Latin American online travel agency Despegar built up momentum across various elements of the business in 2023.
Among other achievements, the company hit its highest ever revenue figure of approximately $166 million in the second quarter, which was also its first positive quarter since 2019. The company also continued to build up its “high margin” packages business, attracted millions to its relatively new loyalty program, launched a generative artificial intelligence trip planner and further developed its B2B business.
The focus for 2024 is to maintain and capitalize on that momentum. PhocusWire talked to Despegar CEO Damian Scokin about the year ahead, the role of artificial intelligence and growth opportunities.
The interview has been edited for brevity.
What’s on your priority list for 2024?
I would say that we have first of all a very attractive market opportunity ahead of us. Latin America will continue recovering from the pandemic. We will just reach pre-pandemic travel levels along the year and continue to capture pent-up demand on top of that specific market opportunity.
There are specific efforts we will launch to increase our growth trajectory, which are our B2B focus that has already yielded very strong results in 2023. Our B2B bookings grew more than 50% in 2023, and we expect that to continue growing significantly with a huge opportunity ahead of us. It all started when we acquired Best Day, that came along with a strong B2B business, and we will take that to all other regions in Latin America. Brazil, we started last year, and in 2024 we will launch Argentina and other countries with the B2B footprint.
Second, we have planned a lot of feature enhancements on the site. One that is taking a lot of our efforts is the interaction of artificial intelligence and how that will bring in a completely new wave of technological transformation in the way people not only book and transact but also how people plan their trips, research their trips and how people are serviced. And how we can remain closer, and more effectively closer, to our consumers while they are traveling. That’s the main focus of our technological effort in 2024.
In addition, we will continue looking for ways to consolidate the industry in Latin America. There is always a strong M&A (mergers and acquisitions) pipeline, a pipeline we are optimistic will yield results from additional transactions in 2024. So there’s a lot of things going on in Despegar.
Can we go a bit deeper into the B2B focus, I think it’s Hoteldo and white labels?
Yes, it’s two different pillars. Hoteldo is a technology platform and content for smaller travel agencies and then the B2B2C white labels (pillar) is us supplying our technology platform and content to partners like a bank, or a retailer, that has a loyalty or affinity program and wants to provide travel to their consumer base. B2B2C is something that will allow us also to grow beyond Latin America. We are in conversations with some partners outside the region. That’s a way we can leverage our technology platform, leverage our inventory and gain access to consumers outside Latin America without having to build a brand from scratch and without having to buy traffic from Google.
That must be quite a competitive landscape, but you still see opportunity outside Latin America there?
It’s not only something we see, it's something that some clients have voluntarily approached us about. Some multinationals, banks that operate with us as a partner in Latin America, have said, "Can you come to Europe or the United States to do the same for us in other regions?" It’s more a pull demand than us going out. We can use our technology platform and in some instances our relatively small size is an opportunity because we can tailor our offer to something our clients want. We have a very flexible and scalable technology platform.
In your last earnings you talked about the growth of Brazil. Can you talk about where you see geographical opportunities for growth and what elements of the business are appropriate for those geographies?
I would split the answer in two. In terms of geographic growth in Latin America, we have been very much focused in the past two years on Brazil and Mexico. You can see that in our organic and inorganic growth. We focus on targets in those regions. I would also add Colombia.
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Our organic growth in those regions, particularly in Brazil, is going to be accelerated through rationalization of the market after the bankruptcy of 123Milhas. So we have ample growth opportunities where we are the largest player but still with ample room for growth because of the fragmentation of the market. That applies both to B2C and B2B.
In addition, a second avenue of growth is B2B outside Latin America, that’s what we are exploring.
So B2B is a big play for you. Are there other areas of the business, more to do with the core online travel agency business where you see opportunities for growth?
The key component of our growth in the B2C space is packages. To continue developing features and offers for the consumer to further push the penetration of packages. Packages account for north of 40% of our B2C sales. We believe there is ample growth for taking that north of 60%, which is a greater value proposition for the consumer, a one-stop shop, better prices and also better for us because it allows us to have better terms and conditions with suppliers.
Can you talk about gaps where you might be exploring M&A activity?
We follow a very disciplined criteria for looking at M&A opportunities. The one I already mentioned is geographic scope. Second is how the potential target transcends both our product offering and our sourcing capabilities. We want to leverage inorganic growth as a way to gain more scale in sourcing. Third, capabilities, for example in the case of Best Day, around acquiring a B2B capability and technology platform that enriched our offering. Those are the criteria. You can imagine that within that there are a certain number of targets in each geography where we’re having conversations, but we’re very disciplined and we’re very conscious of not paying more than what the target can generate in value for shareholders.
When you look at the pillars and the strategic focus you have just laid out, what are the challenges to achieving those?
I wouldn’t say we see particular challenges to achieving those things. I would point out the natural challenges of the travel industry in Latin America. The travel industry is a very dynamic industry. If you don't evolve quite fast, you start getting left behind because everyone is moving very fast. And obviously, Latin America is a challenging region in terms of volatility and payments; we are experts in that. So we don’t see any particular challenges other than historic challenges of travel and the historic challenges of Latin America, and some of those are actually assets in the way we deal with them.
Is there anything that stands out for you in the behavior of Latin American travelers or perhaps specific to one country that you’re focused on?
One of the key aspects of travel in Latin America in the past 18 months is that consumers are willing to pay, and are paying, higher prices than ever because the prices of air tickets and hotels, as in other regions of the world, are at a historic high. But the Latin American traveler has diverted expenditure from other categories in order to continue to travel, and we’re working extensively to make that travel more affordable through payment means, through Koin, our financing arm. We’re seeing a willingness to spend on travel, which is surprising us despite the higher than ever prices that our partners are commanding.
Your loyalty program increased almost 200% to 17 million members in the second quarter of 2023. What are you going to do to capitalize on that?
We’re doing a few things and planning some more in the future. Right now you can see that 8% of our transactions have a component of points redemption, so there is significant engagement for a very early program like ours. In the first year of the program we concentrated on what we have achieved, which is a significant customer base and significant engagement. Now we’re taking that to the next level in terms of increasing repeat purchases from those consumers and bringing in some new partners to the program. Initially, they will be travel related, and in the second phase, partners beyond the travel space.
Over the course of the pandemic a lot of consumers went back to booking direct with hotels. Now there is a view that because OTAs have put so much investment into their loyalty programs, hotels have to be careful it doesn’t swing back. What’s your view?
That’s a dynamic that’s very much correct in the U.S. If you look at loyalty programs of hotels in Latin America, they are very minor so it’s much less of an issue here.
You started to test your generative AI trip planner in Q3 last year. Can you share any lessons?
We tested our travel planner and then released it to some markets. Argentina was one. We learned a lot and will release a second version in the next couple of months, which will take it to the next level. We learned a lot about how people like interacting with an assistant like that and how to blend that enhanced interaction with the content we would like to put in front of the consumer. We’re coming up with a very exciting new way of interaction, which makes it not only easier but also much more personalized to the conversation the consumer is having with our assistant. We are finishing the internal test phase of that second version, and we are confident that in the next couple of months we’ll make a public release of that in beta.
Did anything surprise you in testing the generative AI trip planner?
I would highlight the speed at which we, as a software development team and the tool itself, evolved into something more precise, more meaningful, more relevant. It’s a very fast trajectory from playing with the tool to what can we do with this? And from being very basic and rudimentary to something extremely relevant and, from our perspective, that can radically change not only the way consumers interact with travel agencies but how much travel agencies participate in different stages of a trip.
We follow a very disciplined criteria for looking at M&A opportunities. I already mentioned geographic scope. Second is how the potential target transcends both our product offering and our sourcing capabilities. We want to leverage inorganic growth as a way to gain more scale in sourcing. Third, capabilities, for example in the case of Best Day, around acquiring a B2B capability and technology platform that enriched our offering.
Damian Scokin - Despegar
Traditionally online travel agencies were not very good at helping the consumer research and plan for a trip. We were transaction driven, which at the time in the late '90s, early 2000s, was a huge revolution. Now we see this can be another technological revolution (that) takes the role of OTAs to a different level in terms of being much closer not only to the research phase but also to be a much more effective adviser along the whole travel journey. OTAs were very good at taking the transaction of buying the trip to the next level, but the other stages we were not very good at. We lagged behind.
Do you think that AI can help you with the other phases of the trip? Can it help you differentiate?
This will be, from our perspective, another leap in which the leaders will be ahead of the pack, and leaders — and we aspire to be one of the leading firms — will take a significant advantage over the ones that are lagging behind. It’s not very different in a way from the '90s when some players moved online (and) suppliers were lagging behind for a while. Now suppliers, hotels and airlines have caught up to a certain extent, but now the leading OTAs, the ones that are good using this technology to their benefit, can take a new leap forward and differentiate from others.
Are there other areas of the business you are using GenAI in?
We are focusing on three areas. One is the one I just discussed, how we can help the consumer research, imagine and transact even better. The second is customer service, all the interactions, all the processes, not only through an agent that interacts with the consumer but also how generative AI can help power our customer service agents to become even more precise, more knowledgeable in their interactions with consumers. And the third area is what a lot of tech companies are doing in engineering and product teams.
Buy now pay later and your Koin initiative, is that something that is in significant demand? Is it more important to Latin American travelers than other regions?
A significant portion, about 40% of Latin Americans, don’t have access to a banking relationship or have enough of a credit line on credit cards. So any type of financing becomes more relevant when you cater to that type of consumer. In addition, the price level of travel and how much prices have increased, we believe that providing affordability as a component of the value proposition is key for success in Latin America. Koin is not just an isolated action, it’s part of a set of initiatives, a full array of payment methods, and for segments that do not have access to banking relationships or credit cards, providing a financing tool is pretty vital. It’s not just a nice to have, it’s a key competitive advantage. And if you look at how much Koin has grown over the past year and how much the performance of Koin has improved, we’ve committed to make it profitable by the first quarter, and we are pleased with the result. I think we will deliver and excel in that target. We’re very happy with how it has helped our value proposition with affordability and with the performance trajectory that Koin is demonstrating in the market.