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Sabre Sits Pretty As Travelers Still Need Middleman

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S ometimes it's tough to cut out the middleman. In a world where personal travel agents are a "Mad Men"-style relic and consumers are savvier about Googling deals online, one might think travel intermediarySabre Corp. ( SABR ) is at risk of going the way of indoor smoking and three-martini lunches.

But the company's vast network and information technology strength have put it in a plum position to benefit from both traditional travel agents and online agencies alike.

Sabre operates what is called a global distribution system, or GDS -- essentially a huge reservation network that keeps an inventory of available flights, hotels, schedules and rates, and aggregates them in a way that is clear and accessible. Most major airlines and several online travel sites use Sabre's system.

"It's the major value of the GDS," Cowen & Co. analyst Gregg Moskowitz told Investor's Business Daily. "Otherwise you'd have direct bookings, which clearly the airlines would love because the margins would be higher, but you wouldn't be able to reach as many customers."

Corporate fliers often rely on traditional travel agencies, which are tuned into the GDS and are said to account for about 30% of U.S. travel bookings. But even individuals who click around for flights on the Web are likely to wind up using some kind of aggregation service, since online travel agencies, or OTAs -- such asExpedia ( EXPE ) andPriceline ( PCLN ) -- also use a global distribution system.

In Expedia's case, there are two -- it uses both Sabre and major competitor Amadeus, according to Morningstar analyst Dan Wasiolek, who said that all OTAs use one or two GDSs.

"They're not (planning on) reinventing the wheel," he said. "Major OTAs are still using GDS to source airline (content)."

Few Rivals

The travel network industry is populated by only a few major players. Amadeus and Sabre jockey for the lion's share, withTravelport ( TVPT ) trailing in the No. 3 spot, say analysts. With 37.1% of air bookings as of Q3 2015, according to Sabre's estimates, the company leads the U.S. GDS market. Rival Amadeus, which has more exposure abroad, is No. 1 in Europe.

Under Sabre's model, airlines and hotels pay the company a distribution fee, and Sabre pays travel agents an incentive to use its system. About 70% of its revenue comes from the global distribution system, while the rest comes from its growing IT solutions segment. Morningstar estimates the company has a "high-teens share of the airline IT market."

In its most recently reported quarter, Sabre said adjusted earnings grew 26% to 29 cents a share, in line with Wall Street views. Sales rose almost 17% to $785 million, topping views for $783.6 million.

Airline and hospitality solutions revenue rose 4.9% to $219 million during the quarter. Travel network revenue climbed 22.1% to $569.2 million as bookings grew 29.5% on strength in the Asia-Pacific region.

Sabre has been fortifying its position in the Asia-Pacific, an area that provides much room for growth, say analysts. In July, it completed the acquisition of the remaining 65% of Abacus International that it did not own for net cash consideration of $411 million. Abacus is Asia-Pacific's leading GDS.

Selling Properties

The company also has been shedding properties as it narrows its focus. Earlier in the year, Expedia acquired online travel agency Travelocity from Sabre for $280 million in cash. Expedia also acquired OTA Orbitz Worldwide this year, effectively solidifying its hold over the domestic OTA market.

While Sabre's GDS offers both airline and hotel listings, its lodging content is "not as strong" as its airline content, says Morningstar's Wasiolek, with "a few tens of thousands of hotels" vs. Priceline's hundreds of thousands of accommodation listings.

According to Cowen, only 27% of hotel reservation volume is made through a GDS, compared with 90% of airline reservation volume.

"Given that GDS's help airlines realize higher ASPs, we are optimistic that penetration can increase, but it is by no means guaranteed, given the dispersion of bookings share" among global distribution systems, online travel agencies and direct bookings, Moskowitz wrote.

Growth Prospects

On the IT solutions side, the hospitality segment offers room for growth, and Sabre knows it. Its $154 million acquisition of hotel reservation system provider Trust Group, announced in late November, is smaller than the Abacus deal, but one that adds to its hospitality segment. That's an area that Sabre Chief Executive Tom Klein sees as "increasingly strategic" to the company, according to Moskowitz, who said that Sabre's solutions side of the business is seeing faster growth.

The major risk to Sabre and other global distribution systems is what is known as disintermediation, or cutting out the middleman.

Lufthansa andSpirit Airlines ( SAVE ) tack on additional fees for consumers who don't book directly through official airline channels.Delta Air Lines (DAL) reportedly has wiped its listings fromTripAdvisor (TRIP) and other OTAs.

GDS market growth hasn't matched pace with overall airline industry traffic as travelers book flights directly from airline sites, according to Wasiolek.

But that risk has stabilized somewhat, he said, as low-cost carriers have found it difficult to reach global and corporate customers without the help of a GDS. And as Sabre and Amadeus add more ancillary services -- think premium seats and extra legroom -- they are providing airlines more control over their branding and ability to upsell via a GDS.

In theory, an airline could link up directly with online travel agencies like Expedia or Priceline to bypass a GDS. But Wasiolek notes that the process of aggregating carrier data is expensive and time-consuming for OTAs, and it would be inefficient for travel agents and travel management companies to work through OTAs that lack the aggregated content and back-end capabilities of a GDS.

Little Turbulence

For now, the era of the global distribution system doesn't seem to be hitting much turbulence.

"While airlines have had some success with direct bookings, their success in evading the GDS for indirect booking channels (traditional travel agents, travel management companies, online travel agencies) has been very limited," wrote Wasiolek on Nov. 6. As a result, all airlines continue to use the GDS distribution channel to access traditional travel agents and travel management company-driven demand and most all of online travel agency traffic, wrote Wasiolek.

And what about services likeAlphabet 's (GOOGL) Google Flights, a search tool that relies on flight information software company ITA Software?

The Google service, which has been around for several years, presents "no budding threat" and "certainly hasn't had much impact," said Cowen's Moscowitz. "But it's something to monitor longer term nevertheless."

Sabre share prices have climbed 80% from their initial price of 16 in April 2014. The company, which originally was spun off fromAmerican Airlines (AAL) parent AMR in 2000, has an IBD Composite Rating of 87, meaning it has outperformed 87% of all other publicly traded companies in a mix of technical and fundamental factors.

The stock is a member of IBD's Leisure-Travel Booking group, which includes highest-ranked memberCtrip.com (CTRP) as well as Priceline, Expedia and smaller rival Travelport. The group as a whole ranks 17th out of IBD's 197 industry groups.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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