% 9% 0%
FFO to Debt 23.7% NA 41.1% 152.5% 377% NA
• Optimal capital structure exists for the investment grade and varies significantly
for those in speculative grade.
• Capital structure extremely important at the ‘BBB-’ level given ramifications of
falling out of investment grade category. An optimal capital structure would
consist of maximizing debt usage (40% debt/capital).
• Financial policy and appetite for risk driver of financing decisions in the ‘B’
category. page 10
12. S&P Key Industrial Medians to Rating
80.0%
7
70.0%
6
60.0%
5
50.0%
4
40.0%
3
30.0%
2 20.0%
1 10.0%
0 0.0%
'BB' 'BBB' 'B' 'BB' 'BBB'
'B' Average
Average Average Average Average Average
EBITDA Interest Debt to
1.9 3.9 6.5 75.9% 53.7% 42.5%
Coverage (x) Capitalization
Debt to EBITDA (x) 5.3 3.5 2.2 FFO to Debt 11.5% 22.4% 35.9%
• OWW key credit metrics closer to ‘BB’ average on most metrics, but
its credit profile constrained by non-qualitative factors…its relationship
with Travelport and The Blackstone Group.
• The Company’s optimal capital structure relative to other industrials is
constrained as Rating Agencies will expect a significant cushion to
mitigate governance concerns. page 11
13. Strengths Key Credit Highlights
• Strong global brands with • High leverage compared to
leading industry positions industry peers
• Technology leadership • Aggressive financial policies
• Breadth and diversity of • Corporate carve-
products and suppliers out/separation risk with
• Growth potential of hotel and Travelport
dynamic package bookings and • Dependence on highly
internationally competitive and seasonal
• Significant marketing and travel industry
eCommerce expertise
• Moderate barriers to entry
given importance of
technology, brand awareness,
supplier relationships
• Positive free cash flow
Risks
14. Current Capital Structure
• Debt financing approximately
52% of capitalization
• 100% bank debt consisting of
$92.5 million revolving credit
facility due 2013 and $492
million senior secured term
loan due 2014 bearing interest
at LIBOR + 300 bps
• Approximately 56% of equity
held by Travelport and its
affiliates (including The
Blackstone Group)
• Cost of debt: 9.0%
• Cost of equity: 19.6%
• WACC: 12.2%
16. Capacity to Absorb Low-Probability Adversity
2010A 2011E 2011E 2011E
• Sources of cash positive
(-20%) (+10%) (+20%) even in event of 20%
EBITDA 142 114 157 171 EBITDA decline
Funds from • Good banking relationships
operations 116 93 128 140 and access to capital
Changes in
working capital (18) (18) (18) (18)
markets
Maintenance • Capital expenditures largest
level capex (40) (40) (40) (40) cash use
Discretionary
cash flow 59 35 70 82
• Plus annual prepayment on
Revolver the Term Loan (50% excess
availability 60 60 60 60 cash flow)
Maintenance • Minimal maturities over
cash 97 80 80 80
next three years
Liquidity 216 175 210 222
• Healthy cushion to financial
covenants
17. Optimal Capital Structure
• Online travel industry largely low investment grade (BBB-/Baa3)
– Expedia, Priceline.com, Sabre Holdings (Travelocity)
– Characterized by moderate financial policies, solid cash flow
generation, high equity component => optimal 25%-35% debt to
capital
• Orbitz is the weakest of these publicly rated entities
• Capital structure considers moderate growth profile of Company,
aggressive financial policies and ownership structure, access to
capital markets
• Existing businesses capable of delivering satisfactory growth,
especially in Europe and Asia Pacific
• Complemented with tuck-in acquisitions and continued investment in
technology
18. Optimal Capital Structure (Cont’d)
• Negative returns on capital diminish ability to attract external
equity capital; cost of equity will be prohibitively expensive
• Financial policy more consistent with needs of private equity
owners
• Debt will remain largest component of capital structure given
cost of capital and shareholder return requirements of
Travelport and The Blackstone Group (via ‘special dividend’)
• Operating leases play small role in off balance sheet financing
given nature of assets
• No underfunded pension or OPEB obligations
19. Recommendation
• Knowing that Orbitz is not an investment grade company and is
owned by private equity sponsors:
– Debt to EBITDA is the best measure of leverage
– Orbitz should aim for 3.5x-3.75x debt/EBITDA
• Would reduce overall cost of debt
• Potentially position for debt rating upgrade
• Provided financial flexibility to access public debt markets
page 18
21. Why Optimal Capital Structure is Constrained
‘B-/B3’ Corporate Credit ‘B/B2’ Corporate Credit ‘B+/B1’ Corporate Credit
Rating Rating Rating
- 4.5x to 6.75x - 4.0x-4.5x debt/EBITDA - 3.5x debt/EBITDA
debt/EBITDA - Debt structure entirely - Would enable Company
- Debt structure entirely bank debt (term loan plus to access public bond
bank debt (term loan plus revolving credit facility) at markets with senior
revolving credit facility) LIBOR + 300 bps unsecured debt rating of
- Significant reliance on - Limited access to public ‘B-/B3’
free cash flow generation bond market in current - Capital markets closed to
to repay obligations capital market environment Unsecured Bonds rated
- Leverage is below below ‘B-/B3’
average but constrained by - Debt structure could
ownership structure consist of senior secured
- Some financial flexibility bank debt and unsecured
for additional financing: bonds
acquisition related debt - Lowers cost of capital
capacity of $200 to $250 - Enhanced financial
mil flexibility and ability to
respond to opportunities 20page
22. Assessing Orbitz for Capital Structure
Business Risk Profile
Financial Risk Profile
(MODERATE)
(AGGRESSIVE)
Editor's Notes
U.S. Online Travel Industry Size ???Online travel is the largest eCommerce categoryIndustry moves with the economyEconomy is stabilizing but still uncertain around timing and sustainability of recoveryBusiness travel, a key indicator of the overall health of US economy, bouncing back due to higherthan anticipated GDP, more robust export and corporate profits in 2010US: most mature market (54% penetration rate) where growth of bookings has slowedEurope, Asia Pacific: high level of fragmentation, particularly in hotel industryContinue to benefit from increase in Internet usage and growing acceptance of online bookingSignificant growth opportunities in Asia Pacific where competition is not as entrenchedEurope (37% penetration rate); Asia Pacific (21%)
Online travel distribution industry consists largely of Expedia, Travelocity (owned by Sabre), Priceline and Orbitzand more focused players such as Allegiant and Ctrip.com.Sabre is also owned by a private equity group, Silver Lake Partner and The Texas Pacific Group. Its ratings rank equally to Orbitzeven though leverage is much higher. Having generated over $3 billion in revenues in 2006 (prior to going private) – affords Sabre operating room with respect to capital structure. Silver Lake and The Texas Pacific Group are also viewed somewhat more favorably than Blackstone, which has a history of very aggressive LBOs and special dividends.Allegiant is a leisure travel company that operates in the U.S. transporting travelers in small cities to cities like Las Vegas, Orlando, Phoenix, Tampa/St. Petersburg, Los Angeles, and Ft. Lauderdale. Operates its own regional aircrafts, and as such we would expect a much more conservative capital structure given high capital intensity and energy sensitivity of its business. Greater usage of off balance sheet financing in the leasing of aircraft.Ctrip.com is a China-based leisure travel services company that operates in Asia only. Capital structure is all equity, which is probably not the best use of financing – but likely driven by conservative financial policies of management, less developed debt capital markets, and lower appetite for debt generally in the Asian market.
The acceptable median for Orbitz might be closer to 5x debt/EBITDA.But, because its owners have sought to extract financial resources from Orbitz in the past (typical of private equity-owned firms), Ratings Agencies typically want up to a two-notch cushion in leverage.More recently, Orbitz also faces negative pressure from Travelport potentially going into financial distress. Travelport is the global distribution (GDS) provider for Orbitz and also issues letters of credit for Orbitz.So while Orbitz’s business profile is ‘fair’, performance and liquidity adequate, its relationship to Travelport constrains financing options.A company like Orbitz would be loathe to go beyond prescribed measures for fear of a downgrade – essentially closing its doors to external debt financing.
Seasonal cash flow pattern.Gross bookings are generally highest in the first half of the year as customers plan and purchase their spring and summer vacations. Net cash outflows during the second half of the year Working capital fluctuations addressed by drawdowns on revolver ($72.5 mil revolving credit facility, of which $60 mil still available)Financial covenants :minimum fixed-charge coverage ratio requirement of 1.0x and a maximum total leverage ratio of 3.0x
Company has no intention to pay dividends on their common stock for the forseeable future, but they will likely pay another special dividend at some point to Travelport/The Blackstone GroupCompany paid $109M special dividend at time of IPO and term loan facility in 2007