Mondee Holdings, the travel tech darling that rode a wave of post-pandemic wanderlust to record profits in 2023, just released its Q1 2024 earnings. On the surface, everything seems rosy: net revenue up 16%, adjusted EBITDA beating expectations, free cash flow positive, and even a guidance bump for the year. But buried within the upbeat pronouncements and bullish projections lies a subtle shift in the company's revenue composition that could signal a looming threat to its high-flying take rate.

While analysts have fixated on the explosive growth of Mondee's non-air revenue – a remarkable surge from 26% to 51% year-over-year – a less obvious but potentially more significant trend has been playing out within its core air business. Mondee's management proudly trumpeted the company's success in expanding its short-haul international flight bookings, particularly in the Asia-Pacific region. This makes sense: with the region finally shaking off the lingering effects of pandemic travel restrictions, demand for shorter, regional hops is booming.

The problem? Short-haul flights inherently carry lower average transaction prices (ATPs). While the transcript doesn't explicitly break down ATP by flight distance, the implication is clear: Mondee's air revenue mix is tilting towards lower-priced tickets. This is further corroborated by the 62% surge in transactions coupled with a relatively modest 6% increase in gross bookings. More transactions for less total booking value translates to a declining average ticket price.

Here's where the potential time bomb comes in. Mondee's impressive take rate growth – which doubled since pre-pandemic times – has been fueled by a double whammy of higher-margin non-air products and increased transaction volume. But if the underlying average price of its core air offering is shrinking, the company will need an even more dramatic expansion of both transaction volume and non-air sales to maintain its current take rate trajectory.

Let's look at the numbers. Assuming Mondee's take rate on short-haul international flights is roughly 5% (a reasonable estimate based on industry benchmarks and the company's historical air-only take rate), and these flights now represent, say, 25% of its total gross bookings, this shift alone would exert a downward pressure of approximately 0.625% on the overall take rate. To compensate, the remaining 75% of the business would need to generate a take rate of around 9.5% – a significant jump from the current 8.2% – just to maintain the status quo.

Revenue Composition Shift (Q1 2023 vs. Q1 2024)

Source: Mondee Q1 2024 Earnings Call Transcript

Transaction Volume vs. Gross Bookings (Q1 2023 vs. Q1 2024)

Source: Mondee Q1 2024 Earnings Call Transcript

This isn't to say Mondee's doomed. The company's aggressive push into packages, hotels, and ancillary services clearly shows its awareness of the need to diversify revenue and bolster margins. Its AI-driven marketing optimization and focus on higher-value customer segments could also help mitigate the downward pressure on ATPs.

However, the potential for a take rate slowdown raises some critical questions. Can Mondee sustain its phenomenal transaction volume growth in a market where pent-up demand is fading and economic headwinds are gathering? Will its non-air sales continue to outpace the overall business, especially in light of the competitive landscape in these segments?

Mondee's management has repeatedly emphasized its commitment to reaching a mid-teens take rate in the medium term. But without addressing the underlying shift in its air revenue mix, this goal could prove more elusive than investors anticipate. The coming quarters will be crucial in determining whether Mondee can defuse this potential time bomb or find itself scrambling to plug a growing hole in its revenue model.

"Fun Fact: Mondee's founder, Prasad Gundumogula, started his entrepreneurial journey selling flowers online, proving that even journeys can begin with a single bloom. Perhaps his experience navigating the volatile flower market prepared him for the ever-changing landscape of travel."