Sabre CEO Tom Klein spoke to industry stock analysts at a Nasdaq investor conference today.
Klein laid out the investment case for Sabre, and we have highlights from that below.
But first, Klein took time to discuss Sabre's view of Lufthansa's plan to "tax" bookings made via middlemen like itself.
Addressing Lufthansa's claims
Lufthansa Group, parent of the German national carrier, recently said that, from September this year, it will add a Euro 16 surcharge to any bookings made via the global distribution systems (GDSs) -- Sabre, Amadeus, and Travelport -- covering both offline and online third party intermediaries.
The levy will apply on every first issue ticket for Lufthansa, Austrian Airlines, Brussels Airlines, and Swiss International Airlines worldwide.
Klein was asked by an investor how the Lufthansa move impacts Sabre. (Air France might do something similar, say reports.) Sabre's CEO said he did not see it as an industry trend.
"What we have is one annouced action. Nothing has happened yet, except that we have taken a haircut on our market cap, as have our competitors....
What they've done is what airlines do when they signal airfare increases. They say they might do this in the future. I think it'll be interesting to see how it plays out in September.
I'm confident that our business will be fine. They're just about two-and-a-half percent of our volume overall.
Their distribution cost through Sabre is less than the 2% average we have for airlines overall. They get a high yeild through our channels...
This will turn out to be another proof point of the stability of the GDS industry. It will take time to play out. It will play out over the summer, until September....
I would suggest that a carrier like Lufthansa, and maybe even specifically Lufthansa, gets as much or more value out of GDS services as any other airline group in the world.
About 70% of Lufthansa's revenue comes through GDSs. And the airline is structured in a way that it really takes advantage of GDS services.
As an example, they have a good point-of-sale business, a better mix than most airlines. Their airlines are full of a United Nations of customers, not just Germans, and they do well in destination cities, much better than Delta, United, or American....
In markets where they're not strong they still get strong point-of-sale.
They have complex networks, they have premium cabins and multiple classes of service, they do a lot of sharing of passengers.
All of those things are facilitated through GDS technology, and it's difficult to do all of those things, including comparison shopping and servicing of corporate customers, without a GDS -- certainly difficult to replicate as a one-off.
The last part is that the servicing cost of customers is high for Lufthansa.
It has admitted to the press that it has a high cost of labor. So it is not set up to service customers with the level of service necessary for direct business at scale.
Taking phone calls from customers is not a good business for Lufthansa.
They are on the precipice of making themselves uncompetitive. Their annoucement is: We'll make our fares higher than our competitors.
And buyers will broadly reject this strategy.
If you're a corporate buyer that has a corporate procurement system set up to do quality control and hit a system with robotics to continually check to see if there is a better itinerary or fare out there, when you take a carrier as large as Lufthansa out of the process, you add a level of complexity to corporates that is unattractive.
And except for a few large German companies, Lufthansa is only a small share of budget.
We take Lufthansa seriously. But we haven't seen a technical solution from them."
Klein made a larger pitch for the GDS business.
Klein was bullish on his company's global distribution business, where he says Sabre has been seeing accelerating growth month after month in 2015, something he'll discuss more on the upcoming second quarter conference call.
"First of all, there is a virtuous cycle of value where the GDS connects airlines to their highest-yielding customers.
Those are generally corporate buyers, as well as travelers who want choice in selection or service model or post-booking services.
To get to those customers, the airlines have to provide content to the GDSs, so that an agency can best position the airline's product. That means giving the agents full content -- which gives buyers confidence and creates more of a frictionless marketplace.
It means giving agencies the tools they need to service the largest, most complex corporations they need to purchase travel.
For the largest corporations, just airline spend alone could approach $1 billion a year. There are a number or corporations out there that spend $1 billion a year on airline tickets.
As a procurement category, this is managed like any other supply chain you have in a corporation for purchasing. That process is built around technologies like ours.
We're very deep into that corporate buying process. We think we're the best. But as an industry, that procurement process is wrapped around the services that GDSs like us provides.
And it goes beyond "click-to-buy," which is a very small part of the services we provide for agencies, airlines or corporations.
For consumers, they want transparency, choice, and services that airlines today aren't in a position to provide for them."
Klein said that, in Europe in the aggregate, it has low teens market share. In the Middle East it has share in the high twenties; in the US it has a majority share; in Africa it has small single-digit share.
"There's a number of markets where we haven't been, like Africa, or Spain, or Turkey. We think the markets are underweighted in some places, and they move fairly slowly....
We're the only GDS that has a single global desktop that we upgrade across all of our customers, Sabre Red -- our a SaaS product, with localizations. We go to market in an efficient way.
It's a daily grind. In Europe, Middle East, and Africa, you have the highest unit economics of anywhere in the world for our business, so it's profitable growth.
But it's a bit of hand-to-hand-combat because it's a fragmented market of agencies."
The importance of the Wyndham deal
Klein said Sabre has in the past nine months had "first to market" deals for its hospitality enterprise segment with Wyndham, first with a property management solution (PMS) deal and then with a central reservation system (CRS) deal with the US-based chain that has 7,500 properties worldwide.
"The reason it was a breakthrough deal is that Wyndham is one of the 25 largest hotel brands in the world. All of the 25 brands have central reservation systems in-sourced. Wyndham is our first-mover..."
Sabre is installing the PMS now and expects the CRS implementation to happen in 2016.
"We think we've got a couple-year head start over any competitor in the CRS business among the top 25 globals.
We already have the leading share of CRSs in the long-tail of independent hotels, with 20,000-plus, approaching 30,000, hotels in a world with maybe 450,000 hotels globally in total....
The growth rate within this segment within hospitality is in the high teens and low twenties, faster than 14% a year for our hospitality servcies division as a whole, and it is still getting scale....
The discussions with other chains since the Wyndham deal is robust. There's a lot of interest....
The big hoteliers that have in-house technology have a prevailing problem of spending all of their money to keep up with security, emerging technologies in the data center, worrying about disaster recovery, which audit committees are demanding, etc.
They're not able to get to innovation, and when they can, it's expensive, because they're adding to legacy systems.
So when they can move to something that can scale, in a multi-tenant model, with a third-party provider, that can innovate with new releases every quarter, we'll see opportunities there.
Sabre contrasts with Amadeus in that we don't see Amadeus in the hospitality marketplace, except trying to sell a white paper around enterprise.
We're working on enterprise for independents and mid-size chains. Amadeus isn't competing. We have a couple-year headstart on them."
Sabre as a SaaS company
The company has rolled out 23 new products since its IPO of April 2014. Klein said:
"If we were a stand-alone software-as-a-service (SaaS) company, in the U.S. market we would be about the fifth-largest from a revenue standpoint, and the second-largest after Salesforce from an earnings before interest, taxes, and amoritization."
Last year, the company generated $786 million in revenues from those SaaS lines of business, with a 13.5% compound annual growth over five years.
For its airline and airport IT services division (which offers flight-planning tools, a reservations system, and commercial planning and operations software), Sabre has a sales-and-implementation pipeline that promises steady business growth.
As of today, its solutions help more than 500 million passengers a year board airplanes. Klein said:
"We have a pipeline that's sold that will be implemented between the fourth quarter of 2015 and the first-half of 2017 that will add 290 million more passengers boarded above the 500 million we already do....
It's American Airlines, TAM, Copa, Alitalia, Air Berlin, and others.... We won more than our fair share over a period of time. I don't see that happening again, but there's plenty of business we could get globally.
For comparison's sake, Sabre boarded 350 million passengers a year back in 2008. So it has been picking up the pace of contracting, and the airlines it works with have also been increasing their passenger volumes.
Margins have expanded from the low 30s "a couple of years ago," to mid-30s last year, and to "high 30s over the next several years."
On the acquisition of Abacus, an Asian Pacific GDS, Klein says the process has "tracked really well" and is "bullish" on beating the 1 August planned close date. Klein says it will go after Abacus's inefficiencies to generate gains as soon as it owns it.
Pre-IPO, Sabre's capital was deployed in a debt-heavy way. Its debt was 4.5 times net leverage. It is targeting 3 to 3.5 times. With the Abacus acquisition its debt is at 3.3 times. It wants to get to 3 times. It might consider going a bit lower.
It plans to keep future acquisitions, "primarily on the software side," to the $10 million to $130 million range.
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