Travel search company Kayak recently announced a multi-year agreement with its long-term technology partner Amadeus. With the agreement, Kayak will expand the use of the latter’s airline fare and availability technology for more comprehensive flight search results on its websites and mobile applications.
Google‘s (NASDAQ:GOOG) acquisition of ITA software, which provides the majority of airfare query results for Kayak, has put the company in jeopardy as airline travel queries account for around 85% of the total searches performed on Kayak’s websites and mobile applications. We estimate that airline ticket referral fee contributes above 14% to our current price estimate of $25.16 for Kayak. Thus, the non-renewal of agreement with ITA in the future could have a significant impact on Kayak’s valuation.
Though the company does not disclose the contribution of Amadeus in its total query results, we feel that an extension in agreement strengthens the partnership between the two companies. In addition, the decreasing reliance on ITA software will be a breather for Kayak and its potential investors that look forward to investing in the upcoming IPO.
Concerns on Google-ITA Deal Can Impact Kayak
ITA Software licenses its airfare search and pricing software to Kayak under an agreement which expires in December 2013. With Google getting the regulatory approval of the acquisition in April 2011, it may not renew ITA’s current agreements with the online travel agencies such as Kayak, or do so at unfavorable terms. Alternately, Google can create its own flight search tool which enables users to find comparable flight information on the Internet without using Kayak’s services.
As per Kayak’s May 2012 S-1 filing, ITA Software directly provided around 39% of its overall airfare query results. If Kayak is unable to replace ITA with a comparable technology, it could significantly effect the company’s revenues and operating margins by impacting the comprehensiveness of query results.
Is Kayak Leaning On Amadeus To Reduce Dependence On ITA?
Since 2006, Amadeus has been providing increased efficiency to Kayak’s search services by making use of its Meta Pricer platform that enables efficient and quick retrieval of airline queries to Kayak’s users. In its latest S-1 filing, Kayak announced entering into a “products and services” agreement with Amadeus in January 2012, though the multi-year agreement was announced by Amadeus this month.
Data from Kayak’s SEC filings have been indicating a declining dependence on ITA’s software. While ITA provided above 60% of the airfare query results as per Kayak’s November 2011 S-1 filing, the percentage has dropped down significantly to 39% in its May 2012 S-1 filing. The fact that Kayak signed the agreement with Amadeus around the same time that it registered a drop in percentage contribution of ITA’s airfare query result could be indicative of the company’s strategy to reduce dependence on ITA in the long run.
Though the company claims that the alternate faring engines solutions do not currently provide the level of comprehensiveness and accuracy that ITA’s software offer, we feel that in light of increasing threats from Google, reducing dependence on ITA could turn out to be a good long-term strategy for Kayak.
Based on the current estimated share count, we believe that Kayak’s equity is worth $25.16.