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At first glance, it seems unlikely that Sabre, a company airlines hire to manage reservations, flights, and other functions, would have a project management problem.
The Southlake, Texas-based company saw its revenue rise 13.9 percent to $3.37 billion in 2016. How could a company with revenue growth like that have an uneven record when it comes to delivering products to customers?
Yet Sabre’s new chief executive Sean Menke implicitly acknowledged some possible issues during its fourth quarter and full-year 2016 earnings call Tuesday. He said his company needed to up its game when it comes to execution and project management, though he phrased these ideas in heavily-coded corporate-speak.
Menke said, “The summation of our collective focus on value creation requires that we improve our allocation of resources to more effectively align with our customers’ needs, time-to-market, and greatest return to Sabre. The heart of this is an honest assessment of our infrastructure, technology, and products, and how we will meet these demands.”
Menke underlined his message to the investment community by saying, “We are very focused on accountability. We want you to hold us accountable.”
Some investors weren’t interested. Tuesday’s quarterly earnings report sent the share price of Sabre’s stock down more than 10 percent.
Investors were reacting to a downward revision in Sabre’s forecasted growth. On the call with investment analysts Tuesday, Sabre’s CFO Rick Simonson said the mid-term to long-term expected pace of earnings per share growth is “off the table.” In other words, the juicy and often-forecast-beating returns that investors enjoyed in the two years since Sabre went public have ended.
Executives told investors not to worry. One key justification for earnings not meeting previously forecast levels, they said, is that the company has to accelerate investments in its core technology infrastructure, a process that will be a drag on profits.
Yet investors will be watching to see if the pace of signing new business and repeat business is falling off due to delivery problems.
One eyebrow-raising moment came in November when Copa Airlines decided to postpone its planned migration from HP Enterprise to Sabre’s reservation system.
Similarly, in 2012, Southwest Airlines backed away. In a decision with a slo-mo impact, this May, Southwest’s huge domestic passenger volumes switch to a reservation system run by Amadeus, Sabre’s rival.
On Tuesday’s call, Sabre pointed to a successful onboarding of American Airlines onto its reservation system last autumn. Excluding the Southwest drop-off, Sabre forecasts that, in 2017, the number of passengers boarded on its systems will increase by more than seven percent.
On Tuesday’s call, CEO Menke, formerly a CEO of Frontier Airlines and an executive at Hawaiian Airlines and Air Canada, said the company needed to invest in technology to meet carriers’ expectations.
Menke noted that he has worked at airlines where he was involved in two projects around passenger service systems. “It’s really a heart transplant that’s happening,” he said of the shifts from one system to another.
“This is an area that we need to put more investment into. The world’s not getting less complex. It’s getting more complex. As we listen to our airline customers, they want more, and in doing all that, it’s hard for them to do it in-house….
“When I look at this, I get pretty excited about it because, having sat in that chair, I understand what airline executives want. We need to make sure we’re investing faster in getting the capability to market that enables them to do what they’re looking to do….”
Sabre has undergone many changes at the top. In the past six months, the company has replaced its CEO, its chief technology officer, and the head of its cash cow unit, Sabre Travel Network, which saw Greg Webb departing after having run it for five years.
Leadership at Abacus, a flight distribution system in Asia that the company acquired in 2015 for $411 million, has also been mostly replaced. Across Sabre, there appears to have been an uptick in departures at the vice-presidential and higher levels in the past year.
Some disruption like this was to be expected. Like its rivals in providing travel technology services, Sabre has been undergoing a wrenching shift from a decades-old use of mainframe computing systems to a so-called open architecture that is considered the best practice today — and has been recognized as such for many years.
To its credit, Sabre has made progress. This summer, the company will debut new desktop software for travel agents that will be reliant on APIs (application programming interfaces, or methods used for retrieving data) that airlines, hotels, and other partners demand.
Menke said, “As a former airline executive, I understand the importance of distribution — all forms of distribution…. I’m also aware that some forms of distribution, including the GDS [global distribution systems, like Sabre] have sometimes fallen short.”
Menke said he planned to intensively invest in the areas that the company’s airline customers most highly prioritize.
Menke said the company would further invest in deploying “lower cost and more flexible technologies” and would “hasten the adoption of cloud and open platforms.”
On the call, executives did not address problems in middle management that are rumored to be common. A look through 800 anonymous employee comments about the company at Glassdoor.com, a review site, highlights a recurring theme: Sabre’s processes for delivering products to clients are apparently flawed.
More than a hundred of the company reviews expressed variations on that theme, suggesting there may truly be a problem — despite the usual caveats about reading too much into anonymous comments from possibly disgruntled workers.
Some anonymous commenters suggest that the company overpromises to airlines on what can be delivered technologically and on a tight deadline. But a related and more common refrain is that the company struggles with execution, or in how effectively it creates and delivers products.
A small handful of commenters at Glassdoor and another site, TheLayoff.com, blame managers for doing a poor job of overseeing projects. Gripes range from proper staffing to managing time-to-market processes.
Analysts looking for fire behind this smoke will be eyeing whether clients like Air Berlin, Alitalia, and JetBlue renew, expand, or withdraw from Sabre.
Employee comments suggest that Sabre is disproportionately dependent on Etihad Airways. In 2011, Etihad signed a $1 billion, 10-year technology deal — presumably the most lucrative one-off deal in Sabre’s history. That made Etihad almost a complete Sabre shop, from its reservations system to its passenger services system.
Employees allege that Sabre managers allow other airline customers to be neglected if an Etihad project is more pressing. The core problem is not Etihad, but one of project management, the critics say — arguing that there should be enough resources allocated to handle all of the customers.
Operational complexity is why Menke is bullish on Sabre. Flight distribution is a business that requires heavy spending on technology. That heavy spending requirement gives specialist technology companies like Sabre an advantage, Menke reckons.
He feels confident that Sabre can provide the technology to help airlines upsell customers, deliver personalized offers, and sell more complex and non-standard products like basic economy seats, which airline executives at United and elsewhere have demanded.
As a former airline executive, he said he also knows that operational shortcomings on the airline side are preventing carriers from optimizing revenue through dynamic pricing of ancillary services, such as assigned seating.
For instance, it’s not enough to sell a seat upgrade. Airlines need to sync up their computing systems to make sure they can fulfill the ancillary sale and have a method to cope if the service somehow doesn’t get delivered to the customer.
Menke believes Sabre can provide the technology to help airlines solve these interlocking problems in a more cost-effective manner than what the airlines might build in-house or buy from competing tech providers.
Menke is optimistic, despite many recent public calls by major airlines for Sabre (and its distribution marketplace competitors) to cut their fees.
On that score, something important happened in December: Sabre lost a lawsuit with US Airways.
On the call Tuesday, Menke said the company would appeal the decision, though the company has, essentially, set aside $32 million related to the loss ($15 million of which was awarded damages) as a precaution.
If Sabre loses the appeal, the company’s negotiating position with airlines may be weakened, at least temporarily. “It is certainly going to be a once-in-a-long-lifetime of GDS contract provisions negotiation opportunity,” predicts the chief executive of Farelogix, a small provider of technology services to airlines that has had many conflicts with Sabre.
Despite Lufthansa’s effort to reduce its dependence on companies like Sabre, which led to wide speculation that other airlines might follow its path, little has changed in overall airline distribution practices.
That situation is also up in the air. Last April, Sabre sued Lufthansa in a Texas court over its move to charge a fee for tickets booked through its system, claiming the German carrier is violating its contract. A Skift check with lawyers only turned up cryptic comments that the case is still in process and things are “quiet.” A legal defeat would weaken Sabre’s negotiating hand with airlines.
On the call Tuesday, the Sabre CFO said that the share of ticket sales passing through Sabre, Amadeus, Travelport, and Travelsky grew slightly in 2016 but the share is forecast to drop slightly in 2017. In other words, it’s stable. So Sabre’s battle is for one of share within a narrow set of competitors.
The profit margins on those sales may be under pressure from two fronts. Travel agents want more financial incentives. They say that the growing complexity of airline products and rules means they have to spend more time booking tickets on average.
CFO Simonson said Tuesday that incentives to agents would increase in 2017. “We’ve shown that we’re a sustainable gainer of profitable market share. We’re looking to, as we always have, make sure we play strategically and tactically in gaining share long-term.”
For this year, Sabre is forecasting margins on its air business to increase slightly, even though revenue growth will drop from the 8-to-10 percent revenue growth range in 2016 to the 5-to-7 percent range in 2017.
Adding context to that, Menke said, “We will make prudent, modest tradeoffs in gross margin, with a goal of driving growth and increasing share, total EBITA [earnings before interest, taxes, and amortization], and cash flow in Travel Network [Sabre’s air division].”
Looking at the bigger picture, he added: “During my airline career, I spent a significant amount of time thinking about distribution alternatives. Leveraging this background, we will continue to help airline customers to optimize distribution across direct [such as an airline’s own website] and indirect [such as through Sabre’s network of travel agents] distribution.”
Menke may find that creating more accountability in Sabre’s processes may prove critical to achieving his goals.