EDREAMS ODIGEO S.A.
Fitch Ratings has affirmed online travel group
The affirmation encapsulates eDreams' increased rating headroom as trading performance has recovered, driven by a rebound of air travel alongside rapid growth in prime subscribers. The latter signals good progress in the group's transition to a subscription-based model, which has been achieved with competitively priced air tickets and strong investment in acquisition costs that are at the same time constraining group profitability. We estimate that trading recovery should return eDreams' credit metrics in the financial year to
Stable or decreasing churn rates of prime members resulting in improving profitability and financial leverage would signal a successful transition to a subscription model and could lead to positive rating action.
Key Rating Drivers
Recovering Profitability: We expect EBITDA margin to increase to close to 14% for FY23 from 9.6% in FY22 as a result of revenue recovering to pre-pandemic levels. Fitch-adjusted EBITDA includes cash inflow from the increase of prime subscriptions received but not yet recorded as revenue. Profitability remains subdued by high acquisition costs of new users, in particular as a result of the ongoing business- model transition focused on growing its prime members.
We see EBITDA margin trending towards pre-pandemic levels of up to 20% by FY25 once the number of prime members stabilises. This will however be subject to stabilising or decreasing churn in prime members and keeping discounts under control.
Macroeconomic Challenges Delay Deleveraging: We assume an inflationary and a higher interest-rate environment, with a resulting decrease in disposable income for discretionary activities, will affect spending on travel in FY24. Therefore, despite the continuing benefits on revenue growth from new prime subscriptions, more cautious consuer spending could affect product mix and weigh on the average revenue per booking, consequently slowing profitability growth. While eDreams has improved its rating headroom with a forecast EBITDA leverage below 6.0x at FYE23, we expect deleveraging to temporarily slow in FY24 as the economy cools.
Continuing Transitioning Strategy: eDreams has made significant progress in its business-model transition into the first subscription model for the travel industry with approximately 3.6 million prime members as of end-2QFY23, up from 1.7 million a year before. However, it remains to be seen if the group can limit the rate of churn on its enlarged and growing membership base.
While cross-selling opportunities from the subscription model will help increase income to fund subscriber discounts, our rating case projects more conservative sales growth relative to management's ambitious expected market-share gains and levels of repeat bookings from members.
Cash-Generative Business Model: eDreams operates an asset-light business model with a flexible cost base that has proved resilient during the pandemic, while, however, spending some
Following
Strong Positioning in Competitive Market: The global online travel agent (OTA) market is characterised by low switching costs and intense competition from bigger and more diversified operators, metasearch sites and the direct channels of airlines and hotels, making industry players more vulnerable to higher customer acquisition costs and rates of churn. However, the highly-fragmented travel industry in
Leisure Recovery Ahead of Industry: eDreams' focus on leisure has been beneficial, as this part of the market has recovered much faster than business travel following the lifting of pandemic-related restrictions. We expect disruption in the wider travel industry to last until 2024 and 2025 for airline capacity and hotel occupancy, respectively, with international travelling lagging domestic trips. However, eDreams is well-positioned to benefit from the faster growth prospects in leisure, albeit due to the non-recurring pent-up demand of leisure customers.
Limited Booking Diversification: eDreams' business mix offers certain diversification between sources (customers, fees from stakeholders and payment providers etc) and products (flights, hotels, cars, insurance) but the group is mostly exposed to the flights market. It operates in 44 sourcing markets, although its top six regions account for 74% of revenue, led by southern
Derivation Summary
eDreams lags the global leader
Compared with hotel operators such as
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Bookings from prime and non-prime members at 15.6 million for FY23, growing to 20.5 million in FY25 as prime members increase on average to 5.5 million from 3.7 million
Revenue per booking decreasing to
Fixed costs at
Variable costs decreasing to 72% of revenue in FY24 and 68% in FY25 from 80% in FY23 as a result of lower acquisition cost alongside a slowdown in new prime members
Capex of around
No acquisitions to FY25
On average, modest capital inflows excluding increase in prime deferred revenues to FY26
No dividend distribution
KEY RECOVERY RATING ASSUMPTIONS
eDreams would be considered a going concern in bankruptcy and that it would be reorganised rather than liquidated. We have assumed a 10% administrative claim in the recovery analysis
Fitch assumes a going-concern EBITDA of
We assume a 5.0x distressed enterprise value (EV)/ EBITDA. The distressed multiple reflects a weaker competitive position than global leaders' and the disrupted industry in which eDreams operates (compared with regular software companies)
The abovementioned assumptions result in a distressed EV of about
Based on the payment waterfall we have assumed the group's
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Visibility on stabilisation in travel demand, successful resumption of bookings and signs of consolidation of the group's subscription model
Total debt / EBITDA below 4.5x
Positive FCF generation sustaining liquidity buffer
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Incapability to deleverage with total debt / EBITDA above 6.5x
Increased volatility in profitability with FFO margin below 10% on a sustained basis
Liquidity deterioration as a result of delayed industry recovery leading to over-reliance on RCF or external liquidity requirements
Secular decline or deterioration in the OTA business model from a shift to direct bookings or failure to transition to the subscription model
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Limited but Improving Liquidity: As of
Issuer Profile
eDreams is one of the world's largest online travel companies and one of the largest European e-commerce businesses (market share of 5% of european air market share). It provides access to over 690 airlines and 2.1 million hotel partners for 17 million customers across 44 markets every year.
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