A federal judge Thursday heard lively closing arguments in the U.S. government’s antitrust challenge to the proposed merger of travel technology companies Sabre and Farelogix.
U.S. District Chief Judge Leonard Stark listened as attorneys from both sides made their final pitches to a packed Wilmington, Delaware courtroom, which included Sabre President and CEO Sean Menke and Farelogix CEO Jim Davidson in the front row. Judge Stark must decide whether to block a proposed $360 million Sabre-Farelogix deal on antitrust grounds.
The trial has marked the highest-profile antitrust case ever in airline distribution, and the stakes are high. Should the Justice Department lose, it could embolden Sabre — and its peer companies in the distribution industry, Amadeus and Travelport — to pursue harsher lines in their future contract negotiations with airlines, government lawyers argued.
Meanwhile, a win would encourage the Trump administration’s top antitrust cops. It might also create a new court precedent for pushing back against technology mergers at a time of continuing industry concentration across sectors beyond travel. The Justice Department has been reviewing if various large companies are using oligopolistic power to extend their dominance over digital marketplaces.
The U.S. Department of Justice — which sued in August to block the merger proposed in November 2018 — has faced a high threshold with proving its case during nearly two weeks of court proceedings.
The government argued that Farelogix’s products didn’t need to be identical to Sabre’s if they were reasonable alternatives to each other. Farelogix has offered two broad types of products. One helps airlines connect directly with travel agencies to bypass the three middlemen who provide distribution technology (Sabre, Amadeus, and Travelport).
Farelogix got a majority of its 2018 revenue from direct connects, and two-thirds of its workers supported the direct connect service.
Farelogix’s other service, merchandising, helps travel agencies provide next-generation selling techniques that integrate through the tech middlemen. The company said this is its fastest growing service.
Sabre is like a full-service restaurant at a hotel and Farelogix is like a diner next door, argued government lawyers. In the analogy, the restaurant and diner compete in food service.
Sabre’s lawyers countered that it was more accurate to say Sabre is like a hotel that provides shampoo to guests and that Farelogix is like a shampoo manufacturer. They don’t compete in a pragmatic definition of the same relevant market, they said.
The Justice Department focused on how both Farelogix and Sabre have airlines as customers and argued that the extent of overlap in businesses didn’t need to be large for a merger to be potentially anti-competitive.
The Justice Department tried to embarras Sabre.
In closing arguments, U.S. attorneys cited January 2018 testimony Farelogix CEO Jim Davidson gave to a still-ongoing European Commission investigation into Sabre and Amadeus’s business practices where he described Sabre as a key competitor.
Last week, Davidson agreed under cross-examination that he had “probably” referred to Sabre, Amadeus, and Travelport as an “oligopoly” in business conversations in recent years.
The government cited an internal Sabre merger analysis document that, during draft revisions, had for four days included an argument that the merger would help “mitigate” the ability of airlines to bypass Sabre and other global distribution systems. (Sabre’s attorneys argued an official made a mistake.)
The government also cited a document Menke submitted to Sabre’s chairman seeking support for the merger that, attorneys said, “called out mitigating the risk from potential GDS [global distribution system] bypass as a benefit of the deal.” The Justice Department also cited an analysis prepared by Sabre five months ago and seen by Dave Shirk, Menke’s deputy in charge of distribution and airline IT services, that it said implied an anticompetitive intent.
The government cited a text message Sabre’s chief of sales with major U.S. carriers sent to a colleague saying that American Airlines executive Cory Garner would be upset at the merger because he would think it would “entrench” Sabre further.
The government asked American’s Garner, outside of Farelogix, who could provide his group a next-generation distribution capability messaging connection that’s comparable.
“Nobody,” Garner said.
An American Airlines document said the company avoided $101 million global distribution system costs in 2018 as a result of its direct connect strategy. It works with agencies like AmTrav and TripActions.
Garner estimated it would cost American Airlines about $40 million to build a comparable technology with an ongoing $25 million a year in maintenance cost. He said the Farelogix-supported direct connection is 90 percent less expensive than using Sabre’s traditional, full-service global distribution service.
A Delta Air Lines testified that he was “not aware” of any other company other than Farelogix that provided a comparable product and said Delta, which has a self-built, next-generation retailing technology, is considering using Farelogix. Delta said Farelogix’s mere presence helped in negotiations with Sabre and its peers.
A Hawaiian Airlines executive testified the carrier was considering hiring Farelogix for services in 2021 or so. Farelogix is in a pilot test with a Latin American airline, and it recently renewed contracts with American Airlines and Lufthansa, according to testimony.
The government argued that it had submitted evidence that Sabre had been recently negotiating with a foreign airline to sell both its passenger service system and some distribution services. U.S. attorneys said that Sabre’s proposed pricing assumed a post-Farelogix merger pricing of component service that would be significantly more expensive than what the airline might have gotten by hiring Farelogix for comparable merchandising service today.
Sabre’s attorneys countered that the government had mischaracterized that document, though the private nature of the contract meant they had to submit some clarifications privately to the judge.
Sabre Pushes Back
Government attorneys have faced a difficulty in challenging a merger involving companies that Sabre’s lawyers argued aren’t direct competitors.
Sabre argued that the direct connect, or bypass technology, that is one of Farelogix’s offerings isn’t the future of the industry. It presented testimony from executives from major travel agencies BCD Travel and CWT [formerly Carlson Wagonlit Travel] who said they predicted that next-generation retailing could only pragmatically be done if well-capitalized companies with agency reach, like Sabre, handle it.
The government attorneys countered that both agencies receive significant incentive fees from Sabre.
Sabre’s attorney’s pointed out that, several years ago, Farelogix, with customer American Airlines’ support, donated the core concepts of its technical approach to next-generation merchandising to an initiative led by industry trade group International Air Transport Association (IATA). Sabre and Farelogix argued in testimony that this so-called New Distribution Capability effort meant there was nothing unique about what Farelogix does now and that there are many competitors.
Sabre’s lawyers said the government failed to properly define the U.S. market or to put a dollar value on it.
Sabre rattled off the names of more than 20 companies it said provide comparable, alternative services to Farelogix, in addition to airlines being able to build similar technology on their own, as they noted Delta had done. Sabre said JetBlue is using Datalex, and Southwest is using ATPCO, formerly known as the Airline Tariff Publishing Company, while Spirit is using Amadeus’s Navitaire.
Sabre said other potential providers of solutions to carriers like American, Delta, and United include China’s TravelSky via its OpenJaw subsidiary, ATPCO, Sirena Travel’s Websky, TPConnects, Pribas, Caravelo, PROS, Infiniti, AirSky, Unisys, Amadeus’s Hitit Loyalty, and Amadeus’s Navitaire.
Sabre argued that 12 of the 21 most significant airlines worldwide are pursuing next-generation retailing are getting their technology solutions from sources other than Farelogix.
Sabre’s attorneys told Judge Stark that Sabre participates in a two-sided marketplace where it also serves agencies, not just airlines.
On the witness stand, Sabre CEO Sean Menke said “[travel] agencies have been very supportive of the deal. They know there’s continuing transformation happening in the ecosystem. They look for a trusted technology provider that is going to work with airline and hotel customers to provide the appropriate content…their customers [need].”
Sabre argued that, after a Farelogix acquisition is approved, airlines will still have negotiating leverage as before because they’ll retain their existing ability to build direct connections or use the other air content aggregator and connectivity services out there.
Sabre also said CEO Menke’s “word is gold” when he has made his non-binding promises to airlines to maintain Farelogix contracts on the same terms, including price, for at least three years.
In a statement to the media after arguments wrapped up, Menke said, “In its mischaracterizations of the travel industry, the DOJ [Department of Justice] failed to account for how this combination will significantly accelerate innovation and better meet the increasingly complex needs of today’s traveler.”
Wall Street analysts say Sabre stands to gain millions in market value if it clinches the merger, though it is also considered a relatively safe bet without Farelogix.
Farelogix faces a worse prognosis. A government win might imperil Farelogix, a company that may not be able to get an alternative bidder to Sabre’s at an attractive price.
American Airlines and United Airlines considered buying Farelogix but had balked at an asking price of about $500 million, according to testimony. Another interested buyer in 2018 was an undisclosed private equity backed entity.
Judge Stark didn’t reveal his timeline publicly for deciding the case. Either side could appeal Judge Stark’s decision. Sabre postponed its merger agreement until April 30, by which time Sabre expects a verdict. In the United Kingdom, the Competition and Markets Authority (CMA) is also doing a review of the Sabre-Farelogix merger by April 12.
UPDATE: On Friday, the CMA said it had competition concerns.