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The cut in the federal corporate income tax rate from 35 percent to 21 percent a year ago affected many businesses. Sabre, a travel technology giant based in Southlake, Texas, is a notable case in point, as an earnings report on Tuesday made clear.
In 2018, Sabre paid $57.4 million in income tax — excluding a one-time payment related to its foreign subsidiaries. That was a 28 percent lower tax bill than in the previous year.
In the fourth quarter, Sabre reported net income of $82.1 million, a 2.8 percent rise, year-over-year. The company’s executives said Tuesday that the gain was partially driven by the tax rate reduction and partly by a favorable comparison of not having to make the same tax payment on foreign income as it did a year ago.
The savings will keep piling up. Sabre lucked out in that the tax law change coincided with executives’ decision to report all of the company’s revenue as cash in the U.S., an accounting move the corporation plans to complete in 2020. Thanks to the tax cut, all of its revenue enjoys a new lower rate, without hurting the company’s cash flow.
Sabre benefited more from the tax changes than some other travel companies because of an unusual quirk in its debt. It used to be a private company, and the private equity firms that then owned it made a financial maneuver that deferred some of its tax payments. Sabre went public in 2014, and the taxes are now due.
However, the newly lowered tax rate is enabling Sabre to reduce its tax payments by $59.6 million in total between 2018 and 2021.
“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. Given that its tax bill was $57.4 million, the company’s tax bill was 14.8 percent of its revenue. That’s lower than the 21 percent headline corporate tax rate because, like all companies, Sabre took advantage of strategies to minimize its taxes.
For all of 2018, Sabre reported $337 million in net income, a 39 percent jump in this measure of profit over the net income in 2017 and a 39 percent jump over 2016, too.
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 Emirates, to care about its other clients.
Sabre still needs to win renewals of other clients, with Hawaiian Airlines the likely next significant name to watch.
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 legaldisputes 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.
Photo Credit: A view of the relatively new Tel Aviv office for Sabre Travel Network, the tech giant’s distribution arm. Sabre reported its fourth-quarter and full-year 2018 earnings on Tuesday. Auerbach Halevy Architects