Airline Reservations Giant Sabre Gears Up for Turbulence Ahead

By JAMES F. PELTZ

April 6, 2001 12 AM PT

TIMES STAFF WRITER

Sabre Holdings Corp. and its stock are riding high again after rebounding from a slump a year ago. But the operator of the world’s biggest airline reservations system is bracing for another potential downdraft later this year.

Growth in airline travel is beginning to stall. All major carriers have issued warnings that their first-quarter profits will be hurt by a decline in business passengers, and there’s concern that if the economy keeps slowing, leisure travel also will suffer. On Thursday, Delta Air Lines chief Leo Mullin said his airline has already begun to see a sharp drop in bookings from both business and leisure travelers.

Sabre is confident it can weather the problem. The Fort Worth-based company still sees handsome revenue and earnings growth of 20% for 2001, and long-term growth in the high teens for both categories, said William Hannigan, Sabre’s chairman and chief executive.

Its optimistic forecast is based on the premise that, as business travel declines, the airlines will slash fares to keep their planes full with leisure passengers. “And for us, the $99 leisure traveler replacing the $580 business traveler doesn’t negatively impact us, because we get paid on a booking basis irrespective of the fare,” Hannigan said in an interview.

But he conceded that “if you get a long-term [economic] slowdown, where the business passenger isn’t getting replaced by the leisure traveler, then we have a challenge.”

Analysts agreed. “In the short term, there certainly could be some industry weakness for bookings if, in fact, people travel less,” said Matthew Fassnacht, an analyst with J.P. Morgan Chase Securities in New York. “They [Sabre] only get paid when people get into planes.”

Hannigan, though, has taken steps to help protect earnings growth at Sabre, which enables about 54,000 travel-agency offices in 100 countries to make reservations with 420 airlines, 50 car-rental companies, 230 hotel operators and scores of railroads, tour companies and cruise lines. It also makes the software used by airlines at boarding gates for processing passengers. The company had 2000 revenue of $2.62 billion.

Last year Sabre slashed about 1,200 jobs, reducing its work force to about 10,000, as part of a plan to cut $100 million in annual operating costs. Sabre also raised prices for its core reservations business by an average 4.6% last year.

Last month, Hannigan also announced plans to sell the one big Sabre division that’s been struggling: its outsourcing and software group, which handles the computing operations at airlines and other companies. Sabre agreed to sell the unit to Electronic Data Systems Corp. for $670 million.

The division is ailing from drooping revenue--it fell to $853 million last year from $953 million the prior year--and it hasn’t won a major contract in more than a year. The group also wasn’t as profitable per dollar of revenue as Sabre’s main reservations business, Hannigan said.

Finally, Sabre’s 70%-owned online travel site, Travelocity.com Inc., is taking market share from both online and conventional bricks-and-mortar travel agencies, said Jennifer King, an analyst at Merrill Lynch & Co. in San Francisco.

Travelocity’s revenue last year tripled to $193 million from 1999, though it lost $114 million-- a big reason Sabre’s overall net income fell last year to $257 million from $264 million in 1999, excluding one-time gains and charges. However, Travelocity in January predicted that it would break even in this year’s second quarter and turn its first operating profit for the full year 2001, excluding one-time expenses.

Travelocity also is the No. 1 online travel service, capturing 18% of U.S. consumers who bought tickets on the Internet, according to a January survey by Nielsen/NetRatings and Harris Interactive.

Sabre also bolstered its role in selling corporate travel services online by purchasing competitor GetThere Inc. last year for $757 million.

“With Travelocity hitting on all cylinders, and one of the leading corporate travel systems under its wing, we think Sabre is well positioned to benefit as travel moves online,” Fassnacht said.

Once a division of American Airlines parent AMR Corp., Sabre went public in 1996 when AMR sold an 18% stake in the company. In March 2000, AMR completely freed Sabre by distributing the rest of Sabre’s shares to its stockholders.

Bad timing. That flooded the market with Sabre shares just as the stock market--especially the high-tech sector that includes Sabre--was peaking. The problems at Sabre’s outsourcing group also didn’t give investors confidence.

Neither did the growing number of Internet travel sites, such as Priceline.com and Expedia Inc., which clouded Sabre’s outlook in the minds of many investors.

Sabre’s stock stood above $50 a share in early 2000, but lost half its value within six months. Since September, the stock has been steadily climbing, and it closed Thursday at $45.98 a share, up 98 cents on the day, in composite trading on the New York Stock Exchange. Travelocity’s stock, meanwhile, rose 63 cents Thursday to close at $16.50 in Nasdaq trading, off its 52-week high of $32.50.

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Sharpened Sabre

Sabre Holdings’ earnings are climbing in response to the airline reservations giant’s gains in online travel, cost cutting and its plan to shed its ailing outsourcing division. Sabre is the majority owner of Travelocity.com, the No. 1 Internet travel service.

Sabre’s profit is growing again ...

Year net income, in millions, before one-time gains and charges.

2001 (estimated): $308 million

... aided by Travelocity’s strength.

Top online travel sites by share of purchasers:

Travelocity.com: 18%

Southwest Airlines: 14%

Expedia: 11%

Priceline.com: 9%

Delta Air Lines: 8%

Other: 40%

Sources: Sabre Holdings, Nielsen/NetRatings-Harris Interactive, JP Morgan Chase