Can Sabre Slice Up Its Travel Rivals?


By Eric Wahlgren The fallout from September 11 has been dramatic on Sabre Holdings (TSG), which owns the world's most-used travel-booking system. Last year ended with its transactions down a miserable 8%. And the public's ongoing queasiness about travel continues to be felt: Sabre, also the name behind No. 2 online-travel company Travelocity, expects earnings per share for fiscal 2002 to fall at least 29% short of projections made before the terrorist attacks in New York and Washington.

Still, the stock is far from being a basket case, unlike those of some of the nation's largest airlines. On the contrary, Wall Street is mostly bullish on Sabre these days due to how the Southlake (Tex.) company has dealt with a global travel slump. For starters, it has hacked more than $100 million in costs from its 2002 business plan.

And despite the cost-cutting, Sabre has continued to make key technology and other changes in both its offline and faster-growing online businesses. The moves leave it better positioned as people start reboarding planes, trains, cars, and ships again, analysts say (see BW, 5/27/02, "Travel Makes a Swift Trip Back"). Among the recent initiatives: Sabre on Apr. 11 bought back the 30% of publicly held Travelocity shares it didn't already own.

"SIGNIFICANT REBOUND." "We think that Sabre is managing well in this difficult operating environment," says David Togut, a Morgan Stanley analyst in New York, in a recent research note to investors. "While 2002 is clearly a difficult transition year, we see a potential for a significant rebound in air bookings, earnings per share, and cash flow in 2003."

Some of that rebound is already factored into the stock price. After sinking to $22.50 following the terrorist attacks, Sabre shares rose 118% to a post-September 11 high of $49.16 on Mar. 11 before settling back at $37.95 on May 20. Yet Togut, who gives Sabre Morgan Stanley's highest rating of overweight, has a $54 price target on the stock, meaning he believes the shares could appreciate an additional 42% in the next 12 months.

Already, Sabre's first-quarter results released on Apr. 18 topped Wall Street estimates. The company now expects to increase earnings 12% to 18% in 2002 on a year-over-year basis on revenues that are flat to 5% higher. More specifically, it's forecasting earnings per share of $1.93 to $2.03 (or net income of around $284 million), on revenues of $2.1 billion to $2.2 billion, compared with 2001 profits before special items of $1.72 a share, or $232 million, on revenues of $2.1 billion.

NO RAISES. "I think earnings will be very strong this year and next," says Tom Underwood, an analyst at Legg Mason in Reston, Va., who has a market-perform rating on the shares. Underwood says his confidence in Sabre's results "has a lot to do" with the cost cutting it has pursued since September 11. Indeed, Jeffery Jackson, Sabre's Chief Financial Officer, says revenue growth would have been in the "high teens" in a normal year.

As part of the cutbacks, Sabre has eliminated more than 500 positions from its global workforce of about 7,000, Jackson says. It's also forgoing its usual companywide employee raise, he says, and deferring some nonessential investments. "It's really across the board," he says.

But reining in spending is only part of the story. Sabre expects volume to improve by yearend in its Travel Marketing & Distribution (TMD) unit, the travel booking and information system that generated 77.5% of Sabre's revenue -- or $424 million -- in the first quarter. In that quarter, global bookings fell 13.8% over the year-ago quarter. But Sabre expects them to be down just 7% for 2002 overall, indicating an uptick in volume later in the year.

UPBEAT OUTLOOK. Sabre collects fees whenever users -- some 66,000 travel agents worldwide -- of its SABRE 1 system book air tickets, car rentals, hotels, cruises, and other travel-related services. The typical fee for an average plane trip, which is three legs, ranges from $11 to $12, a spokesman says.

The 2003 outlook for Sabre's TMD workhorse is even more upbeat. Next year, Morgan Stanley's Togut sees a 12% jump in bookings. Jackson says Sabre is not releasing projections yet but that Togut's figure is "a good guess."

Recent upgrades to the booking system could also help Sabre rebound, travel experts say. Worldwide, its system has about a 40% market share followed by franchise giant Cendant's Galileo system, which has about a 25% share, Underwood says. Among the new capabilities, agents using the system will now be able to search airfares available on online-travel sites in addition to the fares published by the airlines.

LAST-MINUTE TRAVEL. The new features will increase Sabre's appeal, says Lorraine Sileo, an analyst with Web-travel consultancy PhoCusWright in Sherman, Conn. "It's very helpful for travel agents to be able to offer Web fares since they're viewed by customers as the lowest in price," she explains. And Sabre is the only company with this capability, says Krista Pappas, senior vice-president at New York-based FareChase, which developed the new Web fare-search software.

Sabre, of course, will be counting on its own online-travel agency for growth in 2002. It's predicting that Travelocity, which represented 10.6% of revenues, or $74 million, in 2002's first quarter, will boost revenues by 20% to 30% this year. Helping get it there will be the recent purchase of last-minute travel consolidator Site59 for $43 million. The acquisition will broaden Travelocity's offerings in the more lucrative travel-packages business, Jackson says.

Travelocity also plans to increase so-called merchant sales as a percentage of its business to 25% by yearend from the current mid-teens. Merchant sales have higher margins, since Travelocity can obtain a hotel room or other travel product at a fixed price and then mark it up. For the bulk of its transactions, Travelocity typically acts as an agent, collecting a fee for a product it sells at a fixed price, such as a plane ticket.

LOSING SHARE. Sabre expects big revenue growth as well -- 40% to 45% -- from its GetThere unit, which provides Web-based travel-reservations systems to corporations and others. But the unit is still only a small contributor overall, representing about 2.2% of revenues, or $12 million, in the first quarter. And it's not expected to turn a profit until the first half of 2003. An additional 9.7% of Sabre's revenues come from its Airline Solutions unit, which provides software designed to help airlines lower operating costs.

Despite the brightening outlook, some experts have concerns. Among them is that Travelocity, which was the pioneer and until recently the market-share leader in the online-travel-agency biz, is losing share. Sileo estimates that Expedia, originally a Microsoft venture and now controlled by media company USA Interactive, had about 33% of the market in the first quarter, compared to Travelocity's 24%.

Other competitors appear to be horning in on Travelocity's business, such as Orbitz, the Web site launched last year by the major carriers including American, Continental, Delta, and Northwest. Sileo says Travelocity has to be careful that "it doesn't lose momentum." (The U.S. government is looking into whether the airlines are favoring Orbitz -- their own site -- over other sites when providing the lowest fares.)

FULLY VALUED? Jackson, meanwhile, says his company is "incredibly focused" on Travelocity's challenges, which include becoming less "air-centric" and more focused on higher-margin offerings, such as merchant sales and cruises. A new management team installed in early May is moving in that direction, Jackson says. Sam Gilliland, a former executive vice-president and chief marketing officer at Sabre, became CEO of Travelocity when Terrell Jones retired on May 6.

At least one analyst believes Sabre shares are fully valued. "The stock recovered from September 11," says Markos Kaminis, an analyst with Standard & Poor's, who has a hold rating on the stock. "The upside is somewhat limited." Jackson, meanwhile, points out that Sabre is trading at about 20 times expected 2002 earnings, which is slightly lower than the 21 price-to-earnings ratio for the benchmark S&P 500-stock index.

Kaminis also says his hold rating shouldn't be construed as negative. "Investing in Sabre is a less risky venture than investing in individual airlines or individual hotel companies," says Kaminis. "You are really investing in the travel industry more than in one company."

Sabre combines some of the faster-growth characteristics of an online-travel company with more tried-and-true businesses. Plus, it has the financial wherewithal -- some $700 million in cash and equivalents -- to make acquisitions. If you're convinced the public will soon regain its wanderlust, Sabre could be worth taking a flyer on. Wahlgren covers financial markets for BusinessWeek Online in New York


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