International Travel: Rapid M&A Momentum

Demand for worldwide travel and leisure is growing strongly once again, and investor interest in best-performing businesses is resurging. Earlier this year, Harris Williams advised Scott Dunn, one of the world’s top luxury tour operators, and Direct Ferries, a leading global online travel agent dedicated to ferry tickets. These two transactions exemplify the M&A opportunities that are increasingly prevalent across the international travel sector in the post-COVID world.

In this article, senior bankers from our Consumer Group and Technology Group share insights on why the international travel segment is attractive, what made Scott Dunn and Direct Ferries exceptional investment opportunities, and key considerations for buyers and investors interested in the sector.

Key Takeaways

• International travel continues its strong recovery from the challenges of the past few years, with many leading businesses showing improved financial performance.

• The best travel businesses differentiate on product, exceptional service and customer-centric approaches, and the ability to manage customer acquisition costs (CAC) while growing customer lifetime value (LTV). Better management of these key metrics is often underpinned by platform and technological strength.

• Scott Dunn and Direct Ferries are prime examples of international operators attracting strong investor interest.

Why is international travel an appealing sector for investors?

A strong recovery is continuing in the travel and leisure sector as consumers continue to prioritize spending on experiences over products, even against a less certain consumer macro backdrop.

“Consumers are demonstrating that they crave the experiential nature of travel, particularly after these experiences were impeded by the pandemic,” says Will Bain, a Consumer Group managing director. He adds that domestic travel came back quickly once pandemic restrictions were lifted, and that international travel is now continuing to drive momentum.

Bain estimates that global passenger volumes are around 85% to 90% of pre-pandemic levels. Different segments within the sector are returning to pre-pandemic passenger volumes at different speeds. Some, such as domestic vacation rentals, are already well above 100%, while others, particularly long-haul travel into Asia, are still lower.

While passenger volumes are typically still down, many leading travel businesses have seen their financial results evolve for the better coming out of the pandemic. However disruptive the pandemic was to travel, it did present a unique opportunity to reshape businesses in a way that may not have otherwise been possible.

In terms of revenue, technology investment has enabled more sophisticated pricing optimization for many travel businesses. Likewise, the significant cost inflation across airfares and hotels has driven higher average booking values. On the expense side, sustainable cost rationalization combined with investment in technology has seen greater fixed cost leverage. And in many cases, that investment in technology now underpins a more efficient marketing engine, with leading operators achieving lower CACs than before the pandemic. In a world where like-for-like channel costs should continue to grow, having a broad marketing channel mix is critical.

The net effect is that many travel businesses have delivered strong margin accretion compared to 2019. Further, many leading operators are now generating higher EBITDA levels in absolute dollar terms, even though passenger volumes may still be down. Bain believes this improved profitability should be sustainable.

“The combination of resurging passenger volumes and these newfound profitability margins means that many operators should see continued strong growth at the EBITDA level into the medium term,” adds Ed Arkus, a managing director in our Consumer Group. “It is this solid outlook which has created a strong potential investor base in the travel sector, whether from private equity, longer-term capital, or strategic buyers.”

How are leading international travel businesses able to differentiate?

While there are many different business models across international travel, there are several ways that the best-in-class travel businesses distinguish themselves from the pack to generate sector-leading financial and operational KPIs.

These have typically included one or more of the following:

• Cutting-Edge Technology – a foundational pillar of all best-in-class platforms that provides the tools that enable management teams to drive all core KPIs

• Multi-Channel Marketing Strategy – with constant optimization enabling lower-cost customer acquisition

• A Compelling Product – whether diverse, differentiated, or unique

• Superior Customer Service – pre-, during, and post-vacation. This is particularly important in driving repeat purchase and customer LTV

Within the premium and luxury travel segment in particular, we see customer service as an essential prerequisite to win over the long term. Being able to have a direct dialogue with the customer and fully understand their needs and requirements gives them a significant competitive advantage. “If you are spending significantly on a vacation, you want to know that the travel agent you are using knows their subject matter inside-out and that the itinerary has been tailored,” says Bain. “It’s hard to win in the complex tailor-made segment without this extensive engagement.”

The market for third-party arranged private premium and luxury travel is one of the fastest growing travel subsegments in both the U.S. and the U.K. Despite macro-economic uncertainty, demand from customers in this demographic segment is resilient. It is buoyed by a growing number of high-net-worth individuals, a greater frequency of travel, and a pronounced shift in the U.S. among these consumers from group travel to private travel.

The shift from group travel to private travel is particularly noticeable in the U.S. This is being accentuated by more travel brands selling direct to the customer, rather than via intermediated channels. “These businesses often have unrivaled expertise in specific destinations and types of trips,” says Zach England, a Consumer Group managing director. “They use that knowledge to put together highly personalized private travel arrangements, and the market is responding.”

Another area of opportunity within international travel is the ferry market. This segment is large and highly resilient, with the European market expected to continue its growth trajectory over the long term. “Across the Mediterranean, Northern Europe, and the Nordics, the online addressable market for ferry bookings is estimated to grow steadily through 2028,” notes Arkus.

“This growth is driven by a number of compelling tailwinds, including higher volumes supported by rising flight and car rental prices, higher demand for pet- and car-friendly travel options, and a greater desire for environmentally friendly travel. These themes are growing online penetration and aggregator market share growth,” explains Bain. “The ferry market will continue to benefit from these trends and offers significant headroom across all core source markets.”

What made Scott Dunn and Direct Ferries exemplars in international travel?

Scott Dunn Luxury Travel

Scott Dunn is a leader in service-led, luxury, tailor-made travel. The company is focused on delivering a truly one-of-a-kind guest experience. “The Scott Dunn management team has built a guest-centric and multi-award-winning brand with a market-leading position in the luxury travel space,” says Bain.

“Scott Dunn is bespoke and hands-on, and its travel consultants are true subject matter experts in both travel experiences and destinations,” says Arkus. “The company is able to create exemplary luxury holidays to over 100 destination countries, across multiple trip types—from honeymoons to safaris, to tailor-made touring, ski, and expedition cruising—attracting a loyal and resilient guest base.” Its exceptional levels of guest satisfaction are evidenced by consistently strong net promoter scores across all business units and sector-leading repeat customer rates.

Krishna Patel, a director in our Consumer Group, summarizes that the best travel businesses today are differentiated because they have a very clear view of their point of difference. “For Scott Dunn, it’s about giving guests exactly what they want in a private luxury vacation,” he says.

“Companies with a truly differentiated offering have an advantage,” adds Arkus. “Unique platforms, such as Scott Dunn, are building direct and loyal customer bases through high-quality experiences, customer service, and tailor-made options for guests. It’s a formula that can lead to high levels of repeat bookings, delivering strong levels of profitability and market share growth.”

Direct Ferries

Direct Ferries is the top choice for ferry passengers worldwide and the largest global platform in the sector, offering passengers a seamless ferry booking experience with unmatched choice and customer service.

The company provides the most expansive inventory of ferry routes globally; best-in-class comparison across operators, times, and prices; and a leading customer experience. “All these traits lead to a simple and smooth process from booking to arriving at the port,” says Patel. “This creates consistently satisfied customers who rate their experience highly and book again.”

Direct Ferries is also the preferred partner for operators around the world, delivering international passengers from nearly 200 countries to its loyal base of operators. “Direct Ferries supplies incremental global travelers that operators can’t acquire themselves,” says Bain. “The company solves key operator challenges, while adding tremendous value, by driving bookings from international source markets and providing native language support for a multi-lingual audience.”

“This is enabled by Direct Ferries’ market-leading position across multiple European source markets, data-driven and highly automated approach to digital marketing, website UX, tech sophistication, and application of data science across the business,” adds Arkus.

What should investors interested in this sector know?

COVID-19 was a defining moment for many travel businesses. Those that survived have generally come out stronger. “The better operators took the pandemic as an opportunity to rationalize and invest rather than sit and watch,” says Martin Keck, a managing director in our Technology Group. “They rebuilt their businesses from the bottom up, and invested in technology, infrastructure, and people. Now they are more efficient and profitable and are taking market share. For those performing due diligence on businesses in the sector, it is critical to get a sense of how KPIs have shifted since 2019, and how sustainable those changes are.”

Bain adds that travel has historically been an attractive sector for investors. As the environment continues to normalize, and the best players emerge from a difficult period in their existence, there is growing investor interest in the sector once again. “It’s a sector that suits a range of M&A strategies and a varied buyer universe,” he says. “There are many pockets of opportunity as international travel continues to gain momentum.”

For the best operators and their investors, the outlook is strong. To discuss M&A opportunities across the travel and leisure space in detail, please contact our senior professionals.