Tax Cuts Under Milei Would Allow Despegar.com to Lower Prices, CEO Says

Buenos Aires — Despegar.com (DESP), a digital travel agency with operations across Latin America, will bring down prices in Argentina if Javier Milei’s government succeeds in its bid to slash the PAÍS tax (Impuesto Para una Argentina Inclusiva y Solidaria).

“There is no doubt [we can envision a scenario where prices decrease, because], for consumers, the PAÍS tax represents a ridiculous surcharge,” said the company’s CEO, Damián Scokin, during an interview with Bloomberg Línea. The executive predicted an increase in demand if the tax component in airfares were to be “rationalized” in the country.

Introduced in 2019, shortly after Alberto Fernández took office, the PAÍS tax was unveiled as a temporary economic emergency levy for the following five fiscal periods. It had the dual purpose of boosting revenue and raising the dollar exchange rate, in order to limit the depletion of the Central Bank of the Argentine Republic’s (BCRA) international reserves.

The 30% rate applies to peso-to-dollar exchange operations, foreign currency debit and credit card transactions, and is also imposed on electronic and transactions that take place outside of Argentina. The percentage can vary depending on the type of transaction.

Four years later, and with a new president in office, the tax represented 7.9% of AFIP’s total revenue in the first two months of this year, according to IARAF, a think tank focused on fiscal matters. Its increased share in the national government’s total income will prove a headache for President Milei, who aims to eventually eliminate the tax. However, doing so this year would undermine his goal of securing Argentina’s first fiscal surplus since 2008.

“In Argentina, we have to reach a ridiculous level of complexity for the state to collect more. And at some point, the state won’t collect anything at all anymore,” said Damián Scokin, CEO of Despegar.com.

Record revenue in 2023

Commenting on the company’s record income during the fourth quarter of 2023 —US$203.7 million, a 40% increase year-over-year— Scokin told Bloomberg Línea that Argentina currently represents 14% of total revenue.

Partly due to an aggressive M&A strategy, Despegar has gained significant traction in Brazil and Mexico, the two largest economies in Latin America. Together, these markets accounted for 42.9% of gross bookings —US$806 million out of a total of US$1.879 billion— on the platform during the final quarter of 2023.

However, the largest growth in bookings did not come from these two markets but from the rest of Latin America (including Argentina, Colombia, and Chile), which saw a 133% year-over-year increase between October and December, reaching US$1.074 billion.

In 2023, Despegar turned around from the previous year’s losses (US$ -68.5 million) to record a net profit of $29 million.

The following interview was edited for length and clarity.

Market valuation and quarterly results

Today, Despegar’s share price is at more than double its value during the worst of the pandemic, but less than half from its all-time high in 2018. How do you interpret that market valuation? Should the company be worth more or less than before the pandemic?

Damián Scokin: Markets are not fair. They are what they are, and you have to accept that. Despegar never had a year like 2023. When it was worth double, it wasn’t making as much money; it made about 30% less in EBITDA. This speaks to market volatility, how they value certain things at each moment, and how one should focus on executing, executing, and delivering results. We had a record-breaking year for the company, and that was reflected in a significant appreciation in the value of our stock throughout the year, but we believe it still has a tremendous potential to increase its value further. When comparing it to similar companies, our EBITDA and revenue multiples are still very, very low. I think the market in recent months has recognized the achievement of the guidance we have given, and it’s just a matter of time until things readjust.

What were the main drivers behind that 248% year-over-year EBITDA increase, as well as the record quarterly revenue?

There are several factors related to both the top line and cost structure. On the top line, we achieved growth levels and market penetration in our main markets, Mexico and Brazil, that we had never achieved before. These are markets that have become much more competitive and rational post-pandemic. We’ve had a lot of success with very specific strategies, such as package sales. We’ve been very ambitious and made very competitive offers in terms of prices in those markets, which has translated into excellent revenue generation. Additionally, Despegar has been extremely disciplined over the years in cost management. All cost indicators today are much more efficient than pre-pandemic levels. This allows us, with increased sales volume and revenue, to maintain fixed costs. And that translates into a much larger increase in our profitability. We have a platform, a cost base, that is scalable. It doesn’t need to increase to expand volume.

Projection, strategy, and risks in 2024

Speaking of scaling, where do you think Despegar’s revenue could reach in the next five years?

I refer to what was an Investor Day in 2022, where we outlined our strategy for the next five years. We said we would have average growth rates of 20% in our top line and that when we reached 2019 volumes, we would be around $130 million in EBITDA. We are very close already, and our growth ambition over the next five years is to double the size of the company. We have at least the ambition for Despegar to generate over $10 billion in revenue annually.

Looking at 2024, what are the main risks to Despegar’s profitability?

I’m in New York, and many investors ask me that question. The region has many challenges, with all the elections, etc. But it’s hard to foresee drastic changes or any unforeseen surprises. Brazil is a tremendously relevant market, the largest one. It has a year ahead that may not necessarily be good. It will be better than 2023 because everyone expects interest rates to decrease and that politics will support and not bring bad news. In Mexico, there are elections where no surprises are expected, and beyond the speeches, Mexico continues to be a growing economy. Chile, I think all the storm clouds are already there. It’s not going to be a great year, as there have been better years, but no one expects 2024 in Latin America to be worse than 2023. So, in terms of macro concerns, I generally don’t see them in 2024.

We saw during the pandemic that airfares in the world and traveling in general skyrocketed in price. Do you expect that situation to start normalizing in 2024?

The price of air tickets is at a record high, and it’s hard to predict a short-term decrease because what’s driving those prices to such levels has more to do with seat capacity, which is currently restricted worldwide due to aircraft delivery issues from manufacturers. So, all airlines are severely restricted in increasing their seat availability, and that’s something that no one expects to recover or resolve in the short term. So, price levels will remain high for some time. For us, it’s both good and bad news because Despegar’s average transaction prices are at a historic high. People keep buying because they want to travel, but obviously, we like to offer affordable trips. It’s part of our value proposition, whether it’s good prices or financing. So, for us, it would be good news if prices decrease, although we don’t see it in the short term.

If prices seem quite inflexible in the short term, where does the competition stand for you today? I noticed you increased your commissions compared to 2019.

In terms of percentage, that’s correct. Our take-rate, the percentage of revenue over what we bill, increased, but not because we charge more. It increased for two reasons: because we sell more and more packages instead of individual products, and in that, our margin is higher. And it increased because in the mix of countries, Brazil grew, and it’s a market where we generally have a higher margin. But it’s not that we charge consumers more. Overall in 2023, prices remained stable or decreased. Regarding competition and growth, don’t forget that online penetration in the tourism sector is still low and needs to continue growing. Half of tourism transactions today are done offline, half. Much higher than in other sectors. We grow above the market. Additionally, we are constantly innovating with our features and services, which allows us to gain market share from other competitors.

M&A in Brazil and Mexico

You grew significantly in Mexico and Brazil thanks to M&A. Can we expect news on that front this year?

We always have a very ambitious growth plan, and to achieve that 20% annual growth on average that I mentioned before, we understand it’s a combination of organic and inorganic growth. The inorganic part is not something we unilaterally desire. There must be an agreement on prices, conditions, and we are very disciplined when making offers and acquiring companies to ensure that the economic success of the transaction benefits shareholders.

How do you plan to continue growing in Brazil and Mexico, and how does tokenization fit into that equation?

Brazil and Mexico have similar strategies. Mexico is a market where we still have much more room to grow, and we are doing it through multiple channels. We invested heavily in the acquisition of Best Day, and it’s performing very, very well, but we still have a long way to go. And tokenization is very important in the travel business, in several ways. We are already using it in terms of payment methods. As a payment method, we accept Bitcoin. Few companies do. But also, if you think about the travel experience, it can benefit greatly from tokenization and secure chains. How many times do you have to show your passport on a trip, at check-in, when accessing the security area, when boarding the plane, when arriving at immigration in another country? There are many developments also for ticket sales by users to third parties. Many people are working hard on that, and we see a very, very big attraction. Airlines have to take the first step. Some have done it, like FlyBondi, and we are delighted to support and participate in that secondary market of seat or hotel sales. We are very optimistic for 2024; we believe that the 2023 results are a demonstration of the strength with which the company emerged from the pandemic and the opportunities it has ahead.

Transition in Argentina

Argentina is going through a political, economic, and currency regime transition... Do you think revenue will be significantly affected by the recession this year?

Despegar has navigated those complicated markets. There are short-term changes, obviously Q1 will be very different from Q1-24, very different from Q4-23. But we have been able to adapt, and we believe it won’t negatively affect us. We do trust that competitive conditions will normalize in the short term because today, with the exchange rate gap, with the PAÍS tax, which is a significant fiscal resource for the government, generating demand for travel is a challenge. We consider it a transitional situation.

And what impact do you expect from the removal of the PAÍS tax in the short term?

It has to be be super positive for us, because all the limitations and the extra costs that make it difficult for tourists to travel... In Argentina, people who travel really want to travel, because they have to pay taxes. If you want to pay in dollars, you have to remember to pay your card before the settlement. Like everything in Argentina, we have to reach a ridiculous level of complexity for the state to collect more. And at some point, the state won’t collect anything anymore.

And if the PAÍS tax is eliminated, can we envision a scenario where some prices decrease?

Without a doubt. For consumers, the PAÍS tax represents a ridiculous surcharge. You are well aware of the cost composition of a ticket in Argentina, how much is taxes, and how much the airlines actually make; it’s ridiculous. As people realize that and the government rationalizes, there will be more demand.

Artificial intelligence in Despegar’s operations

How has the experience been with artificial intelligence in the user assistance application, SOFÍA, and what concrete impact do you see in terms of cost efficiency?

SOFÍA is a tremendously revolutionary thing. We are very, very happy with the results we are getting. But we are developing it not with a cost-saving sense, although we do have other cost-saving initiatives with AI, but not with SOFÍA. Sofia is much more about accompanying travelers in the initial stages of the trip, in the exploration part, and in the planning stage. This was entirely internal, developed by an entire Despegar team.

Does the trend of artificial intelligence in companies, in Despegar, potentially lead in the long term to a reduced need for staff?

No, certainly not in our case. On the contrary, there will be more people in technology and product, and if we are smart, fewer people, perhaps, in other sectors. Like any technology, it’s disruptive; in some areas, it generates much more job demand, like productive technologies, and in other areas, it’s disruptive by reducing job demand. Surely in our customer service centers, we will need fewer people because we will automate more processes.

Despegar’s loyalty program

The number of members in your loyalty program grew significantly; how did you conceive it for success?

It’s a program that can be accumulated on top of other airline and hotel loyalty programs, so people accumulate miles or points doubly. People see it as an added value to their miles program. Now our challenge is for those 20 million people who are members to start redeeming more and more. Today, redemption is at 10% of the checkout, 10% of Despegar transactions have some points accumulated component, which is very good, but I have to grow it much more. It speaks to the power, the brand, and the loyalty of consumers to Despegar.