Skift Take

Sabre CEO Sean Menke is right to highlight the progress his business has made during the three years since he took the top job. He's also right to insist the company needs to invest more in tech to keep up with the travel industry's pace of digital change. But will investors be patient?

Sabre said Wednesday it was willing to shoulder heavier costs in an effort to keep the travel technology giant’s growth machine churning. That will include boosting its annualized expenditure on technology by $150 million this year, with likely additional incremental spending in the next few years.

CEO Sean Menke said Sabre is working on a stable of long-term investments that may overshadow short-term results, following the release of fiscal fourth-quarter and full-year results that fell short of some investor expectations.

Menke had an unusually long call with investment analysts on Wednesday to try to explain why the technology expenditure will drive long-term growth, despite potentially squeezing operating income in the short term.

“This will lead to a much more profitable company,” Menke said.

Operating income last year was $363.4 million, versus $562.0 million in 2018, and increased technology expenditure was a key factor.

In the fourth quarter, Sabre booked $941.4 million in revenue. It reported $10.1 million in net income, a measure of profit.

For the full year of 2019, Sabre booked $3.975 billion in revenue and $158.6 million in net income.

Advances on Multiple Fronts

Since October, Sabre has announced several initiatives it will need to support with additional tech spending.

It acquired Radixx, a passenger service solution for low-cost carriers, for $110 million. The deal complements the current SabreSonic system for larger airlines.

It began the first phase of a full-service property management system for Accor under a provisional contract.

It also hired Google Cloud for storage services. The deal anticipates using Google’s tools for data analytics, artificial intelligence, and machine learning to maximize the value of the data the company processes.

Sabre plans to boost its annualized tech spending by $150 million to support the above efforts, such as by kickstarting the migration of its information technology infrastructure to Google and the development of its software for Accor.

Menke’s Vision

On the call with investors, Menke attempted to explain the opportunity Sabre sees as justifying the ramp-up in spending.

Menke said Sabre would use the increased investment to help it get better at “creating personalized offers” for travel agencies and travelers that will encourage more upselling and cross-selling of airline products and services.

“We intend to accelerate our road map for new IT capabilities, processes, and intelligence that will allow suppliers to transition from a transactional focus to a more predictive, customer-centric approach with personalized offers,” Menke said.

“Creating personalized offers isn’t only about creating a new merchandising engine,” Menke said. “It’s also dependent on high-performance shopping capabilities.”

“Shopping volumes over the past few years have grown 50 percent annually, and that is just the tip of the iceberg,” Menke said. “As custom offers continue to evolve, we expect that shopping volumes and complexity will continue to grow. We believe that airlines and more specialized technology providers aren’t equipped to manage these volumes and complexity on their own.”

“We see multiple ways of increasing the total addressable market and revenues in the future,” Menke said. “Unlocking just one more dollar of value per passenger boarded potentially represents a $5 billion opportunity for the global travel industry.”

Potential Turbulence Ahead

Sabre only boosted its flagship distribution business revenue by 1.2 percent, to $673.1 million, last year. This year, it might face even more headwinds.

In the past few years, Sabre has made market share gains in serving travel agencies with its distribution business. But some of those gains came at the expense of Travelport, a smaller peer. Travelport has been distracted by a private equity buyout. Yet if Travelport’s investors help the company regain its footing, they might deny Sabre much more low-hanging fruit to grab.

Sabre has been moving to the cloud in phases for years. The Google deal for cloud services is promising. But it won’t be until 2024 that it expects to complete the move from a transaction-based marketplace on mainframe infrastructure to cloud-based, customer-centric platform. Sabre risks remaining behind the pace of larger rival Amadeus, which has already moved its shopping calculations into a hybrid cloud, if investors don’t support Menke’s vision for tech spending.

Sabre also didn’t account for the potential impact of a spreading strain of coronavirus.

Menke did say that SARS in 2003 led Sabre to see an air ticketing booking decline of 9%.

“In the past couple of days, we’ve seen increased cancelations in the European marketplace,” Menke said.

This potential global health crisis is the kind of event where humans tend to exaggerate how bad the average situation will be, partly due to media hype. Still, at the same time, it’s also the kind of event where people tend to underestimate what statisticians call the “tail risk,” meaning staying in denial about nasty surprises that could happen.

More than its peer companies, Sabre is a major service provider for Expedia Group. That company has been shifting strategy, which can affect its execution. Expedia Group is reliant on driving consumers to book leisure travelers with visual-based TV and digital advertising. But that effort may be undermined by sensationalist media reports about international travel during the health crisis. It’s unclear what knock-on effect any possible hiccups at Expedia Group this year, as it lays off about 12 percent of its staff, might mean for Sabre.

Another wild card is the verdict in the U.S. Department of Justice’s antitrust case to block Sabre’s acquisition of Farelogix, a technology company. If the deal remains stalled, that may hold Sabre’s progress back somewhat. A verdict is expected in the next two months.

In 2019, Sabre recorded $32 million in litigation fees related to the reversal of a previous decision against it in a US Airways antitrust trial. That case is on appeal.

In 2019, Sabre had about $8 million in costs due to antitrust litigation and other foreign non-income tax contingency matters, the company revealed Wednesday.

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Tags: earnings, gds. global distribution systems, global distribution systems, sabre, Sabre Hospitality

Photo credit: Sabre CEO Sean Menke shown at an industry event in Kraków, Poland, in 2017. Sabre

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