“We've looked for opportunities where we can take a stake and either control a majority interest, as in nuTravel or a right-of-first-refusal, as we have at Blockskye. In the case of an investment like that, if it takes off and becomes truly successful, the industry will have an opportunity to keep it industry-owned, as opposed to seeing it take off somewhere else,” says ARC CEO Mike Premo on the past year’s investments in Blockskye, Traxo, and now nuTravel.
Airline-owned settlement and transactions platform ARC’s decision to take a majority stake in nuTravel, a company that provides online booking and travel management applications, reflects the company’s evolving technology transformation along with its evolving investment strategy.
While the details of the acquisition remain undisclosed, ARC CEO Mike Premo offered a look at what motivated the nuTravel deal, as well as the reasoning behind its previous investments over the past year.
In essence, ARC’s interest in shaping airlines’ “omnichannel retailing” capabilities is at the heart of the company’s investment activity.
That activity is being shaped by the changing distribution landscape. After nearly two decades of e-commerce, Big Data, automation, and mobility transforming the nature of shopping , airlines’ retailing strategies have been racing to update legacy systems. Technologies like machine learning and blockchain have moved beyond the buzzword stage and are actively being integrated into airlines’ and commercial aviation vendors’ operations.
While that notion has been oft-stated, in our interview, Premo also pointed to the fact that U.S. airlines have been profitable since 2014. And the greater financial flexibility that comes with a long streak of strong earnings has also served as an important impetus for technological reform within the industry.
ARC’s roots as the Airline Reporting Corporation extend back to the early 1960s as an entity charged with settling airline ticket transactions between carriers and travel agencies. But the Washington, DC-based company has grown into a broader airline distribution and data provider on top of its foundational function.
In keeping with its expanded purview, ARC made its first venture capital investment last April when it announced it was funding Blockskye, a blockchain solution developer that specializes in the travel industry. ARC had earlier worked with Blockskye on a proof-of-concept project to explore the role of blockchain in a commercial aviation retailing context.
And in November, ARC took an equity stake in Traxo, a company that helps corporate travel managers more effectively manage travelers’ direct bookings.
These moves have set ARC’s course for the future and will cement the redefinition of the company charted by Premo, who joined ARC in 2006 as VP of business development and was named president and CEO in June 2011, as he prepare to retire at the end of 2020 and pass the baton to his successor ARC EVP/COO Lauri Reishus in 2021.
Kambr Media: What attracted ARC to nuTravel?
Mike Premo: It's definitely a strategic investment for us. ARC has evolved quite a bit over the years. We've always had our traditional accreditation and settlement activities, but in the 2000s, we launched a data business, which has been quite successful. We’ve since expanded in scope and become a global partner with IATA. But as the industry seems to be changing, and the airlines are focused on NDC and retailing, our board asked us to pursue new directions as an organization, given the successes that we've had.
We've seen a couple of dynamics that have shifted the way people think about the booking, buying, and the servicing process for airlines. The first relates to the overall consolidation in the industry. There are a lot fewer suppliers out there than there were 20 years ago. The sustained profitability of the industry since 2014 has been a big change, too. There was a good 35-year period after deregulation, and the industry that really struggled in the early part of that era.
Since 2014, the industry has been solidly profitable. Strategically, airlines did focus a lot on consolidation and mergers in the 2000s and into the, into the 2010s. But now there's no more merging your way to success. You've got to go out and compete for every customer. The fact that they're profitable means that they can invest. And it’s not only investing in the hard product of the aircraft, the seats, the onboard entertainment, WIFI systems, et cetera. Airlines are also investing in the apps and the websites to present their products and services in a way that is best going to portray their brand and their mind.
Those investments are working. There's a lot of gravity pulling consumers, whether they're leisure travelers or business travelers, to the carrier technologies. However, it's aggravated a situation that we've had in the industry for many years.
For example, if you book at an agency and call the airline, they'll send you back to the agent: "Oh, we can't handle that request because you booked that through your agent. Therefore, you need to call them to change it." And vice versa.
If you booked it at the airline and called your agency, they’ll say: "We’ve got no record of that. You've got to call the airline."
From a customer mindset, this sounds completely insane. They wonder, “Why is this happening?”
The fact is that customers have always valued travel management companies. There's an inclination to want to use those products. Because if I'm an elite traveler, I'm going to get the best experience, notifications, and all of my entitlements best presented to me through the carrier sites. But if the first leg of my three-week trip to Europe changes, and I need to push every hotel back by two days, I need my agent to help me with that. Those kinds of dynamics are increasing the friction between customers, airlines, and agencies.
ARC’s purpose is to help airlines and agencies do business more efficiently. That's been our mantra since 1964 when we started.
So, our board said, "That sounds like a pretty interesting strategy." It certainly supports the airlines’ interests in expanding their direct channel distribution. It also supports our agency customers, who are running into these types of situations even more frequently, or just flat out, losing the customer entirely. There just aren't any good answers today.
As a result, we set up the third leg to our strategy stool, which we call omnichannel retailing solutions. That’s shorthand for allowing people to buy where they want, and get service where they want.
If a carrier wants to serve the corporate travel market, for example, through their own channel, we crafted a list of about a dozen capabilities that airlines just don't have today that the TMC channel offers.
We've been looking to either build ourselves, partner, or invest in other entities to put those dozen or so capabilities together. The goal is to be able to bring a holistic offering both to carriers and to agents. We want to say, "Here's a way to enable what customers seem to want to do in a way that's going to be efficient for you to work with."
That's the vision. And nuTravel actually helped with about a half dozen of those capabilities. They didn't need ARC to have success. Delta just announced yesterday that nuTravel is going to be powering some of the new capabilities that they intend to roll out soon.
Our carrier customers pointed us in the direction of people that they thought were interesting. Certainly, both Traxo and nuTravel were pretty high on that list. We were delighted to be able to conclude some investment in Traxo and a majority ownership stake in nuTravel. That’s the genesis of this new strategic platform for ARC.
How does nuTravel complement and expand the capabilities from Traxo and Blockskye, which ARC acquired last year?
We recently brought all four of the organizations together for the first time. The idea was to let each of the companies tell the story of their evolution and show the highlights of their offerings to the market.
There are a few aspects from each of the companies that overlap. Customers have said to us, "If I'm going to do X, I need you to do X." But in terms of their specific strengths, there's not a lot of overlap.
NuTravel is very much at the front-end of the process. It supports functions like authorization: “Is this a traveler that actually works for XYZ Corp?”
It supports policy issues. If you're going to get what your company negotiated on the airline’s website, [the airline] has to understand what the policy is. And it needs to know how that policy applies to you: Are you a VIP? Are you entitled to fly business class to London? Or do you have to fly premium economy?
NuTravel focuses on the tools that a corporate travel manager needs to execute to have their community reliably represented within the carrier technology. They're very much on the front end of the process of those aspects. Conversely, Traxo's much more focused on the data collection and bit more on the back end of the process.
Blockskye's focus is on bringing a new flavor of settlement and sustained record reliability through the blockchain. It's quite different from either the other two organizations. But there's a bit of overlap here, as well. Blockskye, for example, had to do some reporting out to a duty-of-care provider. There's probably some duplication of effort in that regard.
Ultimately, sorting out which is the most efficient way to do that is our job, so those three organizations can concentrate on where their individual strengths are.
How has ARC’s investment strategy changed these last few years?
We've tried to shift the investment strategy of the industry a bit. Commercial aviation has famously supported the development of new technologies by new companies that later go on to be big and powerful. And at that point, they charge the carriers a lot more money than they ever thought that they would be willing to pay.
We've looked for opportunities where we can take a stake and either control a majority interest, as in nuTravel or a right-of-first-refusal, as we have at Blockskye. In the case of an investment like that, if it takes off and becomes truly successful, the industry will have an opportunity to keep it industry-owned, as opposed to seeing it take off somewhere else.
I don't know whether or not these developments are going to turn out that way. The industry will have to make that judgment at some future point in time. But at least they'll have an opportunity to weigh in on it before something out of their control happens.
Our chairman of the board, Bonnie Reitz, has been a part of the industry for a long time. She was at Continental Airlines and was essential in getting the Prism data processing program set up as its primary corporate travel metric system. Prism went onto great success, and it's probably something that the industry wishes that it had taken a position in earlier on – and being able just to protect their interests a bit more.
In the case of Traxo, it was certainly further along in their investment strategy and capital development plan. We're a much smaller player in Traxo compared with these two other entities. We're still very impressed with their capabilities and their board and their governance. We expect they're going to be a great partner for us, irrespective of the ultimate buyout or ultimate disposition of the organization.
Can you discuss how ARC’s investment strategy will likely evolve over 2020?
As I’ve said, we're not really a financial investor. We're not just investing in these organizations to make a return. We do tend to be more of a strategic investor. It's got to tie into the kinds of business strategies that we're trying to go out and execute. We think there are probably two or three more elements to this omnichannel strategy that we haven't covered quite as well as we would like to. Therefore, we'll be continuing to look for opportunities in those arenas.
We have an exciting opportunity related to our data business that we think is also somewhat strategic for us. They will help us reach a customer community that we've had some trouble getting into.
Our board expects us to bring opportunities that are going to help us from a business strategy standpoint and not just, "Oh, hey, this is a great investment."