12 November 2008

GDS model in for more scrutiny. Sabre placed on watch

I realize that some times I can be a bit of a curmudgeon about the GDS model. I think its flawed and due for reform. That said - they have provided a valuable service for some time. BUT as a class the GDS are now in a certain degree of hurt. It seems that others are begining to come round to my point of view. For example lets take Standard and Poors. On November 10th they placed Sabre on negative watch.

This is an abstract - from S&P's own website.

Sabre Holdings Corp. 'B+' CCR Placed On Watch Negative Based On Weaker Travel Demand Southlake, Texas-based Sabre is a leading provider of electronic travel distribution services. Since its acquisition, Sabre does not disclose its financial results publicly. Date: 2008-11-10

This is not a good situation for them to be in - so I dug a little deeper. It seems that there is a significant set of impending problems that each of the GDS companies has to face. These are:

1. The financial health of their parents. I cannot assess Amadeus's parents - but both TPG and Blackstone have recently gone through a number of major reversals.

2. A significant reduction in traffic. We don't have data from Sabre or Amadeus as their numbers are not public. But Travelport's numbers are public. Their last report was August 13th for Q2. We are awaiting their Q3 numbers - they are not likely to be pretty. Whilst Travelport has some expectation of synergy cost reductions as a result of their integrating Worldspan's operations - Sabre doesn't have that advantage. Amadeus similarly should be able to cut costs due to so far having avoided this process.

3. The expectation of an IPO in 2nd half 2008 has left them bereft of investment funds since the focus was on getting to an IPO or some other major event which would require recapitalization.

4. Need for investment for new services to combat the encroachment of competitors invading their turf.

5. Increasing need for cash to pay incentives to hold onto accounts in a fierce competitive market.

Tough times in river city


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