Avis Budget Group Inc (CAR) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the eBookers PLC quarter one results conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded for Web broadcast. I would now like to turn the conference over to Oliver Strong, eBookers PLC Investor Relations Manager.

Thank you and good day to everyone. Today, eBookers PLC reported its first-quarter 2004 financial results. By now, you should have all received a copy of the press release issued this morning. If you have not, then you can find it on the investor relations section of the eBookers Website -- www.eBookers.com. On the call today are Dinesh Dahamija, Chief Executive Officer and Nigel Addison Smith, Chief Financial Officer.

As a reminder, some of the comments made during this call by management and responses to your questions may contain some forward-looking information. These statements are subject to risks and uncertainties which may cause actual results to differ materially from those in such forward-looking statements. These and other risk factors are described in detail in the Company's listing particulars dated 17th of April 2001, are supplemented by the Company's supplementary listing particulars dated 20th of April 2001 and the Company's annual report on form 20-S for the year ended 31st December 2003 that was filed with the U.S. Securities and Exchange Commission on March 25th, 2004. Please note that all figures referred to in the call are in U.S. dollars and in accordance with the U.S. Generally Accepted Accounting Principles. UK GAAP pound sterling figures are given in today's press release. Adjusted pro forma measures are used throughout this call and are defined in detail with reconciliation to U.S. GAAP figures in the press release. Solely for the convenience of our listeners, the financial information in this call is expressed in U.S. dollars translated at the rate of 1 pound to U.S. dollar 1.84, which was the noon buying rate for March 31st 2004. At March 31st 2003, this rate was 1.575 and as of December 31, 2003, this was 1.7842. I will now turn the call over to Dinesh Dahamija, CEO.

Thank you very much, Oliver. Good morning to the participants in the U.S. and good afternoon to those participants from Europe. Without further ado, I would like to hand the call over to Nigel Addison Smith, our Chief Financial Officer.

Thank you, Dinesh, and hello to everybody. We have announced today a very pleasing set of results, significantly ahead of the expectations of our U.S. analysts.

Looking at sales growth, gross sales in quarter one were up 69 percent year-on-year to $290 million U.S. Pro forma organic growth; that is, including travel bags for January one month before acquisition, was 41 percent. This growth was driven by high online sales as Dinesh will outline in his part of the call. Revenue increased 67 percent year-on-year to $38.1 million. The pro forma organic increase was 41 percent.

Non-air ales performed very well, increasing to 39 percent of revenue in the quarter compared to 29 percent in the same quarter last year. This is an excellent shift. Air lodging remains strong at 9.2 percent due to our long (indiscernible) focus as Dinesh will explain.

Looking at our adjusted operating stops (ph), these consist of sales and marketing, technology costs, other administrative expenses, depreciation and net finance charges, excluding exceptional items. They were at 12.5 percent of gross sales for quarter one compared to 12.8 percent in quarter one last year. This cost base is set to decline further as our business model continues to add value while migrating off-line acquisitions to the Internet. Dinesh will detail the latest phase of cost reductions in his part of the call. They will enable us to make further progress towards our cost based market of 8.5 percent.

Adjusted pretax income for the quarter was a very healthy $1.7 million, compared to $0.2 million in quarter one 2003 and $1 million for the whole of 2003. This is significantly ahead of analyst expectations. Adjusted EBITDA was $4.7 million compared to $0.9 million in quarter 1, 2003; again, ahead of market expectations. Net income funds unadjusted for the quarter was $13.7 million compared to $8.2 million in quarter one last year. Finally, quarter one saw a further strengthening of our cash position to $92.9 million on 31st of March, up from $88.6 million at 31st December 2003. This increase was lower than expected due to the environment in the European air market during quarter one 2004 when some airlines modified the credit terms offered from travel agents for certain types of fares. Normally, eBookers has an average of 65 days to make payment to these airlines. This was reduced to nearly 30 days in quarter one 2004 with high levels of distressed inventory. As an aside, 30 days is the minimum airlines can go to, according to our IARTA (ph) bank settlement plan DSP (ph) contracts with the airlines. Excluding these customer money flows, this has no effects on the operating cash flow of the business.

That concludes my financial summary for what has been an excellent quarter across all metrics. I will be delighted to take any questions at the end of the call. I would now like to hand over to Dinesh Dahamija, our CEO, to review operational progress and then give a statement of trading and outlook.

Thank you very much, Nigel. As you have heard, this has been a good quarter for eBookers and a good start to the year. I would like to focus my part of the call and two key areas -- firstly, the cost reduction announced today; and secondly, some significant developments with our non-air products. I will then wrap up with current trading and outlook.

Looking first at the cost reductions, these are part and parcel of our business model. Our model is to take slow growth or no growth off-line travel companies and then convert them into high-growth online travel companies with low Internet cost basis. We aim to repeat this cycle with a new acquisition every 12-18 months. Integration is 95 percent of the work in any acquisition. We have successfully integrated 13 acquisitions now, 12 of them off-line. All are now delivering high Internet growth rate. With this experience, I believe that we have the best and most experienced management team to add real value by converting off-line acquisitions through the Web.

The online revenue growth of our business as far as conversions, is growing at 113 percent this quarter against quarter one last year -- against quarter one last year, compared to 13 percent for Web-enabled. As we are converting companies, our off-line revenues decreased by 13 percent. Travelbag was a slow growth business when we bought it with just 16 percent of sales via the Internet. Now in April, 54 percent of its bookings are via the Internet.

The success of its model of transforming off-line businesses into automated Internet businesses means that we continuously restructure our cost space. And we've announced today that we have reduced our European headcount by over 200. In India, two automation means (ph) that the staff of our outsourced BPOs (ph) have been reduced by over 70. We estimate that these redundancies and other efficiencies will reduce our net operating cost by at least $4.6 million for the rest of 2004. As further processes are automated and our business model continues to deliver, we will make further reductions and efficiencies. Our longer-term aim is to reduce our adjusted net operating cost to 8.5 percent of gross sales.

I now want to turn to our non-air business. As you can see, we have made great progress this quarter in building our non-air revenues. With initiatives in new management we are putting in, we believe that we can do even more. Before I look at non-air, it is important to point out that for eBookers, their margins actually very healthy at 9.2 percent. Our long unresolved positioning means that we largely avoid the commission cutting and fare wars that are affecting the shortfall specter. Across the industry in Europe, (indiscernible), which accounts for just 20 percent of our business, margins have fallen to as little as 1 percent in many cases. By positioning our business 80 percent in long and mid-haul and through improved contract negotiations, we have done a good job in keeping our margins at this high level of 9.2 percent. The outlook from negotiated fare margins on long- and mid-haul remain stable relative to margins on short-haul. This is because the high fixed costs of the large wide-body bent (ph) on these longer routes makes eBookers an important field management partner for the airline.

Additionally, customers traveling to long and mid-haul destinations often have a wider choice of airlines and routes than those traveling short-haul. This makes eBookers an important information aggregator for consumers and an important distribution channel for airlines competing on these routes.

Along with strong air product, we're changing our product mix to keep our margins rising towards our longer-term goal of 15 percent. The average hotel margin this quarter was 31.2 percent, trial (ph), 27.6 percent and insurance 69.9 percent. Our longer-term revenue target is to get to 50 percent non-air from its current level of 39 percent.

To help us get that, we have made a key appointment today. Runjin Singh (ph) will be joining us soon as Head of Hotels. He joins us from Expedia where he is Director of Lodging Demands in charge of people traveling from Europe to the rest of the world. Previously, he was in charge of Expedia in the Netherlands and Italy. He also has an M.B.A. from NCF and a wealth of IT and technology experience including work with a division of GE. As well as developing eBookers' hotel products, Runjin will help in further in further refinements to our dynamic package technology and also the sale of other ancillary products.

The good news continues with (indiscernible). Our new car (ph) booking engine launched early this year is especially delivering against our targets. Its average margin is very strong at 28 percent. All of its margin is retained by us as the business is 100 percent direct retail with no hotel cost of sales to travel agents. This is good programs at this early stage and we believe that it has a potential to become a major player and to compete seriously with others in the same market. The new car business is currently operating as a stand-alone web site in two locations -- the UK and Switzerland. We intend to incorporate it into our main UK and European web sites throughout 2004.

Turning now to current trading, let me read from our announcement today. After a strong quarter one 2004, trading to date is in line with expectations in our seasonally weakest April to June period. Excellent online growth has continued with organic online passenger growth up 59 percent in April 2004 compared to April 2003. We're carrying our cost reduction program during this seasonally weak period. As we have highlighted, the cost reduction program is progressing well. However, there may be a limited effect on trading during this period of transition. Our mid and long-haul focus largely (indiscernible) us from the increasingly competitive shortfall market.

Ladies and gentlemen, these set of results have been ahead of market expectations. We're delivering excellent online growth and as we Internet-ize (ph) acquisitions, we are taking costs out. Non-air is performing well with excellent prospects of future development. Finally, we believe that our long and mid-haul differentiated positions have differentiated our positions strongly for the future. Our model is working well.

It would now be our pleasure to answer any questions on the results or any other aspect of our business. The question and answer session will be conducted by our operator, who will remind you of the technical procedure for asking questions. Operator?

(Operator Instructions). Michael Novak (ph), Frontier Capital.

Hi. My first question is on the restructuring, can you talk about the steps you are taking to percent disruption and how many times have you gone through this procedure before?

We've gone through this procedure quite a few times before. As we mentioned, we've taken over 12 companies in the past. When we took over Travelbag last year in February in 2003, we didn't make 150 people redundant at that time. This is another 200 that we made redundant now. We've purposely done it during the low season, which is April and May and we've actually closed down 10 shops. So it will affect sales from those 10 shops. Those 10 shops have gone down in sales a lot. And a lot of those calls that come into the shops have now gone to the call centers, and of course online.

Also, you had mentioned that 2Q is your seasonally weakest quarter. Would you expect to stay above breakeven or would it be a loss quarter?

There's two things there. I think -- obviously, you guys over in the states won't be aware of this, but football frenzy is kicking off here in Europe. We have the European Football Championships where national sides compete against each other in June. And notoriously within the European travel industry, that period is very slack, in terms of travel bookings. And June, actually the market in normal years has picked up quite a bit. So that's obviously an additional sort of factor those things that have taken into the equation. Without obviously being able to give any specific guidance under the UK stock exchange rules, were I to say that our house broker, Evolution, here in the UK, I believe that they've got a note out today that indicates a very small loss in quarter 2.

Could I just add, Michael, this is Dinesh, that that does not mean that we don't get any bookings. Those bookings that were destined for June are either made in May or made in July.

We would hope to make a profit in Q2 because clearly it is so close to the critical point of profit or loss. We don't want to have expectations out there that will necessary definitely make a profit.

And then two quick questions. Can you break out the 39 percent of the business that is non-air -- hotels, cars and insurance -- as a percentage of revenue? And then an outlook for cash flow generation going forward. You mentioned the first quarter was below your internal expectations. Would you expect payables to expand in future quarters? Are you sort of stuck at this thirty-day window on a go-forward basis.

Could I just answer the split first of the 39 percent. Hotels was 17 percent, cars was 4 percent. So hotels was 17 percent, up from 12 percent a year ago. Cars was 4 percent, which stays the same; insurance was 7 percent -- travel insurance -- which was up from 4 percent a year ago. (indiscernible) and this includes dynamic packaging, was 11 percent versus 7 percent a year ago and advertising was 1 percent versus 3 percent a year ago. So that is the split of the 39 percent.

As far as cash flow goes, we have contracts with all airlines to -- we get 30 days credit from all airlines and these are contracts and this does not go down. The fact that people use to book in January to travel in July or book it in March with travel October; they used to pay deposits before when they made the booking and then a month before they travel, they would pay the full balance -- that has gone out of the window. And with some of the airlines in the low season where we have had distressed inventory. So instead of getting for 65 days, we're now getting around about for 30 days that we've contracted for. The gross margins -- this does not impact our cash -- this is not our profit. This money belongs to the customers or the airline and the airlines have asked their customers, could you please pay us upfront early, and otherwise, we're not going to keep the seats for you. I don't know if that answers your question.

Okay. Fine, I understand that, but what is your overall outlook for cash flow from operations going forward?

The underlying cash position of the group, excluding customer money, is a cash (indiscernible) position. Clearly, as it's in terms of trade with key suppliers, varies according to what is going on in the travel industry. We can find that it's sort of (indiscernible) our cash position can't alter it as we've found. I mean, we've had some fantastic distress inventory, but equally that means we have to pay them faster. As that position unwinds in the market and the airlines get on top of the extra capacity, it was hopeful in the marketplace for this summer and next winter, then we may well find that we go back to normal inventory on the negotiated fares deals as opposed to these distressed deals. While we're back to normal payment terms, it's a situation that we're monitoring very closely. But we can't have everything. They're giving us some great deals, but obviously they want cash faster.

Did your gross margins in the current quarter benefit from those distressed fares, or would you expect that to benefit future quarters?

In terms of year on year, our air margins were actually down slightly.

The reason for that, Michael, is that 20 percent of our business is short-haul. And short-haul has gone down to 1 percent margin. It's almost like the states, at zero percent. And long-haul, actually the margins have gone up. So the average between the two is 9.2 percent; from a year ago, it was 9.6 percent. So it's long-haul and our strategy has been correct to stay on the long-haul side and the mid-haul side. And we've kept our margins up. Now short-haul can go farther than zero percent, so that's not going to have that much of an effect anymore on the 20 percent of our business that is short-haul.

Thank you.

(Operator Instructions). Ashish Thadhani, Brean Murray.

Good afternoon. Good results. A few questions. I will start with the sales and marketing expenses, which have climbed to $20.5 million in the quarter. Can you explain directionally or in terms of magnitude what we can expect on this line item over the next few quarters?

In terms of the -- what it looks like, (inaudible) apparently the U.S. investor presentation is actually already on the web site, and one of the slides, it's page nine, has gotten detailed splits in terms of the quarter and the historics. But basically, the sales cost was 4 percent of gross sales for this quarter, as compared to 4.3 percent last year. Clearly, as the business increasingly goes online, that means the business doesn't touch the sales consultants and the principal element of our sales cost is the sales consultancy cost. And obviously, that is one of the key determinants in this recent cost reduction program. So really from quarter two onwards, you will expect to see a significant benefit coming through in that percentage.

In terms of the marketing expense, we spent 3.1 percent of gross sales instead of 2.7 last year. The -- quarter one is actually the quarter when we actually spend the most of the percent of your gross sales and during the other quarters, it does tend to be a bit lower. The reason why we spent so much was because the market was so good that we felt it was worth doing that. So those were sort of the key metrics. The marketing costs, as I've previously indicated, it's in sort of 2.6 percent gross sales across the year, and it's possibly slightly higher if it's in the market, you know sort of a reasonable yardstick. And in terms of the sales number, obviously, there is a one-off cost reduction coming through in the sales force with the closure of the five shops and sort of the various other things that we've done with the sales force. And that number obviously will according to the extent to which we can continue the fantastic online growth that we have been receiving.

Taken together, sales and marketing, going from the level that we've just seen in Q1, $20.5 million -- in obsolete dollar terms, you do expect that to decline?

We don't (indiscernible) because it is dependent on a number of different factors. For example, in a good market, we may actually spend more on marketing equal if the online growth did not come through at the rate we were expecting, then we might have to retain more sales consultants. It is dependent on the extent, number of different market conditions.

I would like to add, if I may. (indiscernible), the reason why we've split sales and marketing is that sales -- costs are under attack through Internetization; marketing is not. And the reason why we've stuck to percentages, which is 4 percent for sales and 3.1 percent for marketing, is that if we get a lot of growth, then the absolute number will also grow. What we're trying to do is get the 12.5 percent of costs, total costs, including depreciation, interest, etc., down to 8.5 percent. Now the two points of attack are in our cost reduction program and now one in the future, will be sales costs and general and administrative costs. And these between them are 7.7 percent of the 12.5 percent. So those are the places where we're going to be going for. If there is anything, marketing might stay there or go up or down. It depends on what our competitors do and also depends on the market.

Understood. Thank you. Moving on to non-air revenue, it seems on a dollar basis, it went from 11 to $15 million in one quarter, from December to March. Is this sustainable traction? Can you just explain what exactly happened and -- or are there some specific events that we should be looking at?

In terms of the sort of mix, as Dinesh indicates as to where we're at with hotels at 17, cars at 4, insurance at 7, holidays at 11. Talking through each of those in turn, the insurance, we got the boost actually in quarter four where it went from 4 percent to 6 percent as our turnover -- revenue, sorry -- and the insurance team are doing very well here to make sure that people seem to be focused. On the car side, clearly, that has been more complex and will take time to pick up. And we have actually seen within April now a significant pick-up and our cars. So we're hoping, if the trends continue, as we've seen in April, to be able to announce some good news on the revenue front on the car side. And that has been hovering around the 4 percent of gross sales -- actually, 4 percent of our revenues and we're expecting to see some gain on that in quarter two that we can update you on at a later date. And clearly, the big area that the guy from Expedia will assist on is on the hotel front where we have managed to increase from 12 percent to 17 percent year-on-year from quarter one of last year to quarter one this year and obviously hope to gain significantly with what we're doing with our various hotel initiatives, including the Pegasus technology solution. Also, our non-product database and having someone heading up the hotel (indiscernible).

And (indiscernible) actually share margins, even though we thought margin would not improve, have improved quite a lot. Product margins have gone down, but hotel margins, perhaps slightly; cars have certainly gone up over 4 percentage points, insurance has gone up over 10 percent at nearly 12 --.

I wouldn't read too much into that.

You know, holiday has just gone up from 26 to 38 percent.

We've seen that (MULTIPLE SPEAKERS).

Those might go up and down and as the case may be, it depends on the holidays bought. But what we want to do is, it might be that we've (indiscernible) 61 percent air. It might next quarter go to 63. But the trend is downwards and we hope to get to 50 percent, and don't ask when.

If what we have achieved on the cars and the insurance -- I know you haven't seen the evidence yet of the cars -- it can be repeated on the hotels with having the right person on top driving it, then hopefully we will start achieving on the hotel front.

There's nothing that would suggest that you get a big surge in the March quarter relative to other quarters in non-air, right?

No, it's not a seasonal factor.

Okay. Also, you had indicated last quarter -- did you get that $1 million benefit from the fourth quarter because of revenue recognition?

Yes, we certainly did.

So that came through as $1 million -- is that right?

No, it wasn't (indiscernible) that. I think the number was near $800,000, I think. And the reason why the revenue U.S. GAAP adjustment is only a small number. In terms of what we've been doing in large ADS (ph) contracts, we actually had a negative figure going the other way. So that is why the net revenue U.S. GAAP adjustment is relatively small. We have got more details here, any one (indiscernible) if you want them e-mailed through.

A couple of quick questions also. Online and Web-enabled revenue -- where is that today as a percentage of the total and where was it a year ago? Because it seems that that is what is driving some of the productivity gains that you talked about.

It's certainly high relative to a year ago. We have not given those numbers out. And I don't know, Nigel, we're not going to give those numbers up? So, we haven't given them out to anyone. What we have said is that our -- I'll just stake out (ph) the numbers. Our online growth in the first quarter was 113 percent. If you remember, Expedia in the CIBC Conference in New York in February, said that their growth was 90 percent. So we're in the same ballpark. Web-enabled growth was 13 percent and our off-line growth was -- shrank, minus 13 percent. So because we take over off-line companies and take them online and we don't take them over because we feel that we need to buy their profits or sales, but we take them over for their content. And as you know, we took over Travelbag for the destination focus of Australia, New Zealand and around the world. They do have a ramp off-line, which does decline, and thus our growth comes down to -- I think it's 47 percent or organically, 24 percent.

You've broken these out in three categories, and what I was trying to get at is the faster-growing categories represent what percentage of revenue? But you've indicated you're not giving that number out.

Actually, we'll give it out next time. It's way over the majority. Don't worry about that.

Finally, what was the specific Barclays cash flow covenant that was waived in the quarter?

We had what was described as an absolute cash flow covenant. The details are in our 20-F filings. The Barclays facility agreement is actually a material agreement under -- within 20-F. But basically, it was a covenant that we were never particularly happy with, given the volatility of the cash coming in from bookings and when we'd pay our supplies. Because actually, our cash balance, to respected one tends -- it does tend to go up and down for a loss (ph). And clearly as we have seen, if you do get a (indiscernible) alteration, in terms of trade, you can find one's self in this situation. And given it's actually custom money anyway. So fundamentally, it's this absolute cash flow covenant. And bizarrely enough, it was actually under review with Barclays as to whether it was actually an appropriate covenant at all and we had actually had a number of conversations with them over the last 3-6 months.

Suffice it to say that they've waited anyway. I think if you see the trend here, Ashish, you will see that there are seven covenants that the Barclays Bank has out us regarding borrowing. And I think it's a good thing that we have covenants. It gives them the mission to come to the table and discuss and find out more about the business and how things are going and what is happening. And it's good for us to monitor them and we do so all the time. And one of these was the cash flow customer.

(indiscernible) it's -- in terms of the business model, it's no big deal. It's the covenant that we'd obviously (indiscernible) wasn't there, given the volatility of sort of the cash flows in our business according to how we do our (multiple speakers).

We are negotiating with them and in the next month or so, but well before second quarter results, I hope. We will be able to get some proper types of covenants.

Thank you very much.

Stephen Kaplan (ph), William de Broe.

Hi. I wonder if you could just talk a little bit more about the flight margins. You sound quite confident on your margins in long-haul. Presumably over the last sort to 12 or 18 months, there has been quite a lot of distressed inventory coming available from the airlines. And as volumes are recovering in the airline industry, presumably the amount of distressed inventory is going to shrink. If that is so, is it reasonable to expect that you were able to sustain these quite high margins in the medium-term?

Hi, Stephen. Dinesh here. If you look at our margin over the last year and a day (ph), you can see that we have -- our margins have been pretty steady. And the real shakeout has been in the short-haul environment. And we have seen people like last -- one of our peers -- like Last Minute and Expedia suffering a lot because Ryan Air (ph) and Easy Jet have gone in and with huge excess inventory on the European routes. This is not the case in a big way on the long-haul routes for two reasons. One, if the UK -- British Airways flies from London to, say, Johannesburg in South Africa, then South Africa average is also liable to fly from Johannesburg to London. And there is an equilibrium -- you just cannot put on another four flights if you feel like it. And the same goes for every single country on the long-haul route and all pilots stay in their aircraft, usually the 747 400.

So as far as we're concerned, we know the long-haul mid-haul market very well. Our negotiations have taken us to much higher negotiating points, in terms of margins in the long- and mid-haul market because if you had reduced short-haul margins from 6-8 percent to 1 percent, and we haven't increased long-haul margins, margin will come down from 9.6 to perhaps 6 or 7 percent. Now they are at 9.2. So we have been pretty vigilant and on an increased margin. Now you might say -- what happens in short-haul, what happened in long-haul? Just to let you know that the no-frills concept of Southwest Airlines has never been replicated in long- and mid-haul, haul because it's far.

Well, I think Freddy Laker (ph) might disagree with you, sir. But I wasn't really meaning that. The question I was asking is that -- long-haul fares have been pretty cheap because people haven't been wanting to travel. As a consequence, capacity growth has slowed and with an actual growth in demand, the demand capacity balance has moved in more in favor of the airlines. As a consequence of that, I would have expected that margins in long-haul segment would also begin to get squeezed, because obviously airlines are desperate to try and make some money and restore their balance sheets. And I was just curious as to why you thought felt comfortable that you would be able to sustain the margins of 9-10 percent.

I think just in terms of the dynamics of what has been happening in the long-haul market over the last 2-3 years, really ever since 9/11, there has been a huge amount of wide-body capacity has actually been taken out of the market and there's rows and rows of brand-new 777s and 747s and AT40s depart from the Arizona desert. British Airways has about 20 747s parked at Cardiff. And all of those aircraft have come back into the system for this summer and also this coming winter. And so what has actually happened, because last year a huge number of aircraft were taken out of the system at the time of the war and SARS, some of them having been put back on again after 9/11. What we're seeing now is the first time since before 9/11 of the full wide-body fleet around the world actually operating again. And this is what has precipitated this incredible array of distress fares that are actually out in the market now. It's because every -- I mean, to put it into context, as far as I can understand, I mean Virgin Atlantic for us and 9/11 have 34 wide-bodied aircraft flying. They've reduced that to 24 after 9/11 and I think they're now up at 40. That is just one carrier operating out of the UK.

The effect that this has had in our mid- and long-haul market has really been quite significant. And so there's a huge amount of excess supply that is going to be stoked up in the marketplace over the next couple of years. So what you've then got is all of the aircraft that these airlines ordered some years ago -- for example, all the A380s -- start coming off the production line soon at Airbus. There's a lot of other aircraft that have been ordered, particularly having suppliers of ours like Emeris (ph), have got huge order books of aircraft, many of which are operating the critical Europe to Asia markets (indiscernible). So actually when you look at it, in terms of the dynamics of sort of wide-body deliveries coming out of Boeing and Airbus and what's in the marketplace, we're reasonably confident about the future for long-haul really going out through this decade.

Thank you very much.

(Operator Instructions). Eduardo Kosta, (indiscernible).

Hi, guys. I just had a question on the slide on page 8 that talks about the change in product mix and the margins and how margins were basically constant for year-over-year, Q1 over Q1. And I was just trying to understand -- it seems like the lower margin parts of your business like flight decreased as a percentage of turnover and some of the higher margin areas like hotel went up as a percentage, yet the overall margin was constant. And I would have thought intuitively that the overall margin would have increased, given the mix shift.

In terms of the arithmetic, it's because flights are such a significant component still of our turnover. But even though a relatively small reduction in flight margins can actually offset the effect of the increased margins elsewhere. (indiscernible) as well (indiscernible), it was a bit surprising actually (technical difficulty) Dinesh (indiscernible) with the arithmetic I can assure you does add up.

In terms of what we're doing with air or non-air, the history of this Company is basically a number of travel agents across Europe, all of whom are flight specialists. And the big opportunity for this group has been developing the cross-sell of non-air product because we've achieved the flight customer, so we have actually captured the customer. And obviously, this is an important element of the CRM strategy that we're rolling out as well at the moment, is to ensure that we've managed to obtain the hotel booking. If they're hiring a car, the car park (indiscernible) and obviously try and sell some travel insurance because they don't have an annual policy. And that is the big, big drive and we have clear strategic objective of getting to a mix of air and non-air at 50 percent. And obviously getting to 61 percent, we feel is very good progress.

I see. Just for clarification, could you help us understand what is in sales and what is in marketing? What is the difference between the two items?

The sales is principally the sales consultants.

I', sorry, I didn't hear.

Sorry -- principally the sales consultants we employ to answer the telephones and sit in the remaining shops within the group. And there are things like credit card charges in there as well and there's a couple of other sort of items. And then marketing where initially, the cost of the marketing department and people, thus our advertising spend.

Okay, great. Thank you so much.

Michael Novak, Frontier Capital.

In your 15 percent long-term gross margin number, what is the assumption? I assume that's with flights at 50 percent of revenue like you have said in the past. What is the assumption for the margin in that 15 percent?

What, the flight margin?

Yes.

In terms of the 15 percent, we are actually assuming that there is a degree of margin dilution across the piece, excluding -- we cannot be in the situation where our margins keep on going up, and obviously, as the market gets more competitive. And so if you actually extrapolate forward all of those figures on this particular page, page 8, you'd like to get to a margin that is way in excess of the 15 percent.

That's what I'm getting at.

So it is basically 15 percent is a cautious estimate, because if you did extrapolate everything forward, you do end up with I think something near 18 percent.

But specifically for flights, what is the assumption built into that 15 percent?

We are desperately trying to avoid being specific on any one piece because -- try and predict how the travel industry unfolds in Europe sort of, it's clearly very difficult. While I would logically have expected sort of flight margins to sort of, I want to say constant or possibly there to be some erosion. But the reality is, given what we're seeing with the way the airlines are putting on more capacity, then clearly, there's a potential actually for the margins to stay where they are. So I think it is very much determined by what the airlines choose to do. But if they keep putting on the capacity, we'll keep on having the margins, thanks very much.

Okay. And in terms of the growth rates for hotels, and you had mentioned you hoped to have some good numbers to report in the car segment for the second quarter. Can you just give us some sort of sense on what you would think those businesses are capable of this year and sort of their longer-term growth rates?

I think it was the car hire side. I mean literally, we only launched that as sort of a new initiative back in sort of late January, early February. It's too early to say -- I mean, you know, we were sort of disappointed and then suddenly, we found in April that they were ahead of budget. It is volatile at this stage and I think we'll just have to watch it as it progresses here in the quarter this year. But certainly, the signs in the last six weeks are very positive.

On the hotel side, clearly, we have done a lot of work on that side. So I think it needs a champion, and hopefully we have found the right person. So I guess the benefits with him joinable will only be derived probably at the very earliest in August, if not later. So I think, too, the potential is there. But I think at this stage to try and make predictions at the outset would be difficult.

Okay, thanks.

Stephen Kaplan.

Just if I may ask another question just on strategy. Forgive me, I'm new to following your company. I just wondered if you could talk a little bit about this strategy. You want to buy off-line businesses and take the business on-line. I can understand the principle behind that. (indiscernible) you can just talk about how you have arrived at that and how you assess the (indiscernible) of doing that against buying online competitors, or against growing a new Internet brand in a specialist area as a greenfield? And as part of that, could you perhaps please talk about how you see the drawbacks and advantages of having more than one brand?

Let's answer your first question, which is -- why do we acquire companies, rather than start organic online companies or buy online companies, correct?

Yes, please.

Okay. There are not enough online companies who specialize in the categories that we're looking at. For example, in Europe, we're not in Italy. We need to buy a company in Italy to get the trading licenses and the merchant fares to be able to sell there. To start one organically, it would be very, very difficult to buy, to get the merchant fares because merchant fares have grandfather rights and only 10 or 15 or 20 agents get them. So we'd have to buy one of this 10 or 15, 20 agents.

Secondly, we are very small in France and Germany and we would like to buy rather than add (indiscernible) our organic growth to the relative population of those two countries. That is just reach. I gave you a couple of examples there.

Now let's look at destination focus. We bought Travelbag so that we could get Australia and New Zealand round-the-world Pacific focus, and we now are the largest carrier in Europe on that. We would very much like to be good on South America, the Caribbean, Africa and other places where we're not very good. We're good on Europe to a certain extent. We don't want to be too good on Europe because it's short-haul. We're good on the states and the Northern American continent. So that is the second strategy.

Then the third one is product. We're good on flights but we're not good on hotels or cars. So there is a travel agent that specializes in hotels or specializes in cars. We would want to buy them. And there are not many Internet companies, if any, in that field as well. So those are some of the reasons why we need to buy companies. First, with cars, we've started our own organically. But with destination focus, we've (indiscernible) both Travelbags, which was about 15 months ago. And the last thing that I want to say is that we're in the leisure travel market. We want to become a full travel portal. To do that, we have to one day go into business travel. We might have to go one day into conferences and incentives. And I can give you another half-dozen categories, but I don't want to give all of this information to our competitors.

Thank you.

(Operator Instructions). There are no further questions at this time. Please continue.

Thank you very much for your questions and for joining the call. If after this call, you have any further questions from me or my colleagues, then please contact our investor relations manager Oliver Strong on +44 for the UK -- 207-489-2239, or e-mail him at oliver.strong@ebookers.com and we will get back to you as soon as we can. Thank you for your time and may I wish you all a good day.

That does conclude our conference for today.