Skift Take

Investors liked Sabre's third quarter revenue and profit report. But the verdict is still out on whether the company is relying on cheap fixes like layoffs to hit its targets or if it is laying the groundwork for sustainable growth.

Has Sabre’s executive team embarked on a brilliant pivot that returns the company to its former reliable status as a cash cow? Or, during a transitional period, does the company have underlying cracks in technology and talent investment that have undermined its foundations?

In releasing third quarter earnings Tuesday, Sabre reported that it expects to meet the revenue, profit, and cash-flow targets for 2017, but is it now heading on a path toward sustainable growth?

The Southlake, Texas-based company beat analysts’ consensus estimates for the third quarter, and investors bid up the price of the company’s stock.

That seems to be an expression of confidence in new chief executive Sean Menke. Menke has been selling investors on a narrative that his new leadership team understands how to lead the the company in retaining its profitable middleman status as an airline and hospitality technology vendor and distributor.

All this, though, comes despite suppliers talking about using new technologies to drive more direct sales.

But can Menke make the hard choices to drive long-term growth?

In the third quarter, Sabre saw its revenue rise to $900 million, up 7.3 percent from the same period a year earlier. This revenue gain came despite the hurricanes reducing passengers boarded by 1.3 million during the quarter. Sabre’s profit rose $91 million, a 122 percent increase over the same period a year earlier.

Lowered Expectations

But a significant chunk of the profit came from the layoffs of about 900 employees, or a tenth of the workforce, over the past several months, chief financial officer Rick Simonson acknowledged on a call with investors Tuesday. Another $27.5 million of the profit was from a one-time $43 million litigation settlement of a case with insurance carriers.

The company said in a statement that the layoffs and the trimming of products have “aligned the business to achieve expected growth opportunities.”

Based on trends, the tech vendor said it was on track to meet its outlook for 2017. Menke and Simonson said they expect the company will achieve the high end of its 5 percent to 7 percent annualized growth forecast for the year.

But the forecast set at the start of the year was a downward adjustment in what investors had previously expected. Investors often focus on cash flow as a signal of company health; Sabre downshifted the 2017 projection from $500 million to $350 million.

In short, the cynical take would be that the company’s lowered guidance earlier this year to make third and fourth quarter targets beatable.

One issue Menke will have to deal with is tax-related payments to Sabre’s former private equity owners; analysts estimate the payments will total about $288 million over several years. (CORRECTION: This reporter wrote $350 million in the original. Sorry.)

Customers to Gain and Lose

Looking ahead, much depends on the company winning more contracts while it retools its technology to adapt to changing customer needs.

The outlook is hazy.

In October, news came out that Sabre had lost a chance to win Air Canada’s business when the airline went instead with its rival Amadeus. Menke used to be a top executive at Air Canada.

A game-changer for Sabre would be winning either United or Delta as customers. The two airlines currently rely on a mix of platforms.

But these airlines are said to have complained to Sabre that it tends to give preference to large customers like American Airlines and Etihad — two competitors that United and Delta compete fiercely with.

In a possibly negative signal, Delta recently persuaded code-share partner Virgin Atlantic to move over to Delta’s reservation system rather than opt for Sabre or another technology vendor. That may suggest that Delta is committed to its own system instead of considering Sabre’s.

On a call with analysts Tuesday, Menke noted he has been having conversations with the top officials at major carriers who are champions of the so-called New Distribution Capability, a set of messaging standards. Menke said he is still trying to convince them that the drive to downplay third-party vendors like Sabre comes with potential pitfalls.

Menke’s comments could be interpreted as suggesting that potential customers like United and Delta — which back the new distribution standards — are not sold on Sabre’s vision.

The other major U.S.-based champion of the New Distribution Capability is American, an airline that is in ongoing litigation with Sabre that some say is an effort to try to gain more leverage in its contract negotiations with the company. A verdict favoring American in the case, under appeal, could mean that it and other airline customers might be better able to argue for more favorable contracts.

Another cause for concern regarding Sabre is that it is at risk of losing contracts.

Our sources suggest that JetBlue, Alaska Airlines, and Copa Airlines have had heated negotiations with Sabre about their contracts for using Sabre to handle key technology systems. Sabre executives Tuesday did not have commentary on upcoming contract renewals. They noted that their 2018 forecast will come during the next quarterly call.

Menke also dropped two hints on the call that online travel agencies have indicated they may want to rely more on Sabre to handle the technological burden of interacting with airlines. Menke did not mention the company’s largest online agency customer, Expedia, Inc. But if that is a client considering throwing more business Sabre’s way, that would be a long-term plus.

Sabre also recently won the business of Flight Centre, a large travel agency based in Australia.

Alleged Technical Deficit

The backdrop for the airline turmoil is that many observers believe that Sabre has under-invested in its technology for several years and now appears to be caught in a game of catch-up with its rivals Amadeus and Travelport. To help reverse this, the company recently named a new chief technology officer and a new chief information officer, and deputized them to research the sequencing of new technology investment.

The company has not yet determined how it may shift its distribution business’ heavy reliance on IBM mainframes to one using more open-source methodologies and cloud-based systems. It is also still reviewing which products its Airline Solutions division will emphasize and which will be cut.

Simonson only said, “There is a sharper focus on investing for higher return.”

Simonson said the company plans to make the necessary investments, at least in the short term, by shifting the focus of its existing budget money to higher priorities rather than add more spending overall.

The caveat in that remark is that Sabre had already raised its planned estimate for capital expenditures at the start of the year.

Sabre confirmed its capital expenditures would be in the $335 million to $355 million range for 2017. That range is notably above the $328 million spent in 2016, the $287 million spent in 2015, and the $227 million spent in 2014.

Investors bullish on Sabre will take the increased spending as a sign that the company can grow steadily through this transformational period without a significant change to the attractiveness of its stock performance and dividends.

Cynics will say that to catch up with its peers Amadeus and Travelport, the company would need to start investing more — perhaps about $450 million a year — in capital expenditures to get back on track.


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Tags: airlines, earnings, sabre

Photo credit: This summer, Sabre CEO Sean Menke did a listening tour of major markets. This photo is from a stop in Kraków, Poland. Sabre

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