Q: Last month, Sabre completed an initial public offering of stock following government approval of its 398-page prospectus. What does that prospectus tell us about the structure, economics and trends of GDS contract deals?
A: It is hard to trust the prospectus' descriptions of such deals, as most of Sabre's observations about them are either factually incorrect or contradictory. Although these problems do not make the prospectus false and misleading as a matter of securities law, they make me suspicious about the correctness of everything Sabre states about GDS deals.
The first time that Sabre characterizes agency contracts, it makes no less than three mistakes in one paragraph: "We typically have nonexclusive, five- to 10-year contracts with our major travel agency customers. Our contracts with TMCs and offline travel agencies typically renew automatically, but the vast majority of our contracts with online travel agencies do not automatically renew. Most travel agencies can terminate the contract anytime without cause with the required advance notice."
First, five- to 10-year contracts are not typical, even with major travel agencies. According to ASTA, the typical contract is just three years, most large agency contracts are for just five years, and I know of no 10-year contracts at all. Second, TMC contracts typically do not renew automatically, at least in the U.S. Third, most U.S. agencies cannot terminate their contract any time without cause; rather, they are locked in for the full term of the contract.
Even if we factor in agency contracts outside the U.S., the prospectus is still most likely wrong. In the EU, for example, three-year terms are the norm, no termination is allowed during the first year, and I know of no automatic renewals. Outside the EU, there are GDS regulations in only a few other countries, and deals generally follow what is done in the U.S. market.
Sabre expresses concern for the long-term effects of competition for agency allegiance. It states: "We must compete with other GDSs and other competitors for their business by offering competitive upfront incentive consideration, which, due to the strong bargaining power of these large travel buyers, tend[s] to increase in each round of contract renewals."
So, in one place in the prospectus, Sabre admits that there is a spiral of ever-increasing agency incentives. However, later on, it makes the following claim: "Although this consideration has been increasing in real terms, it has been relatively stable as a percentage of Travel Network revenue over the last four years, partially due to our focus on managing incentive consideration. We believe we have been effective in mitigating the trend toward increasing incentive consideration by offering value-added products and content, such as Sabre Red Workspace ... along with many travel agency workflow and productivity tools."
So there is a trend toward increasing incentives with each renewal, but Sabre has been successful at mitigating the trend, as shown by the fact that incentives have been "relatively stable" as a percentage of revenue over the last four years.
However, the statistics belie this stability. One line item on Sabre's balance sheet is "accrued incentive consideration," which increased 25% between 2011 and 2013. On the other hand, "Travel Network" revenue increased only 5% during the same period.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].