Airline Travel Are Far From Grounded By Rising Fuel Prices

Some analysts say summer gas prices could top $4 per gallon.

Sam Gilliland, the head of travel services giant Sabre Holdings, says he isn't worried. While more consumers might leave their cars at home, he says air travel is still a bargain.

Gilliland says Sabre, which owns travel Web site Travelocity, is shifting to meet the changing needs of the travel business.

Among other things, it signed a slew of deals with airlines in the first quarter that let these carriers offer their fares through Sabre's online and offline travel distribution systems. The airlines include Delta Airlines, United Airlines and Northwest Airlines.

Sabre posted a 20% rise in first-quarter revenue to $700 million. Per-share earnings fell 35% to 24 cents, a decline the company attributed to costs related to acquisitions and to seasonal factors.

Gilliland recently spoke with IBD about the travel business.

IBD: Will summer travel trends be affected by high gas prices?

Gilliland: We continue to believe that Americans are going to travel this summer. Many have already booked their trips. We don't think there'll be a dramatic impact. Maybe there'll be shifts from driving to flying.

IBD: Is flying still cheap, given oil prices and other factors?

Gilliland: Airline tickets are still a screaming good deal. They're still about 15% lower on average than they were before 9-11. It's our view that (oil prices) won't have a dramatic impact on demand.

IBD: Aren't more fuel surcharges on plane tickets possible?

Gilliland: Airlines could take their prices up some more. We've seen a 10% increase in airfares year over year. That means low-cost airfare and network airfare providers have been taking their prices up. But those prices are still lower than they were before 9-11. I think planes are going to fly really full this summer.

IBD: Travelocity rival Expedia last week released first-quarter results that greatly lagged expectations, in part blaming lower commissions paid by airlines on ticket sales, leading to a 26% one-day decline in its share price. Does this indicate problems for the entire online travel industry?

Gilliland: While I won't comment on our competitors, I would say that Travelocity's core businesses are performing nicely. In the first quarter, we saw strong top-line growth without increasing marketing spend. Our transaction revenue grew 21% in North America, faster than the market, and total global packaging revenue remained quite strong at 38% growth.

We continue to have access to great hotel content, with margins that are not deteriorating. And we see Travelocity on track this year to triple operating income.

So based on our experience so far, we believe there is solid growth ahead this year for the online travel space, domestically and abroad.

IBD: What other changes in consumer travel trends do you see?

Gilliland: We have groups of consumers now who are accustomed to buying travel online, and that bodes well for online travel agencies. I see continued robust growth in packaged travel sales where items like airfares and hotels are included.

IBD: Is competition intensifying in online travel?

Gilliland: We're getting smarter and so are our competitors. But I also see competition getting more disciplined. You don't have cutthroat pricing anymore, you have competitive pricing.

IBD: How has Sabre transformed itself over the past few years?

Gilliland: For one thing, revenue growth's taking off.

If you look way back at our history before the online travel business began, we were primarily a travel distribution business. We took what was available and put it on our shelves and distributed it through travel agents.

IBD: What impact did this have on Sabre's sales growth?

Gilliland: We had a few years of relatively flat revenue growth. Now (in 2006), we're seeing between 15%-20% growth this year in revenue, and we see (that holding) over the course of the next several years. We're also looking at EPS growth this year of about 15%.

IBD: What's fueling the growth?

Gilliland: Certainly a fair amount of this growth is coming from Travelocity. Travelocity now accounts for about a third of Sabre's total revenue. That's up from about 10% in 2002. We expect Travelocity to be closer to 40% of revenue by the end of the year.

IBD: Where else is Sabre growing?

Gilliland: We're growing our hotel business as part of the Sabre Travel Network. It's grown by a fairly dramatic clip of about 25%. That's indicative of the value we're providing to hotels, not only through Travelocity but also through our larger travel distribution network.

IBD: How is Sabre doing internationally?

Gilliland: Our non-U.S. revenue has grown from a little less than 30% of total sales in 2002 to a little less than 40% today. And we operate now in about 143 countries. Our global footprint has changed considerably.

IBD: What about free cash flow?

Gilliland: Sabre expects its free cash flow to be greater than $300 million in 2006. This compares with free cash flow of $134.9 million last year.

IBD: What types of deals did Sabre strike with airlines last quarter?

Gilliland: On April 21, Sabre announced that it had signed long-term full content (fare publishing) agreements with Delta Air Lines for seven years and United Airlines for five years. (And Monday, it announced a five-year pact with Continental Airlines.)

This is in addition to a long-term five-year deal signed with Northwest in the first quarter and another five-year deal with U.S. Airways. We also signed a five-year deal late last year with AirTran.

IBD: What was the point of these deals?

Gilliland: We're focused on developing a balanced distribution model for everyone, including travel agents and corporations. The deals are cost-efficient for airlines, require us to continue our own cost reduction focus at Sabre, and drive acceptable balance between long-term stability and efficiency, and incentive reductions for travel agents.

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