American Express (NYSE:AXP) is planning to form a joint venture with Certares International Bank LLC to spin off half of its corporate travel business. In a press release, the credit card company announced that it would maintain 50% ownership in the joint venture, named American Express Global Business Travel, while an investor group led by Certares would own the remaining 50%. Certares is expected to invest between $700 million to $1 billion in the business, providing cash injection to the corporate travel branch. Revenues from travel services currently account for just 5% of American Express’ revenues, but the company expects the division boost the corporate payments business which is closely linked to the travel business. Corporate travel sales account for more than 10% of AmEx’s corporate card billed business.
Our $74 price estimate for the company’s stock is in-line with the current market price. We will update our model once the final details of the transaction, expected to closed by the second quarter of 2014, are announced.
Earlier this year, American Express announced that it would revamp its travel services business to technology based services with around 5,400 job cuts. Travel sales to corporations account for 80% of the company’s total travel sales and AmEx believes that corporations would rather book work trips online than go through an American Express travel agent. Travel is a big part of business for any corporation and a recent Global Business Travel Association revealed that total business travel spend by corporations across the world is close to $1 trillion. U.S. companies spend the most, near $262 billion per year while Chinese companies spend close to $200 billion.
In 2012, American Express reported close to $19 billion in corporate travel sales on which it earned 8% commission. Taking just the U.S. markets, this would give AmEx a market share of 7%. Business travel spend grew by 4.4% in 2012, and is likely to expand as the U.S. economy improves. The unemployment rate in the U.S. has recovered from a peak of 10.1% observed during the financial crisis in 2009 and reached a four-year low of 7.3% in August.  Assuming a 5% growth rate through the decade with American Express’ market share reaching 10%, the company’s corporate travel sales can reach $38 billion by 2020. We expect the company to lower commission charges to ward off competition. A 7.5% commission rate will allow AmEx to generate close to $3 billion in revenues from travel sales to corporations.
The Card Business
There are around 7 million American Express issued corporate cards in use around the world with an annual average cardmember spend of $24,000. More than 10% of the billings on these cards are travel sales and boosting its travel business will allow AmEx to grow the average cardmember spend. The company currently earns a transaction fee of 1.7% of the spend on its corporate cards.Notes:
- U.S. Department of Labor, Labor Force Statistics from the Current Population Survey [↩]