Business Bloopers
The 2013 Squeeze: How Webjet Lost 52% of Its Net Profit Overnight
Before Webjet became a multi-billion dollar giant, it hit absolute rock bottom. By 2013, the pioneer of Australian online travel found itself caught in a lethal single-revenue trap. When global titans like Expedia and Booking.com invaded the domestic market with massive advertising war chests, Webjet’s margins vanished overnight. Combined with a multimillion-dollar acquisition blunder, the company suffered a catastrophic 52% collapse in net profit and a 30% stock market crash. This case study details the dark corporate crisis that nearly ended a homegrown digital trailblazer.
All the businesses in history have come to a moment of reckoning. That epiphany moment for Webjet, Australia’s first and largest online travel agency, became a horror in 2013. The company had ruled the local digital travel market with almost no competition for fifteen years. It has taught Australians how to avoid the travel agents on a storefront sale and use all the latest technology to book their own flights online.
However, early success can quickly lead to issues in structure setup. Webjet held its front door wide open by depending almost exclusively on one weak revenue stream, commissions from domestic flights. The Australian-founded pioneer was taken completely by surprise when huge global technology platforms marched in to Australia with infinite advertising budgets.
A business that appeared invincible was dead in the water within a matter of months. This is the story of an industry leader succumbing to the single-revenue trap, ruining itself with a multi-million dollar acquisition blunder and then watching its business spiral downwards in plain sight of a panicking stock market.
The Monopolistic Comfort Zone
Webjet found itself in a mess, and you need to turn back the know a little way before for COVID-19. Webjet itself is a pioneer of the industry having been founded in 1998. It created an incredibly simple interface that compiled the flight schedules of different airlines, allowing average consumers to compare prices in real time between airlines.
Thus, this simple formula worked for over 10 years. The business model was inexpensive; Webjet earned a tiny fee every time a domestic flight was reserved on the platform. They had less competition for customers, since they were the first big digital player in the country. They became a household name on word-of-mouth and rudimentary digital marketing.
The financial rewards followed. Webjet handled a staggering $768 million in Total Transaction Value (TTV) by 2012. For all of its tiny size, it was very profitable earning a NPAT off $13.6 million. The board and shareholders of the company were at ease. They just assumed because they owned the Australian-based digital real estate, that they’d own the customer for life.
They were wrong. Little did Webjet know, why they collected their lazy transitional fees for domestic holiday flights in Australia a storm was brewing overseas. They were building multi-billion-dollar tech engines to supply global travel beasts, and they were directly targeting our high value, tech-hungry consumers.
The Dangers of a One-Revenue Infrastructure
The headline numbers might have looked spectacular, but Webjet’s underlying infrastructure had an obvious clutter. It was simply tethered to the number of domestic flights. In contrast, like many of the modern digital platforms that have expanded via accommodation, car rentals and travel insurance etc Webjet was a one-trick-pony.
That left the business completely exposed to the whims of the big airlines. If Qantas or Virgin Australia wanted to change their load factors or cut the commissions they paid on third-party booking sites, Webjet had no means of insulation.
Even worse, air travel’s been a low-margin, high-volume business since before flying in compression bottles was science fiction. A business requiring deep pockets to survive an overnight shock of the market must deliver high-margin products along with its core offering. This was because Webjet did not have a strong hotel or holiday package engine and were flying with near-empty pockets
When the Global Aggregators Went Ashore
The change came in late 2012 and early 2013, never to return. Global travel giants/OTAs like Expedia, Booking came up. It was an enormous all-out push into Australia for both Expedia. And they didn’t just come in through the back door, but rather with hundred $M war chests.
And just like that, the cost of acquiring a customer online was through the roof. Even if an australian punched into Google “cheap flights to Melbourne” Webjet was not the top result anymore. Instead, they were outbid on search engine ads by multinationals willing to lose money on every click for the sake of grabbing headlines.
Expedia and Booking. com could accommodate wafer-thin margins in flights, because they were offering a low-fare hook into high-margin international hotel rooms and all-in holiday packages. Webjet, operating a simplistic flight aggregator, was stuck at the industry bottom of the value chain. Then, bidding wars for ads crushed their margins virtually overnight.
The Frenzied Flight into Global Markets
The executive team were now under the pressure of being listed on the Australian Securities Exchange (ASX), internal revenue targets began to miss. They required an expedited response to show the market that they were fighting back, and building their footprint.
So, when Webjet announced in December 2012 one of its biggest strategic moves ever, it raised quite a few eyebrows. They raised capital in order to buy the Hong Kong and Singapore based online travel agency, Zuji. At a few million for this acquisition, we have incurred hefty pre-tax transaction and transition expenses of $5.4million alone in Q3 FY2020.
On paper, it seemed that the purchase made sense. In return, Zuji was designed to provide Webjet with instant access to the fast-growing Asian travel market and quickly build scale against competition from online behemoth Expedia.
But in actuality, the timing couldn’t have been worse. Webjet had acquired an operationally cumbersome rival that was severely damaged by the same international price warsc, ithad not bought a healthy growth engine. Zuji was bleeding money. From the benefit of hindsight, Webjet had a financial year ending June 30, 2013 that was anchored by massive, one-time trading losses from Zuji which were taken between the date it purchased its stake in Chinese website Zhike and March 22.
2013: The 52% Profit Collapse
There was nowhere for management left to hide by August 2013. The company published their audited full year financial results for the twelve months to 30 June 2013 and the figures rocked the Australian financial community.
However the site only managed to take out a small increase in total volume of bookings, but its underlying business profitability had absolutely collapsed. Webjet also released their Net Profit After Tax(NPAT) which halved from $13.6 million in 2012 to $6.5 million in 2013. This was a shocking 52.2% decline in net profit year on year.
Even worse was net profit before tax which plummeted from $19.3 million to just $11.4 million. The $5.4 million ZYGI lay out on Zuji plus a further $2.2 million in pre-tax losses for the launch of its new test hotel site, Lots of Hotels, had sapped away the company’s operating cash flow and efficiency.
The Retribution in the Stock Market and the Panic of a Investor
Response of the Stock Market Halving profit was fierce, savage and remorseless. When a market leader sees its profit cut in half in a year, it doesn’t just answer questions and I.T. investors run for the hills. In October 2023, the rush for Webjet’s paper led institutional investors and everyday shareholders into a panic where there was a massive, rolling sell-out. Over the year, Webjet’s share price fell 30%.
Worse still for management, this crash occurred in the absolute bull market of corporate Australia. The ASX 200 index increased by over 13% in 2013 (from memory). Webjet wasn’t sitting still while the rest of the market toasted new highs, it was drowning.
The Invisible Pivot: The Darkest Hour Before
Webjet was at rock bottom by the end of 2013 and was down with debt from its acquisitions, margins were decimated, growth strategy was screwed and bankruptcy appeared inevitable as the international competitors were lining up to finish it off. The core business model was pretty much dead.
However, this total calamity was exactly what saved a single the largest corporate turnarounds in Australian history. Wary of their inability to ever outbid Expedia in a direct consumer advertising battle, Webjet management began quietly sketching a visionary new path. As, they shifted their attention from ordinary travelers and created an unnoticeable backend B2B wholesale engine. A silent, final-ditch shift that managed to salvage the company, and render it a multibillion-dollar force for good around the globe; is a story of survival.
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