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Sabre’s Bottom Line Got a Lift From U.S. Tax Cuts

Sean O'Neill
Sabre’s Bottom Line Got a Lift From U.S. Tax Cuts

Last year’s cut in the headline U.S. federal tax rate for corporations from 35 percent to 21 percent affected many businesses. Sabre, a travel technology giant based in Southlake, Texas, is a case in point.

On Tuesday Sabre reported its earnings. In 2018, Sabre’s management-adjusted results included $117 million of tax expense in 2018, versus $162 million in 2017.

The drop in its effective tax rate was from 29.5 percent to 21.6 percent, reflecting a reduction in a U.S. statutory tax rate due to U.S. tax reform. That was in line with the new national 21 percent headline corporate tax rate.

On a call with analysts Tuesday, Sabre’s executives said that its gains were partially driven by the tax rate reduction. In 2018, the company reported management-adjusted net income of $428 million in 2018, representing growth of 9.6 percent.

From a cash taxes perspective, Sabre owed $59 million in cash taxes in 2018, a year-over-year increase of $23 million. The company also owed a $47 million one-time transition tax related to the enactment of tax reform that it expensed in 2017 but is paying out in cash over a decade.

That said, Sabre has not been a U.S. cash taxpayer since 2014. Before then, Sabre was a private company, with private equity firms as its controlling shareholders. The company made some common financial maneuvers that deferred some of its tax payments. It has not been a U.S. cash taxpayer since its initial public offering (IPO) due to net operating loss carryforwards related to pre-IPO assets, primarily the online travel agencies like Travelocity and LastMinute.com that it divested. It is now reaching the end of our these net operating losses and will begin to pay US cash taxes in 2019 and it expects to become a full U.S. cash taxpayer in 2020.

Correction: This article’s discussion of Sabre’s tax payments, above, was corrected after publication. The reporter misunderstood key details of Sabre’s finances.

“We now expect to put [the payments] behind us a year earlier than [we expected a year ago],” said Douglas Barnett, executive vice president and chief financial officer, during a call with investors on Tuesday. “Due to the changes driven by U.S. tax reform, we expect to pay out the remaining balance in 2020.”

Overall, the tax savings represent only a slice of the company’s revenue picture. But the tax savings likely provided some of the cash to enable Sabre to make its acquisition of tech vendor Farelogix for $360 million last November.

For the full-year 2018, Sabre boosted its revenue by 7.5 percent, to $3.87 billion. Its management-adjusted net income was $428 million, representing growth of 9.6 percent last year.

A Commercial Win

On Tuesday, CEO Sean Menke reported a major win for the company. JetBlue Airways agreed to renew its contract to use Sabre’s operational software, called a passenger service system.

The renewal had been jeopardized by incidents in October and November 2016 when JetBlue was one of several Sabre central reservation system customers who experienced glitches that interrupted operations and interfered with passenger booking and boarding.

JetBlue executives rang alarm bells that Sabre may have under-invested in its technology system and that the carrier might be in safer hands with a competitor like Amadeus, said two sources.

In a statement Tuesday, Michael Stromer, vice president technology and digital products at  JetBlue, said that “Sabre laid out a seamless plan to modernize our PSS technology footprint.”

Two years into his tenure as president and CEO, Menke appears to be making progress in changing the perception among some airline executives that Sabre’s technology team had become been too influenced by its largest airline customers, American and Etihad, to care about its other clients.

Since 2014, Sabre’s IT solutions services have been losing market share to Amadeus despite the unit’s lower profitability compared to its closest peer, according to an equity research report last month by investment bank Berenberg.

For all of their software businesses, Berenberg estimates that Sabre spends 20 percent less on research and development (R&D) than Amadeus. One caveat: It takes Sabre’s capital expenditure as a proxy of R&D, and it makes an unverifiable assumption that 75 percent of Amadeus’s total declared R&D spend relates to its software business.

Sabre clearly needs to win renewals of its other airline IT clients.

Last year, Sabre won renewal of Aeromexico, which had been under pressure by Delta, one of its major investors, to switch to Delta’s passenger service system, AIR4. Delta moved Virgin Atlantic to its system a few years ago. In 2017, Southwest and Air Canada each switched parts of their software operations to the systems of tech rival Amadeus.

A Legal Loss

On February 1, the Supreme Court of Texas ruled in favor of Lufthansa Group against Sabre in a dispute about whether state courts have the authority to review one of Lufthansa’s disputes with the Texas-based company.

The Texas high court ruled that state courts are allowed to hear Lufthansa’s case. Sabre lost its argument that state courts would exceed their authority if they weighed in on the contract dispute due to its reading of federal laws.

The court published the decision online.

Lufthansa alleges that, in response to the carrier adding an $18 surcharge on tickets booked through Sabre and its peer companies, Sabre allegedly began encouraging travel agents to breach their contracts with the airline. It accuses Sabre of directing agents to book flights through Lufthansa’s direct connections, where there is no surcharge, and then enter the itineraries into Sabre’s reservation system. Sabre then collected an administration service fee for so-called passive bookings. Lufthansa alleged the fees are not billable under the contract terms.

In the past, Lufthansa, like many airlines, had agreed to let Sabre charge a small courtesy fee for these passive bookings but the assumption was that it would be rare for agents to have to do this.

Once Lufthansa began reservations in Sabre more expensive by adding an $18 charge per booking, the airline appears to have changed its mind about passive bookings.

Sabre hasn’t yet said if it will ask the U.S. Supreme Court to review the case.

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