Sabre is a bellwether for the global travel industry as a major processor of transactions for airlines and hotels. The picture isn't pretty. But the company looks capable of weathering a delayed resumption in travel.
Recent stay-at-home orders have gutted the travel industry, which drives a majority of the revenue for technology company Sabre. The Southlake, Texas-based company’s software-processing revenue comes from helping travel companies sell and market products, process transactions, and manage operations.
The coronavirus pandemic prompted a grisly decline in Sabre’s net airline bookings, which declined by 23 percent in February and by 111 percent in March, due to cancellations overtaking new bookings. Sabre has been processing only about 100,000 flight bookings a day compared to the 1.5 million a day it ordinarily handles.
Executives said the company has sufficient liquidity, with a cash balance of $1.7 billion, to cope with continued turmoil.
“We believe our current liquidity is more than sufficient for a year and a half even in a zero booking, no travel scenario,” said president and CEO Sean Menke during an earnings call on Friday. Two-thirds of the company’s cost structure is variable, which helps provide protection in a prolonged downturn.
The cushion may come in handy. Menke predicted that leisure travel would be more likely to rebound ahead of corporate travel as businesses juggle their responsibilities to maintain the health of their workers and face cost cuts on travel spending due to recession. About 70 percent of Sabre’s airline bookings involve travel management companies, which primarily serve corporate travelers, while about 30 percent is for online travel agencies, most prominently Expedia Group.
The crisis will set back some projects. In January, the company had announced that Accor would hire Sabre for a first phase of building a full service management system that any hotelier who wants to contract for the solution would be able to. That project has been postponed “primarily due to Accor’s furlough of about 75 percent of its workforce,” Menke said.
During the first three months of the year, Sabre generated $659 million in revenue, down 37 percent year-over-year. It reported a net loss of $213 million, compared with net income of $57 million, a measure of profit, in the same quarter a year earlier.
Cash on Hand
Sabre had ended 2019 with about $436 million cash and marketable securities. It has since drawn $375 million in credit. It has also issued $1.1 billion in more debt, and it has begun a cost-cutting program to save a few hundred million more.
The company has also saved by abandoning its bid to buy Farelogix. In March, Sabre paid Farelogix $46 million in a $21 million termination fee and certain attorneys’ fees it had advanced the vendor. The break-up costs equaled 12 percent of the planned acquisition price of $360 million. A reduction in taxes paid in the quarter partially offset the termination costs.
A Story Owing a Debt to Debt
Sabre had a net debt of $3.033 billion at the end of March. Like its travel technology competitors, Sabre will likely see its earnings drop dramatically this year. That will make it harder for Sabre and its rivals, Amadeus and Travelport, to take on more debt to cope with surprises or take advantage of opportunities.
One way to measure this indebtedness is the company’s consolidated leverage ratio, also known as a net debt-to-earnings before interest depreciation and amortization (EBITDA) ratio. The ratio suggests how long it might take for a company to pay back its debt. Ratios higher than five often mean a company will struggle, experts said.
At the end of 2019, Sabre’s net debt was 3.1 times its earnings, compared with larger rival Amadeus, whose net debt was 1.2 times its earnings and privately held Travelport, whose net debt was seven times earnings, said rating agency S&P Global.
The coronavirus has overturned the path of these companies, cutting revenues and likely earnings. As of the end of March, Sabre’s net debt to Sabre’s adjusted earnings for the last 12 months before interest depreciation and amortization ratio stood at 4.3.
The company’s main fix was to borrow more as cost cutting wouldn’t be enough to help it survive.
The new debt, along with reduced earnings, will later this year elevate Sabre’s leverage ratio to 8, a level that S&P Global forecasts will remain until at least early next year. The ratings agency assumes that Sabre’s transaction volumes will be down at least 80 percent in the second quarter of 2020, with significant cancellations and with a slow recovery through the last half of 2020.
Blame Private Equity
Some experts assigned blame for Sabre’s indebtedness on private equity firms Silver Lake and TPG Partners, which took Sabre private in 2007. Before the buyout, Sabre’s consolidated leverage ratio was 2.24. By 2013, the owners had piled the company with debt without significantly enhancing the company, boosting this ratio to 5.5.
The company’s initial public offering in 2014 raised cash that it used to pay down its debt. Refinancings and tax law changes also helped cut its borrowings.
Yet the private equity owners had deferred significant investments in the company, and that put the company at a competitive disadvantage, experts said.
Sabre has had to pile up debt in recent years to make catch-up investments in its technology and products. It acquired tech companies like Abacus and the Trust Group. Last year, Sabre’s $110 million acquisition of airline passenger service system provider Radixx gave it software that appeals to many budget airlines that Sabre hadn’t been able to reach with its more premium product, SabreSonic.
Sabre might enter next year with a precarious pile of debt. But its principal debt maturities don’t arrive until 2022 ($1.15 billion) and 2024 ($1.78 billion), allowing enough time to recover under likely scenarios.
CORRECTION: This story originally said 2023 for the first maturity.
Yet Sabre must make interest payments and charges on its loans. In its first quarter, it faced a $31 million in a “bad debt expense.” But executives highlight its flexibility. Some of its credit agreements have covenants requiring the company to keep its total net leverage ratio to under 4.5. Still, those agreements allow Sabre to avoid penalties due to the sharp decline in travel volumes.
“We believe Sabre is resilient and well-positioned for a post-crisis environment,” Menke said.
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Photo credit: Sabre CEO Sean Menke shown at an industry event in Kraków, Poland, in 2017. Sabre