Amadeus IT Group SA

MAD:AMS

Earnings Call Transcript 2020-Q3

[Operator]

Welcome to the Amadeus Third Quarter 2020 Link Presentation webcast. [Operator Instructions]I am now pleased to hand over to you, Mr. Luis Maroto, President and CEO of Amadeus. Please, sir, go ahead.

[Luis Maroto Camino, President, CEO & Executive Director]

Good afternoon, ladies and gentlemen. Welcome to our first 9 months of 2020 results presentation. Thank you very much for joining us today. Till and Ana are also here with me. I will focus on our most important developments in the quarter, and they will elaborate on the key financial aspects. On Slide 4, I would like to start by making a few remarks on the market activity we have seen over the past months and its impacts on our segments. As you will have seen, travel remain depressed over the summer period, heavily impacted by the COVID-19 pandemic. However, following the initial signs of activity resuming in May, June, global air traffic continued improving through the quarter across regions on the back of travel restrictions being lifted in parts of the world. In July, air traffic declined by 79.8% versus previous year, improving from the 86.5% decline in June. And then in August, we saw another improvement, with global air traffic contracting by 75.3% relative to 2019. In September, traffic declined by 72.8%, again, progress with respect to August, however, a softer improvement, as new COVID-19 outbreaks impacting the tail of the summer season have brought the return of governmental restrictions. The traffic evolution we saw in the third quarter was mostly driven by domestic air traffic as international air travel continues to be broadly muted by cross-border mobility restrictions. Our air bookings in this context remained positive throughout the third quarter as gross booking outweighed cancellations. In the third quarter, and I will add into October, we saw our air TA bookings performance relative to prior year improve each month and across regions, supported by gross booking growing month-over-month as well as a continued normalization of the cancellation ratio. We have seen this pace of improvement in Europe reversing somewhat in October. But overall, we have continued to improve, with Amadeus gross booking daily growth in the past weeks ranging between minus 70% and minus 75%. As a whole, for the third quarter, Amadeus air TA bookings decreased by 89.8% relative to previous year, and distribution revenue declined by 85.3% versus prior year. Excluding the effects from cancellations associated with COVID, our underlying distribution revenue evolution in the third quarter was minus 75%. In the first 9 months of 2020, our air TA volumes and distribution revenues decreased by 82% and 77%, respectively, a 60% revenue evolution, excluding the COVID-19 cancellation effects. Amadeus passenger boarded performed in line with industry traffic in the third quarter and improved gradually across regions each month through August, with September only slightly improving over August, driven by a slightly worse PB performance in Europe. In October and based on Altéa PBs, we estimate a continued improvement over September. In the third quarter, we saw Amadeus passengers boarded declined by 74.9% following a decline of 93.9% in the second quarter, resulting in an evolution of minus 63% in the first 9 months of the year, very much in line with global air traffic. In hospitality, our CRS transactions continued to outperform air volumes, declining by 34% in the third quarter. To share some color on the global hotel market performance we see, we have seen gradual increases in occupancy across the summer and public holidays. While there were initial concerns about the potential for declining travel following the summer holidays, global accommodation booking trend on average showed sustained occupancies in the beginning of the fall season. Overall, our hospitality business continues to demonstrate a strong performance in relation to overall market conditions. In the third quarter, IT Solutions revenue contracted by 52.4%, outperforming passengers boarded negative growth, supported by revenues across our business portfolio not directly linked to airline traffic or not driven by transactions, particularly in the area of hospitality. In the first 9 months of the year, IT Solutions revenue experienced a 37.5% revenue decline relative to prior year. The following slide, to recap on our group performance in the quarter. Please note that this performance excludes the implementation costs related to the cost saving program that we announced in July. In the third quarter, driven by the volume dynamics I described on the previous slide, Amadeus group revenue declined by 70.1% versus prior year or by 64.6% if we exclude cancellation effects associated with COVID. Cost of revenue contracted by 94%, flexing with air travel agency booking evolution. The fixed cost reduction plans we announced in the first half of the year are yielding positive results. And in the third quarter, our P&L fixed cost, composed of personnel and other operating expenses, also declined by 16.8%. This P&L fixed cost reduction was hindered by an increase in the bad debt provision associated with COVID. And excluding this effect, our P&L fixed cost decreased by 19.5% in the third quarter. As a result, EBITDA amounted to EUR 2 million in the third quarter, an evolution of minus 99% relative to the previous year or a decline of 86.6% relative to the previous year, if we exclude cancellations and bad debt effects linked to COVID. CapEx, also part of our fixed cost reduction plan, declined by 30% in the quarter compared to prior year and supported a free cash flow result for the third quarter of EUR 156 million cash outflow. We also suffered in the third quarter an adjusted profit loss of EUR 125 million. Excluding the COVID-associated cancellations and bad debt effects as well as upfront fees related to the new financings, our adjusted profit underlying performance was minus 121%. Over the first 9 months of the year, Amadeus Group revenue declined by 59.8% or by 50.2% excluding COVID cancellations effect. EBITDA experienced a negative evolution of minus 89%, impacted by COVID cancellation and bad debt effects, excluding which, our underlying EBITDA performance was minus 72%, supported by the progress in our fixed cost reduction plan. We suffered an adjusted profit loss of EUR 214 million, which had an evolution, excluding cancellations and bad debt effects as well as upfront fees related to the new financing of minus 99.5%. Free cash flow amounted to a cash outflow of EUR 328 million, with leverage closing at 4.6x last 12-month EBITDA. As you can see, our performance remains impacted by the low travel volumes. It is not easy at the moment to be very optimistic for the short term, but we have also seen some positive signs in the market. I will highlight that domestic air traffic in China reached the levels of 2019 in September, and this must be inclusive of both a leisure and a corporate travel recovery. Some travel barriers have been reenacted, allowing for certain international routes to be reopened. And we see progress in several fronts for a vaccine, for COVID treatments and for other initiatives, as the airline industry is pushing for a rapid, accurate and scalable testing framework. Nonetheless, in Europe, the situation has worsened recently with new additional lockdowns being established. So the situation remains uncertain. Our performance in the third quarter improved from the second quarter as volumes improved. Further, our revenues have continued to outperform our volumes. This is due to the resilience afforded by our nontransactional-based revenues, which, in 2019, represented 15% of our revenues. Additionally, as I was saying, our hospitality volume-linked revenues, which are not so directly impacted by air traffic, are also outperforming our air volumes. I will add that all the actions from the enhancement plan we announced in July and from the package of measures announced in March are well in motion and yielding important savings. We remain highly committed to these plans. Till is going to review this matter shortly. Thanks to the savings and our revenue resilience this quarter, in spite of IATA reported air traffic of minus 76% versus 19%, Amadeus achieved positive EBITDA excluding the cost saving program implementation cost.I will finish my recap by reiterating our confidence that we have sufficient and large liquidity headroom to face a highly severe scenario through the rest of 2020 and through 2021. Till is going to review our liquidity and cash burn shortly. Before moving into that, I will complete my overview by sharing some business updates with you. On Slide 6, you see an overview of our business activity that has taken place over the past 3 months. In distribution, we signed 24 new contracts or renewals of distribution agreements with airlines in the third quarter, amounting to 56 in the first 9 months of the year. Also since October and following our agreement, Southwest's complete offer for business travel is available through the Amadeus Travel Platform. In September, we were pleased to announce a key strategic NDC distribution agreement with Air France-KLM Group. Amadeus subscribed travel agents will soon be able to compare, order, pay and service Air France-KLM NDC content on the Amadeus Travel Platform. In Airline IT, we are pleased to announce that Jeju Air, the largest South Korean low-cost carrier, has contracted for our New Skies PSS. Pre-COVID, Jeju Air carried approximately 14 million passengers annually. We also had several upselling successes amongst our airline customers, including Turkish Airlines, who contracted for additional solutions from the Amadeus software suite. Additionally, Alaska Airlines became the first airline to implement Amadeus Revenue Management as a non-Altéa passenger service system carrier. In the hospitality space, data and visibility into trends are becoming more critical, and we have seen the demand for our business intelligence solutions grow in this context. In the third quarter, we expanded our strategic partnership with Accor to include the use of our Demand360 solution, helping improve decision-making, maximize distribution strategy and increase revenue per available room as well as local market share. We renewed our partnership with Hilton for the use of our business intelligent solutions, and Hilton will encourage Hilton's property to utilize our GDS advertising services, part of our media suite, those leveraging the power of data to more effectively advertise to demand. Also in the third quarter, Resorts World Las Vegas contracted our service optimization solution. And as sanitation and safety has become the highest priority for travelers, hoteliers have had to quickly adjust their processes to address these needs and ensure traveler confidence. We offer hoteliers the operational tools to guide the property process for these new demands. Today, many hoteliers are evaluating how to most effectively prepare for their business needs at present, including access to market insights, leveraging multichannel strategies to win available demand and running efficient operations while also planning for the future. This is driving an accelerated focus on the adoption of technologies for many hoteliers. Northland Properties contracted for our comprehensive Amadeus Integrated Booking Suite. This packaged offering includes iHotelier, channels management, reservations and booking engine; Guest Management system, Loyalty and website, in a single solution to drive demand, increase guest loyalty and improve brand recognition. In Airport IT, we also continued to expand our customer base during the quarter, with Stuttgart, Nashville International and Long Beach International airports contracting for several solutions. I will now pass on to Till and Ana for our financial review.

[Till Streichert, Chief Financial Officer]

Thank you, Luis. Hello, everyone. This is Till speaking. Please turn to Slide 8. As Luis said, let's review the progress we've made this quarter on achieving savings through the implementation of actions within our enhancement plan. As you know, our enhancement plan aims to strengthen Amadeus for the future. It involves the workforce reduction and actions to improve the way we operate, serve our customers and to foster innovation. The pillars of this plan, now well in motion, include the acceleration of digital programs; process simplification and standardization, M&A integration, acceleration; speeding up our adoption of agile, lean Scaled Agile framework methodologies as well as internal reorganizational steps. This plan added from our adoption of quick measures in March in response to the first COVID effects, including the reduction of our contractor base, implementing a hiring freeze, a salary freeze and limitations to travel and other discretionary corporate spend, amongst others. We have continued to progress in this area, as demonstrated by the EUR 144.2 million fixed cost reduction we've achieved in the third quarter of 2020 versus the same period in 2019. This fixed cost reduction is composed of a EUR 91.5 million decline in our P&L fixed costs, excluding bad debt, and a decrease of EUR 52.7 million in CapEx. In the year-to-date, we've achieved a EUR 310.3 million fixed cost reduction compared to the same period in 2019, where EUR 152.3 million came through P&L fixed costs, excluding bad debt, and EUR 158.1 million from CapEx. I will add that our expectations for Q4 2020 are to further advance, and we would generally expect to achieve a fixed cost reduction versus Q4 2019, greater in absolute terms than the one achieved in Q3 2020. This will result in a larger fixed cost reduction in 2020 versus 2019 than originally anticipated from the programs we've announced in half 1. These incremental savings are driven by additional initiatives in parallel to our announced plans, such as voluntary unpaid leaves and other expenses also temporarily reduced. Please note, we expect to ramp up -- to ramp some of these costs up again eventually and, to an extent, in 2021 as we see the business context evolves. Therefore, they should not be considered as permanent savings. Although we expect to see these temporarily cut costs in 2020 reverting to growth in 2021. In 2021, we foresee a EUR 550 million fixed cost reduction compared to the 2019 fixed cost base, excluding bad debt, and coming likely between 50% to 60% through the P&L and the remainder through CapEx. I would like to emphasize that it is also true that if circumstances remain weak, we could extend part of these nonpermanent savings into 2021. Finally, with regards to the broadly EUR 200 million of implementation costs related to these programs. We expect them to be largely incurred in 2020. We had EUR 75.8 million in implementation costs incurred in Q3 2020, and a large part of the balance will be incurred in Q4 2020. We are expecting that approximately 35% of the EUR 200 million will be paid out in Q4 2020 and the balance in 2021. Please turn to Slide 9 to review the liquidity available to Amadeus. On September 17, 2020, we enhanced our liquidity by issuing a EUR 750 million eurobond maturing in September 2028. We also canceled the outstanding EUR 500 million of our undrawn bridge to bond loan. And on October 6, we paid our 2020 bond maturity of EUR 500 million back. Pro forma for the bond maturity at September 30, our liquidity available amounted to approximately EUR 3.7 billion and was composed of cash of EUR 2.5 billion, a EUR 1 billion undrawn revolving facility and an undrawn covenant-free EIB loan of EUR 200 million. Our main financial maturities over the rest of 2020 and 2021 include a EUR 500 million bond maturity in November 2021 and several maturities in aggregate amounting to EUR 80 million of our older EIB loan and commercial paper of EUR 558.5 million outstanding as of September 30, 2020. Please note that Amadeus has been able to refinance commercial paper maturities during the second and third quarter. Additionally, our commercial paper is eligible for European Central Bank purchases under the Pandemic Emergency Purchase Program. As Luis stated, with this liquidity, we can face a severe scenario, that is a hypothetical scenario, assuming air traffic was to be minus 80% of 2019 over the rest of 2020 and in 2021. And as you will have seen, we have reduced our monthly cash burn this quarter to about minus -- above minus EUR 50 million per month. Based on this hypothetical assumption of traffic at minus 80% for Q4 and that we expect some working capital effects and some nonrecurring cash-outs next quarter, so in the fourth quarter, including payouts related to implementation costs of our enhancement plan, we are expecting our monthly cash burn to increase in Q4 relative to Q3. For Q4 2020 and for 2021, if we assume a traffic scenario at minus 80% versus 2019, we see our monthly cash burn ranging between minus EUR 50 million to minus EUR 100 million per month. This is monthly free cash flow, that is EBITDA less CapEx, change in working capital and cash interest and taxes. Please note that given the seasonality and timings of flows, monthly cash burn will fluctuate throughout the year. We also assume that we can continue to refinance our short-term paper maturities directly or through the EU Central Bank mechanism. We could or not refinance our bond maturity in November 2021. However, with the EUR 3.7 billion amount of liquidity available today plus the October 2020 bond maturity, together with the monthly cash burn considerations I've just explained, it allows us to face 2021 with confidence from a liquidity perspective. In any case, we will continue to monitor the situation closely. I will now pass on to Ana to review the Q3 financial performance.

[Ana de Pro Gonzalo, Former Chief Financial Officer]

Thank you, Till. Hello, everyone. Please turn to Slide 10. Before I get into the details of our financial performance, let me explain what we have done this quarter to help you better understand our evolution. First, P&L figures displayed across this presentation exclude onetime costs incurred in the third quarter of 2020 related to the implementation of our cost saving plans launched, as you know, in the second quarter of 2020. These costs amounted to EUR 75.8 million or EUR 54.5 million posttax and related mainly to severance. Second, as we did in the second quarter, we have calculated an underlying performance view to exclude certain COVID-19-associated effects on our P&L. These are mainly 4 of them: cancellations, bad debt, impairments and the upfront financing transaction fees. So if we go to the slide, as you can see, we have a table with our key P&L captions where we display, in the first column, column A, the reported figure evolution resulting from comparing the third quarter in September year-to-date in 2020, both excluding the cost reduction plan implementation cost with the same period in 2019. In column C, the one labeled underlying change, we show the resulting evolution from excluding these COVID-19-associated effects that have impacted this quarter and the year-to-date performance. And in the column B, we have quantified these COVID effects by caption. Let me walk you through each of them. The largest one comes through the cancellations of bookings. Given the disruption in travel, we have had a very high cancellation ratio, as you know, to the gross bookings in the second quarter and although reduced, also quite high in the third quarter. As you know, a cancellation implies a negative revenue as we return the booking fee, but also a negative cost of sales as incentive is returned to us. In the third quarter and year-to-date, this negative revenue and this negative cost of revenue were in turn offset by the respective cancellation provision effect. Due to the increase in cancellation levels across the travel industry, we increased the cancellation provision during the first quarter to cover for cancellation risk in the second and third quarter. Therefore, during the second and third quarter, we have applied the cancellation provision, which partially mitigated the negative revenues and the negative cost of revenues from the cancellations in the corresponding quarter.Together, combined the negative revenue of cost and/or negative cost of revenue from cancellations that have exceeded a normal situation cancellation ratio, net of the respective cancellation provision in the period, it has had a negative impact of EUR 77.5 million on revenue in the third quarter, EUR 406.7 million in the first 9 months of the year and a positive impact of EUR 21.4 million on cost of revenues in the third quarter and EUR 173.6 million in the first 9 months of the year. We also saw an increase in the bad debt provision, negatively impacting the combined personnel and other operating expense cost line. This was driven by the reassessment of the credit risk of some of our customers that became high-risk customers in accordance with our default definition; and secondly, the changes in the provision matrix because in the context of COVID-19, we have increased the percentages. The bad debt provision increased by EUR 18.4 million and EUR 64.9 million in the third quarter and in the first 9 months of 2020, respectively. So excluding bad debt, the combined personnel and other operating expenses declined by 19.5% and 11.1%, respectively, in the third quarter and the first 9 months of 2020. Another effect has been an impairment charge amounting to EUR 16.2 million in the third quarter and almost EUR 81 million in the first 9 months of the year. I will explain this quite shortly, but the charge related to some customers ceasing operations or canceling contracts as well as some assets not delivering their expected benefits over the same time frame as before. If we exclude impairment charges from the first 9 months of 2020 and 2019, D&A expense declined by 11.4% in the third quarter and 0.3% in the first 9 months of 2020. And finally, the upfront fees from the financing transactions undertaken in March, April and May 2020 raised the net financial expense caption by EUR 2.8 million and EUR 5 million in the third quarter and first 9 months of the year, respectively. For an overview of the revenue in the period, please turn to Slide 11. Firstly, by segment. As Luis has just described, in the third quarter of 2020, distribution revenue declined by 85.3% relative to the same quarter last year caused by the COVID-19 impact on volumes and, to a lesser extent, by a lower air booking revenue per booking, which was driven by a higher weight of local bookings. This was partially mitigated by a positive revenue impact from the cancellation provision, as explained, and an increase in revenues from the solutions supporting processes related to ticketings and cancellations. Also, the revenue evolution was impacted by other decline in revenues lines, such as revenue from both travel agency IT and non-air solutions, although their decline -- this declined at a softer pace than the bookings. If we exclude the combined effects from the higher-than-usual air bookings cancellations relative to gross bookings and the cancellation provision, the underlying distribution revenue declined by 75% in the third quarter of 2020 and by 59.9% in the first 9 months of the year. In IT Solutions, revenue in the third quarter of 2020 decreased by 52.4% versus the same period of 2019, driven by 74.9% airline passengers boarded volumes decline. IT Solutions revenue outperformed passenger boarded growth, supported by revenues not directly linked to airline traffic or not driven by transactions, particularly in the area of hospitality and Airport IT. In the first 9 months of the year, IT Solutions revenue decreased by 37.5% compared to the first 9 months of 2019. Our group revenue declined by 70.1% in the third quarter of 2020 or by 59.8% in the first 9 months of 2020. Excluding the COVID-19 cancellation-related effects, our group revenue decreased by 64.6% in the third quarter and a 50.2% reduction in the first 9 months of the year. In the third quarter of 2020, our EBITDA, excluding the implementation cost, amounted to EUR 2.1 million, a 99.6% contraction versus the same quarter in 2019, driven by the drop in revenue and combined with the fixed cost savings achieved in the quarter. Excluding also cancellation and bad debt effects associated with the COVID-19, EBITDA declined 86.6% in the third quarter of 2020. And in the first 9 months of the year, EBITDA, excluding the implementation cost, amounted to EUR 196.2 million, which represents an 88.8% decline versus 2019 or a 72.1% decrease if the cancellation and bad debt effects associated with COVID-19 are also excluded. I will give you the details of our cost structure evolution over the period. In the third quarter, cost of revenue amounted to EUR 21 million, a 94.2% decline versus the same period of the previous year. Cost of revenues was impacted by the reduction in air bookings volumes as well as higher-than-usual air booking cancellations relative to gross bookings. This was partially offset by our booking cancellation provision. Excluding the effects from the higher-than-usual cancellations and the cancellation provision, cost of revenue declined by 88.2% in the third quarter. And in the first 9 months of the year, cost of revenue declined by 79.7% compared to the first 9 months of 2019 or by 63.7% if we are to exclude the COVID-19 cancellation-related effects. Supported by our cost saving plans and excluding the implementation cost and the bad debt effects associated with the COVID crisis, our combined personnel and other operating expenses cost line decreased by 19.5% in the third quarter and by 11.1% in the first 9 months of the year. Including bad debt, our net fixed cost decreased by 16.8% and by 8%, respectively, in the third quarter and the year-to-date. Below the EBITDA line, in the third quarter, depreciation and amortization decreased by 10.8%, mostly due to a decrease in amortization from purchase price allocation exercise driven by certain assets which have reached the end of their useful life at the end of the second quarter of 2020. In the first 9 months of the year, D&A increased by 10.1%, mainly driven by an increase in the impairment charges versus 2019. The high reduction in travel volumes brought about by the COVID generated an accounting impairment test triggering event for Amadeus. We identified impairment losses related to specific developments and implementations efforts carried out for customers that have either canceled the contracts, suspended or ceased operations and also assets that may not deliver the expected benefits over the same time frame as before. As a result, an impairment charge amounting to EUR 80.8 million, EUR 57.8 million post-taxes, was accounted for in the first 9 months of the year. D&A in the 9-month period decreased by 0.3% relative to last year, if these impairment losses are excluded. In the third quarter, net financial expense amounted to EUR 76.5 million (sic) [ EUR 36.5 million ] compared to an income of EUR 2.3 million last year. This variation was mainly driven by EUR 11.3 million of exchange losses versus the EUR 14.7 million of exchange gains that we had last year. Also, interest expense increased by EUR 13.6 million or by EUR 10.8 million if we exclude the effect of the upfront financing fees from the bridge to bond facility and the convertible bond. As a consequence of both, a higher average gross debt outstanding and higher average cost of debt, driven by the new finances in 2020 under the COVID-19 situation, in the 9-month period, net financial expense increased by 61% versus 2019 or by 49.6%, excluding the upfront financing fees, largely driven by the 15.5% growth in interest expense. In the first 9 months of 2020, our income taxes, adjusted to exclude EUR 21.3 million tax income impact from the cost savings program implementation cost, amounted to an income of EUR 139.5 million. The group income tax rate for the period was 28.6%, higher than the 24% and 22% income tax rate reported in the first 9 months of 2019 and in the 2019 full year, respectively. This increase in the tax rate comes from the effect of tax deductions associated with our R&D in the context of a negative taxable income result. The combination of a contraction in the operating result, higher financial expense and tax income resulted in a decrease of 138.7% and 136.9% in adjusted profit and adjusted EPS, respectively. If we exclude the cancellation and bad debt effects associated with COVID and the upfront fees in relation to the new finances, the adjusted profit and adjusted EPS contracted by 121.1% and 120.1%, respectively, in the third quarter of 2020 versus the same period last year and 99.5% plus 99.4%, respectively, in the year-to-date. Turning to Page 13, the review of our cash flow evolution in the period. Let us start with CapEx. In the third quarter, CapEx declined by EUR 52.7 million or 30.3%. And CapEx in property, plant and equipment declined by EUR 9.6 million, 53.8%, in the third quarter, impacted by the cost saving measures put in place. CapEx in term of intangible assets decreased by EUR 43.1 million or by 27.6% in the third quarter of 2020 as a result of lower capitalizations from software development as well as reduction in the amount of signing bonuses paid. Lower capitalization from software development were due to the decline in R&D expenditure of 23.2% in the third quarter, resulting from a selective approach to our investment in the context of COVID, prioritizing investments in strategic projects whilst postponing efforts devoted to more long-term initiatives and also to a lower capitalization ratio due to the project mix. In the first 9 months of the year, CapEx decreased by a total amount of EUR 158.1 million or 29.1% relative to 2019. This was driven by a decrease of both CapEx in intangible assets by EUR 124.6 million and CapEx in property, plant and equipment by EUR 33.5 million versus 2019.Moving on to our free cash flow. Amadeus Group free cash flow amounted to an outflow of EUR 156 million in the third quarter and to an outflow of EUR 328.3 million in the first 9 months of the year. This free cash outflow in the third quarter was driven by the severe impact of the COVID, which impacted our EBITDA, as we have seen and has been already described through this presentation; a reduced CapEx amount relative to last year, which I have just described; and higher interest paid, coupled with lower tax payment, compared to the same period last year; and a cash inflow from change in working capital. Let me give you some color on the behavior of these other variables within the cash flow over the period. The change in working capital amounted to an inflow of EUR 88.2 million and was positively impacted by EUR 73.3 million cost reduction plan implementations, which were costs incurred in the quarter but not yet paid. If we were to exclude this effect, the change in working capital amounted to an inflow of almost EUR 15 million, which is a deterioration of EUR 48 million versus the third quarter of 2019. This deterioration primarily resulted from the activity deceleration we have experienced over the past month. In the third quarter of 2020, we saw higher cash distribution cost payments associated with past periods in proportion to the distribution expenses accounted for in the quarter as compared to prior year. These effects were partially offset by delayed payments amounting to EUR 29 million, partially delayed to the fourth quarter of 2020, which were related to social security and payroll taxes. In the third quarter of 2020, we had a cash tax outflow of almost EUR 26 million, a reduction of EUR 46.8 million versus the cash taxes paid in the third quarter of last year, mostly resulting from a reduction in prepaid taxes on 2020 taxable income, driven by the contraction in the financial results expected for 2020 versus 2019 and, to a lesser extent, an increase in tax reimbursements from previous years. On interest and financial fees paid, they have increased by EUR 7.6 million or 49% in the third quarter of 2020, resulting from the upfront financing fees that we have explained and partially offset by the increase in the bank interest collections, driven by a higher average amount of cash at hand in the period. With this, we have finished the presentation for our first 9 months of 2020. And we are ready to take any questions you may have. Thank you very much for your attention.

[Operator]

[Operator Instructions] The first question comes from Adam Wood from Morgan Stanley.

[Adam Dennis Wood, European Technology Equity Analyst]

I've got 2, please. Maybe first of all, on the shorter term, if you could give us a little bit of help on thinking about Q4 volumes. So I guess you were seeing more restrictions in Europe, but it didn't look as if there was a big bounce back in the third quarter in Europe. Just if you could help us around what you're seeing there. And then learnings from Asia, maybe ex China, are you seeing a similar bounce back in those markets? And was that kind of fully in the third quarter already? Or would you expect that to also help Q4? So just giving us a little bit of a feel for where you think Q4 volumes might be panning out given the changes we're seeing. And then secondly, we're obviously very interested in your ability to cross-sell, upsell, start new projects over the next kind of couple of years as we look through recovery. What's the environment like talking to airlines today? Are they totally closed for business and not really wanting to discuss new projects? Are you actually able to still be in there and able to sell them this openness to be able to cross and upsell and install things?

[Luis Maroto Camino, President, CEO & Executive Director]

Okay. Adam, thanks for the questions. Let me start with the first one. I think we mentioned during the presentation that we have seen a continuous improvement every month, as you have seen. In October, we have also provided you with some information. It has continued the improvement. However, as we said, Europe has deteriorated, but the rest of the regions have kept improving. So the overall improvement is less than what we have seen in the previous months. But still, there is some improvement. How things may evolve in the coming months is extremely difficult to really get. And now if we take IATA, the latest estimation of IATA for the fourth quarter, they are talking about a minus 70% passenger growth, which is better than what we have today. But it's not a huge improvement. So we expect that things may improve still a little bit, of course, depending on the evolution of the situation in Europe and in the rest of the regions. But overall, not a huge improvement compared to what we have seen in the third quarter. And in Asia, excluding China, I mean, again, and it's the same trend. It's not at all the trend of China, where we have seen domestic traffic almost coming back to the volumes of previous year. But we have seen a progressive improvement in the majority of the markets. I mean, if we take India, Japan or Korea, where domestic traffic has improved compared to the previous months, so Asia is improving. All the regions overall, we see better figures, with the exception of Europe at this point. However, not enough to really project for the fourth quarter a huge improvement compared to the current figures. Moving on to the second question, yes, I mean, I believe we need to consider different kind of conversations with airlines. There are some airlines less entitled today to really talk about additional functionalities. But overall, the business continues, and we have given you some examples when we talk about Turkish Airlines or some other examples that we have provided you, where our selling capabilities are there. We have a healthy pipeline of discussions. And therefore, I believe that we should have a track record not different from what we have seen in the past. So the airlines are not closed to keep conversations, to rethink about the future. Because at the end, everybody needs to think about what happens after the recovery. So these conversations are happening. And therefore, we look forward to really keep improving our upselling capabilities.

[Operator]

The next question comes from Julian Serafini from Jefferies.

[Julian Alexander Serafini, Equity Analyst]

So I have 2 questions. The first, for Luis, it's a bit of a bigger picture, longer-term question. But when you're looking at the distribution or the GDS market, can you share your outlook or how do you think that market evolves once we come out of the COVID crisis? Do you think airlines will be more dependent on the GDS networks? Or do you think they may try to reduce dependence in order to save costs? I'd be interested in getting your view on that. And then the second question, probably more for Till or for Ana. Just can you give a little more detail in terms of what is going on inside the IT Solutions revenue? I mean, clearly, you mentioned that the revenue is outperforming the bookings figures. I think we all see that. But it looks like there's other moving parts beyond just hospitality holding up that is doing -- something is going on inside that it looks like it's doing better than we would expect. So I'm hoping maybe you'll provide a bit more detail in terms of what is outperforming exactly in that line?

[Ana de Pro Gonzalo, Former Chief Financial Officer]

Okay. So if you want, I kind of start with this last point. You have a lot of moving parts within the revenues. So you have the direct link with the passengers boarded, which, of course, is evolving in line with the evolution of the passengers boarded. Then you have the part of hospitality that, as we have explained, is moving better than the passengers boarded. But here, for example, if you are comparing to the unitary and you're trying to look for passenger boarded evolution, you have to take into account that this is more flattish throughout the year, or it has behaved more flattish throughout the year, while we've seen a very sharp decline of the passengers boarded in the second quarter and a relative decline -- recovery, sorry, in the third quarter. So if you're trying to compare the evolutions of passengers boarded with the revenues, it doesn't match because of the different behaviors of the different captions. So I would say hospitality has continued to outperform clearly the airline revenues. Airline IT, the part that is related to the passengers boarded, follows the trend of the passengers boarded. And then you have the caption of services, which did very well in the second quarter, has still been doing good in the third quarter but not as good as it was doing in the third quarter. So you have different moving parts, where I could say that the worse behaving is the one related to passengers boarded. The others seem better, but not all of them following the same exactly trends into the third and second quarter and compared to the passengers boarded evolution. I hope I have clarified that.

[Luis Maroto Camino, President, CEO & Executive Director]

Okay. The overall view of the GDS or whatever distribution platform that we can call in the medium term, I will differentiate between times of recovery and long term, okay? In the times of recovery, you have different effects. You should expect a positive effect in the sense that, okay, in the current situation, whatever is sold should be valid. So airlines should be keen of trying to fill the planes from the different channels and, therefore, probably less push towards a pure strategy of selling direct. On the other hand, you could argue that probably business travel may recover a bit slower than leisure travel, as we have seen in other recessions. So short term, there will be pluses and minus. But if I think long term, I believe that GDS will stay playing a role. I mean, it has proven to be a very efficient platform. So if the GDSs are able to really evolve the technology, as we are doing, investing on NDC, having the relevant content and having an efficient way of distributing content, I am completely sure that -- again, I don't know, long term, what that means. But in the medium term, the traffic will be there. But again, we will need to evolve and provide a platform that is able to handle the new technologies requirements plus the right content to really allow the intermediaries to really deal with that in the future and being there. So I'm optimistic about the medium term. We are doing investments on that front. We are trying to really aggregate content, as we always report to you, from different sources, from low-cost carriers, from different technologies like EDIFACT or NDC. And based on that, we expect the GDSs will continue playing an important role. Again, saying that, we need to see how the recovery happens, if it is more low-cost, domestic, business, leisure. And this will have an impact in the short term.

[Operator]

The next question comes from Stacy Pollard from JPMorgan.

[Stacy Elizabeth Pollard, Head of Software and IT Equity Research]

So 2 questions from me as well, please. I know it's a little bit early to ask, but how are you thinking about 2021? And I appreciate that you don't give guidance yet for next year. But perhaps what are the range of scenarios that you plan when you consider the level of your cost base? And then maybe, in particular, on the free cash flow side, is there a certain level of revenues that you need to see the bar -- to see as a bar, let's say, to get back to positive cash flow in, I don't know, Q4 or Q1, for example? And just, Till, there was something that you said -- sorry, I'm not sure if I heard it correctly. Did you say that Q4 would burn -- the Q4 burn would be higher than Q3? Or was that just under that minus 80% scenario? And then may I ask a second follow-up question after?

[Luis Maroto Camino, President, CEO & Executive Director]

You take the fourth quarter, Till.

[Till Streichert, Chief Financial Officer]

Let's just start on that one.

[Luis Maroto Camino, President, CEO & Executive Director]

Yes.

[Till Streichert, Chief Financial Officer]

Because that's a quick one. So yes, indeed, so -- and it actually ties into what Ana explained also on the cash flow side for the third quarter. You do have obviously implementation costs, which we have announced, and we will start paying that in the fourth quarter. That's one item. And the second item is that we had certain payments in relation to social security taxes and also some payments that got delayed, which basically get paid now in the fourth quarter. So yes, the fourth quarter is expected to be higher. But again, in a scenario, as we have said, of -- and again, it's a theoretical scenario of a minus 80% of traffic going forward, we do expect that our cash burn rate is within the range of minus EUR 50 million to EUR 100 million per month, of course, fluctuating on a monthly, respectively, quarterly basis with the normal volatility of your working capital.

[Ana de Pro Gonzalo, Former Chief Financial Officer]

And on the free cash flow on the 2021, what can I tell you, Stacy? I mean, it's impossible to give you any outlook, any guidance. Of course, we expect, we hope that there should be a recovery. And we -- that's what IATA has recently published. So you can see that throughout 2021, there is expectation in the market for our recovery, which will depend very much on the situation in regards to health and additional lockdowns and additional measures. What we've seen on the places where the situation is under control is probably a faster recovery than what right now IATA is forecasting for the next years to come. But of course, there is also airlines that are reducing capacity, which will take a time to be put back into the market. So difficult to say. What we have done is, as I think Till has very rightly pointed out, is secured the liquidity, reduced our cash flow outflow quite heavily because of the cost-cutting program measures. And therefore, we feel very confident that we have liquidity position, very healthy, even if we were to have a very, very bad situation in 2021, which is not what we are foreseeing. But we need to make sure that even under that very difficult and challenging scenario, we are protected. And that's what we are seeing. Now at what level we are free cash flow breakeven? It will depend on where the recovery comes from. It's not the same if it's across all regions or skewed towards one more sector or the other. So I don't have a number. I mean, I think last quarter, we were already talking about this more or less and same traffic, around minus 60%, more or less, but depends on what the traffic is, what the hospitality is doing, what we can do in services, additional customers we make, market share wins. I mean, it's not an exact science.

[Stacy Elizabeth Pollard, Head of Software and IT Equity Research]

Fair enough. And then second question is just on the hospitality side. What are customers' IT priorities right now? Luis, I know you touched on it. But maybe with regards to the idea of putting their CRS and PMS together into a single platform, is that still a vision that you could see in the near term? Or is that conversation kind of pushed out quite a bit further into the future?

[Luis Maroto Camino, President, CEO & Executive Director]

No. Not at all. This is something we pursue. We feel quite optimistic about that, and it's part of our core strategy. So this is ongoing, and conversations are happening as we speak. So I mean, as you know, I -- okay, hospitality has been more resilient for us, also benefited from the fact that our business is strong in the U.S., where the impact has been lower. And therefore, we feel optimistic about preparing ourselves for the recovery and continue investing in our technologies that we have in our portfolio.

[Operator]

The next question comes from Michael Briest from UBS.

[Michael Briest]

Luis, I think it says that 24 GDS deals were signed in the quarter. Can you talk a little bit about any overall trends there on pricing or payment terms, anything that's changing? Because I guess you and the airlines must anticipate, as you said earlier, a slower recovery in business. Is that affecting unit pricing? I think somewhere, it was mentioned that there were lower unit fees in the quarter. And then Till or Ana, the bad debt provisions increased by EUR 65 million year-to-date. I think it was EUR 120 million at the end of last year. How much of that is actually being consumed? Because I mean, I'm assuming debtors have actually come down quite a lot way given the revenue base. And what is the bad debt related to? Is it more on the Airline IT or the hospitality side? I guess the GDS revenues are more sort of ring-fenced within the payment system of the airlines?

[Luis Maroto Camino, President, CEO & Executive Director]

Okay. Let me start with negotiations. I mean, one of the issues or issues and advantages of our model is that this unit basis transaction. So of course, the fact that there are less volume means less revenue for us, but also less bill to the airline. So we have not seen, in the negotiations, with the airlines something different from the past. Of course, there are always different negotiations with different carriers, but it's not COVID having an impact in the ongoing and normal negotiations of our distribution capabilities. So I will say the impact in the P&L, I think, is different. It has to do more with the mix than really with the specific negotiations with the carrier. So I will say, I mean, both on Airline IT and on distribution, it's business as usual. Yes, payment terms are a different matter. We have some negotiation, but not related to the deals and to the contractual framework. It's more, okay, based on discussions with some specific customers, but even if they have a current contract, not related to new negotiations with them, okay?

[Ana de Pro Gonzalo, Former Chief Financial Officer]

It's more cash relief measures that we'll have tried to provide to our customers on a one-by-one basis rather than renegotiating the contracts.

[Till Streichert, Chief Financial Officer]

Let me make...

[Michael Briest]

So you would say no -- so there is no change in unit prices of...

[Luis Maroto Camino, President, CEO & Executive Director]

No. No, not at all. I mean, of course, you may have with some, and you may have increases with others as part of the ongoing normal way of dealing with our contracts in the different fields. But there is nothing really related to this specific situation, no. The cash matter is different. That's why we have some movements also on the working capital because, yes, in some cases, there are some negotiations depending on the customer and the financial situation of the customers about some delays in the collection. But of course, as has been explained before, I think we try to always balance between business reasons, short-term costs of the company and medium-term benefits in all the decisions we are taking. I mean, in the cost front, in the cash management to really, of course, take care of the customers, get benefits in the medium term, but also protect our short term.

[Till Streichert, Chief Financial Officer]

Okay. Getting to the bad debt question. So obviously, in the current -- and you're right. So we've increased by EUR 18 million in the third quarter and year-to-date by EUR 65 million. And look, it is a reflection of the current climate in the travel industry. And literally, in 2 buckets, we've updated the provision matrix because you need to reflect what your expected credit loss ratio is going forward in the current climate; and equally, of course, the classification of customers as high-risk customers and accruing accordingly for that. Of course, you do have also -- and that's a little more a mathematical effect as basically, your receivables are aging through the different stages, they move also into your higher-provision areas. And that, obviously, in a prudent approach, how to manage that, you've got to reflect it in your bad debt charge.

[Ana de Pro Gonzalo, Former Chief Financial Officer]

But then we have also been collecting better than what initially we thought, which is part of why you have seen that our free cash flow has deteriorated but not as much. So -- but we are collecting part of the revenues that we are recording. And therefore, as the crisis evolves, we will see whether this debt provision is required and then we will apply it, and we will do the cleaning of our accounts receivable, or whether we finally manage to collect part of it, and then we will revert the accrual. I think that we are not yet at that stage because we are still in the midst of the pandemic, and we continue to talk to our customers.

[Michael Briest]

So the EUR 65 million increase is a provision. It's not actually debts that have gone bad and airlines gone bust, and you're never going to collect it?

[Ana de Pro Gonzalo, Former Chief Financial Officer]

Correct. All right. The part that goes bust is within the impairments. We cleaned that within the impairments. So when -- every time we have, whether it's a travel agency or an airline or a customer going bust, what we do is we clean the balance sheet through the line of impairments. So the bad debt is taking into account the 2 factors that Till has just mentioned, which is you take your accounts receivable, you put them by date, so you do your aging, and that has increased. There's been delays on the collection, and then you increase the percentage because you are being more cautious. But it's like a precaution. We have increased the percentage that we are providing for in the bad debt provision in each of the aging segments. And then on top of that, we have also been more cautious in qualifying customers as higher risk, less risk. We have added more customers to the higher risk and, therefore, providing more specific provision.

[Operator]

The next question comes from Neil Steer from Redburn.

[Neil Steer, Partner of Software and IT Services Research]

Just I've got a couple of quick ones as well, if I may. Ana, just relating to that last comment on impairments. I thought the impairment charge was really taken against the intangible assets on the balance sheet. And I was going to ask you if you could give us a rough feel for how much is due to canceled contracts. How much is due to airline ceasing operations? And I think the third bucket you suggested was where you have developed or spent money historically, but now you feel you're not going to get the anticipated benefits of those products.

[Ana de Pro Gonzalo, Former Chief Financial Officer]

No. I'm not going to give you the exact buckets in each of the questions, Neil. What we have done is being quite prudent. So in the second quarter, with the triggering event, we did a bit of a quick review of all of our major lines and all of our major captions. And then, as you know, normally, we do the impairment testing during the third quarter. And therefore, we have completed it, adding additional. So the same way I was explaining previously to Michael, the bad debt, we have tried to be very cautious, taking into account the current price situation. And therefore, we have taken a very, I would say, careful look at a specific project, which doesn't mean that they are not going to be successful. It means that because of the crisis, the time on which we probably will make the recovery of investment will take longer. And therefore, we have done the impairment. We have also increased the WACC [indiscernible] that also into a worse environment. And those, to give you a little bit more color, tend to be things that are more recent because you have less customers, you have less headroom, and therefore, those business cases tend to be closer to the book value. And of course, if you start deteriorating, you do some haircuts to the expectations, you increase the WACC. And you continue to look at a shorter period of time, those deteriorate faster, and we have impaired for those. Then you have customers which either have ceased operations or, that due to the current circumstances, have decided to cancel the contracts that they had with us. And then we have to impair as well. So those are the 2 basic things that are included under the impairment. But because of the ceasing operations, as you've seen, there are not that many customers. I would not really like to give you any specific number because then, we are too close to giving you some data from some specific customers.

[Neil Steer, Partner of Software and IT Services Research]

Okay. And just a couple of points of clarification. Firstly, do you expect to see negative bookings of a significant magnitude in Q4? And then unrelated to that, you've obviously signed another piece of business with Turkish Airlines. Are you getting closer to core PSS services with Turkish? Or is this very much not related to core PSS? And any decisions they may make on that?

[Luis Maroto Camino, President, CEO & Executive Director]

We would love to, Neil, but no. I mean, I -- of course, Turkish is a very close customer to us. We provide them with different functionalities. And we hope one day to convince them to really get the PSS. So it is our objective. Of course, it is, as you know. They have an internal system that I have been running for years, and we would like to convince them. So I would love to convince them and get them as a customer, but this is not related to that. The fact that they have been using technologies from us for the last 10 years, and we extend our footprint with Turkish as we could. And of course, hopefully, one day, we will be able to really sell them more and one of them, the PSS.

[Ana de Pro Gonzalo, Former Chief Financial Officer]

And in regards with net bookings, we have seen quite a stabilization of the cancellation. And since volumes are quite low and most bookings are done now very close to the time of departure, we are not seeing -- we do not expect Q4 to see an acceleration on the cancellations. So we don't expect a huge improvement, as Luis, I think, has mentioned already. But we don't expect to go back into the negative bookings ground.

[Operator]

Ladies and gentlemen, we have now reached the end of the results call. I will now give back the word to Mr. Luis Maroto for the final remarks. Thank you.

[Luis Maroto Camino, President, CEO & Executive Director]

Thank you very much for attending the call and always for your support to Amadeus. Thanks a lot and looking forward talking to you for the full year results at the end of February. Thank you.