Sabre confirms $411 million Abacus takeover [ANALYSIS]
Since 1998, Sabre has had a 35% stake in Abacus. It is buying out the shares of the other owners, 11 Asian airlines.
The statement also says the takeover sees “new long-term distribution agreements between Sabre and the 11 airline owners of Abacus”.
The move has been anticipated since January.
The original six airlines that built Abacus — Cathay Pacific, Singapore, Malaysian, Royal Brunei, China Airlines, and ANA — split their shares evenly among themselves, at 8.45 percentage points of their 65% of the joint-venture.
A later joiner, Philippines, got a smaller slice, about 6 percentage points. The other airlines were minority shareholders, without board representation.
Buying Abacus may lead to “Bye-bye, Abacus”
The strategic justifications for acquiring Abacus outright will be branding, non-airfare content, and China — not the company’s core business, the air GDS.
Sabre wants to be able to say it has a major brand presence across Asia Pacific. Logically, Sabre is likely to rebrand Abacus in its own name.
Meanwhile, the status of Sabre Pacific as a brand and an organization with its own developers is unclear.
On 24 February 2012, Sabre completed the sale of its 51% stake in Sabre Pacific, which had been jointly owned, to Abacus for $46 million of proceeds. Now, the company will re-inherit Sabre Pacific, through its Abacus buyout.
So the Abacus brand might be replaced by Sabre or Sabre Pacific, sources speculated.
The core and its 24 parts
Abacus International itself is only about about 40% of its true staffing and resources.
Each of its two dozen key markets has its own national marketing company (NMC), where, typically, the national airline is the majority shareholder. Abacus’s share in each NMC is usually less than 10%.
In Singapore, for instance, the NMC is Abacus Travel Systems. Abacus International only has a 7% share, sources said. The rest is owned by Singapore Airlines, SilkAir, SingTel, and NATAS (a travel agency association).
The concept isn’t rare: In Asia and elsewhere, Travelport uses national distribution companies (NDCs) that are independently owned and operated, too. But unlike Abacus’s NMCs, its NDCs are not dominated by airlines.
Sabre must seize control of Abacus’s most significant NMCs if it wants to cut a lot of fat out of the system.
Instead of each NMC having its own call center, for instance, customer service could be centralized in, say, Sabre’s global call center in Montevideo.
Beyond cost savings, it is a matter of industry politics that Sabre must take control of the NMCs in a key markets by receiving the share owned by the major partner airlines.
Otherwise, airlines could use their control of NMCs in particular countries to threaten rear-guard actions against Sabre policies as a negotiating tactic.
Market share decline
Back in 2002, Abacus/Sabre had 57% market share of GDS bookings in Asia Pacific, counted as one-way segment volume, on average.
Today that figure is much lower, in the mid-30s percentage-wise, said sources.
It is neck-and-neck with Amadeus, with Travelport is in the high 20s percentage. (The figures exclude China, Japan, and South Korea, because of their unusual GDS markets, and low-cost carrier bookings, which tend to avoid GDSs.)
Why the downward drift? The main reason is money.
Abacus has been slower to hike the transaction fees it charges its partner airlines than its competitors have, because the airlines that own Abacus have insisted on receiving discounts.
Amadeus and Travelport receive higher transaction fees from their travel suppliers.
The differential lets them afford to pay higher incentive fees to their travel agency subscribers, including travel management companies and corporate travel departments, thereby increasing transaction volumes and revenue.
About 55% of Abacus’s air GDS bookings are for partner airlines, says one former employee. That’s a lot of discounting.
To be precise, there is rebating rather than discounting. Up-front booking fees are the same for all.
But rebates and other benefits are given to the Abacus partner airlines as long as they meet requirements, such as doing marketing campaigns for their NMCs — whose growth they profit from as owners.
It’s unknown if the airlines conditioned their sale of shares to Sabre on the condition of continuing to receive preferential treatment for, say, another decade. If the sweetheart deals will continue in some form, then Sabre will continue to have limited room to outmaneuver its rival GDSs.
That said, a quarter of the fees goes to Abacus International to fund operations. So Sabre-led efficiency cuts at headquarters could help.
How Sabre could regain market share
In 1999, Abacus claimed to have “90% market share in most of its partners’ home markets,” including in the country with its headquarters, Singapore.
Today, Abacus only has about 55% market share in Singapore, its headquarters country, sources said. (Amadeus recently moved its sales-and-marketing team from Bangkok to Singapore.)
Hong Kong, home to Abacus partner airline Cathay Pacific, has also dropped from about 90% to the 50% range.
Why has Amadeus been so successful? One theory has to do with how it has been trouncing Sabre on its airline solutions side.
The context: Many airlines have moved from internally controlled reservations systems to a multi-hosted Passenger Service System (PSS). Amadeus, Sabre, and Travelport have been battling to sell such communal hosting platforms.
Amadeus has lately been winning contracts. In 2012, two of Abacus’s key partner airlines, Singapore and Cathay, switched to Amadeus for reservation systems support, which handle the airline hosted bookings. They followed ANA’s switch in 2011.
In the past year, China Airlines, Jet Asia, and Thai have switched to Amadeus’s Altea system, too.
Amadeus uses these wins in its marketing campaign to convert travel agents to switch to its GDS platform because of supposed system compatibility.
It claims that, by switching, agents will have a better experience with last-seat availability, matching passenger name records (PNRs), and other processes, sources said.
True or not, Amadeus’s claims may be working as a marketing tool.
By grabbing control of Abacus, Sabre has a shot at coordinating a response. On-the-ground intel and a holistic sales approach could reverse both trends on the air GDS and on its SabreSonic PSS, sources said.
Sabre’s three levers to regain market share are improving the product for agents — meaning better breadth and depth of content, ease of functionality for peripherals, customer service, and support.
Marketing matters, too. Now that Sabre has control, it can now execute its marketing pushes strategically and efficiently. Its grasp of key NMCs increases the fluidity of decision-making.
Sabre may justify the deal on Wall Street as a way to leverage Abacus’s footprint in 31 countries for cross-selling Sabre’s hotel solutions — its fastest-growing division.
This point is less persuasive, source said, because few Asian agencies book hotels through GDSs today.
Yet the success of Sabre’s suite of hospitality products in the West could, through proper execution and an adaption to local market conditions, also work in Asia Pacific.
A profit machine
None of these considerations probably matter to Sabre’s largest investors, who most likely only care about the smoothed out effect of the deal on quarterly earnings growth.
Assuming September closing date, Sabre said:
“The transaction will boost its 2015 revenue by approximately $120 million, be approximately neutral to 2015 Adjusted EPS and modestly accretive to current-year adjusted EBITDA. In 2016, Sabre expects the transaction to increase revenue by more than $300 million, to increase Adjusted EBITDA by approximately $50 million and to be accretive to Adjusted EPS by approximately $0.05.”
On this score, Abacus is neutral-to-positive. Profits at Abacus have hovered in the $30 million to $50 million range in recent years, said sources.
Sabre has provided to Abacus data, transaction processing, and product development services, for between $50 million and $70 million a year in revenue, on average, in recent years.
Last year, Abacus’s hit a record in overall bookings, rising percentage-wise in the high single digits, year-over-year, according to statements by the company and Sabre. In the first quarter, Abacus’s revenue increased $9 million, or 11%, year-over-year.
The latest year for official data to be discussed by executives in public was 2013, when Abacus said it booked $335 million in revenue. That was about a third higher than the $208 million it had said it grossed in 2001.
Abacus declined to disclose specifics about its business to Tnooz.
At industry events, however, executives have touted that the company has achieved record-breaking volume, revenue, and profitability, year-on-year, for the last five years.
China and Japan
Sabre could tell Wall Street investors that its Abacus acqusition gives it an advantage in the emerging Chinese travel market.
It’s true that Abacus has gone further than its rivals in establishing a foundational presence in China. It has become the first foreign GDS to be officially capable to issue tickets through its official process.
Another worry: part of Abacus’s good reputation in the Chinese travel industry as a whole depends on a halo effect from its having powerhouse airline owners Asia respects, such as Cathay.
With Cathay and other airlines gone, Sabre will have to work hard to protect that reputation.
The biggest immediate opportunity may actually lie in Japan, not China.
Sabre inherits those shares. In a statement today, Sabre said that its partnership to provide technology services to Infini will continue.
The company seems likely to bid for the remainder of Infini, sources said.
LCCs take flight
Low-cost carriers (LCCs) have taken flight in Asia Pacific, rising eightfold over the last 10 years, to nearly 200 million seats in 2014, said the Centre for Aviation.
Abacus’s fees rose over that timespan, too, from $3 per segment, or individual flight leg, in the mid-1990s, to $8 to $10 per segment now for some carriers (though participating carriers are said to get discounts), sources said. Rival GDSs have hiked their fees, too.
The rising fees run at a cross-current with the rise of LCCs in Asia. High fees for processing tickets do not make sense when the tickets themselves are dirt cheap.
One solution that Abacus launched in the mid-1990s and still runs is FareX, which captures some of those non-standard fares booked outside of te GDS.
Sabre could gain market share through superior breadth of content by luring some LCCs to participate in FareX and by presenting the cheap fares in an integrated display with full-service carrier content.
There could be other solutions to the LCC issue, too. (See A deep dive into Asia-Pacific low cost carriers, GDS channels, and collaboration.) Given that long-time anti-GDS airline Ryanair recently agree to go on a GDS, many of the APAC LCCs might, too.
A different path would be to acquiring a passenger service system that already caters to LCCs, such as Navitaire.
Cost savings conundrums
Cutting costs by finding synergies is a common sense target for Sabre.
The cuts will be hard. For example, even though it’s hosted, Abacus builds its own products. So its product development could go away, post-deal.
So there’s a risk: Innovation, local business intelligence, and bona fides of being an Asian-led company might be lost in cost-cutting.
Exhibit A: Abacus claims to have led the industry in developing mobile reservation tools for agents.
It built the apps in HTML5 instead of as native apps to appeal to the mobile install base in Asia, for instance — something that’s proven to be a competitive edge, sources said.
Cutting fat out of the NMCs is another option, once Sabre takes control of key ones. Most of the NMCs have probably been losing money, in terms of operational costs versus income generated. They are propped up by the national airlines, said sources.
Does Sabre have the Asian touch?
Much depends on how Sabre manages regionally and locally in Asia.
Sabre’s decisions for the leadership role of Abacus, post-acquisition, will be studied for its symbolism by many in the Asian travel community.
Historically Sabre has had a reputation for liking to “drive the bus.” Its company culture may be prone to imposing a centralized model, managing from 9,700 miles away.
Would a Dallas-based, top-down approach work well in Asia? Consider Sabre’s European operations, where it has long had a centralized model. It hasn’t had scintillating market share growth there.
Some sources say there’s a need to think differently, market-by-market, about the scope of services being offered, whether it’s through the traditional travel agency channel, or its other tentacles for hotels, car, and airport services.
Don Birch, who was CEO of Abacus between 2001 and 2008, declined to comment on the company’s current or past strategies or other matters. But Birch — who had helped to created the company in 1988 while at the Swire Group, a shareholder of Cathay — did reminisce about his time at the helm there.
One of his comments seemed relevant today:
“Never was the phrase ‘Think Global act Local’ more true.
As we know, the GDS is a mature and relatively simple business model, but in the Asian context it plays out more at the local level than Head Office.
As I traveled around the region, I was constantly amazed at the differences. The distribution business in Australia bearing no relation to that in Kazakhstan — something that was often hard to understand.”
Between peril and promise
Today’s deal has been a long time coming. In February 1998, Sabre took 35% share of Abacus for $139 million, plus $100 million in assets. In the mid-2000s, it tried to buy out their airline partners, unsuccessfully.
Today’s deal will win praise. Yet it does not immediately change the balance of power among GDSs. The final verdict may not be known for another decade, after all of the chess pieces in Asia Pacific have been played.
Sean O’Neill had roles as a reporter and editor-in-chief at Tnooz between July 2012 and January 2017.