US View – April 2007

US View – April 2007

Good, bad… or ugly?


The travel technology industry, like other sectors, is being swept up in the private equity buying frenzy.


Awash in easy money, private equity firms such as the Blackstone Group, the Texas Pacific Group, Silver Lake Partners and One Equity Partners are acquiring global distribution systems, online agencies, travel management companies and airlines, and turning them into private fiefdoms for the good of their own investors.


One of the latest travel firms to exit the public markets is Sabre, which operates a GDS, Travelocity and Lastminute.com, among other holdings. The Texas Pacific Group and Silver Lake Partners recently completed a $5.4 billion leveraged buyout of Sabre, a move that signals private equity ownership or control, in the case of Amadeus, of all four GDSs.


These massive buyouts are maybe great for investors in private equity firms and the bankers that finance them. But there are serious doubts about whether these shopping sprees enhance the value propositions of the acquired companies and their customers.


At a recent National Business Travel Association forum in New York City, top officials from Sabre, Continental Airlines and Carlson Wagonlit Travel defended the reach of the private equity boys and girls, arguing that the nature of a company’s ownership – whether it is public or private – is not the key metric.


Continental president Jeffery Smisek noted the airline, now a public company, modernised its fleet when it was formerly owned by TPG. Sabre chairman and chief executive officer Sam Gilliland proclaimed his company will spend more on “product” in 2007 than in 2006. And CWT CEO Hubert Joly said private equity’s wooing of travel companies is a tribute to the travel industry.


But, while management often gets a nice payday when private equity firms move in, it is clear that the buyout firms’ chief allegiance is to their investors and that they view their conquests as commodities to be bought, lopped, paired, divided or sold.


Sabre may spend more on product this year, but it has been on an intense cost-reduction campaign over the past few years that will only intensify with TPG and Silver Lake Partners at the helm. Ditto for Travelport and Worldspan, which are slated to merge later this year.


Did it really benefit Sabre GDS clients, namely travel agents, when Sabre transferred its North American helpdesk from the US to Montevideo a couple of years ago? Will similar moves, gutting this service or that, really benefit end users?


What is clear is that whatever moves Sabre undertakes will be done with a hugely increased debt load. TPG and Silver Lake Partners only put up about $1.4 billion of the $5.4 billion it took to buy Sabre. They borrowed the rest, increasing Sabre’s debt-to-earnings ratio almost six-fold.


And Travelport owners the Blackstone Group, Technology Crossover Ventures and One Equity Partners recently went a step further. Having purchased Travelport about eight months ago, the investors recently had Travelport take out a loan for about a quarter of their $4.3 billion investment, and used it to pay themselves a dividend.


Some analysts view the loan as signalling an early exit strategy for Travelport’s owners.Travelport already announced that it intends to execute an initial public offering for, as of this writing, unspecified parts of Orbitz Worldwide, which takes in Orbitz, Cheaptickets, Ebookers and more than a dozen other consumer brands.


So, like a stock broker looking to churn as many transactions as possible, Travelport’s private equity owners seemingly intend to put Orbitz.com through another transformation. Launched in 2001, Orbitz’s airline owners carried out an IPO for parts of Orbitz in 2003, and sold the company to Cendant in 2004.


Purchased by the Blackstone crowd last year as part of the Travelport deal, Orbitz.com, or a share of it, presumably will be part of Travelport’s Orbitz Worldwide IPO in 2007.


Observers have to wonder whether all of this disruption and distraction is really healthy for Orbitz.com and other companies squeezed in the private equity crush. Or is it just a killing for investors?


Now comes word that Blackstone itself intends to raise $4 billion in its own IPO, which may be the first among numerous public offerings by the private equity behemoths. Personally, I hope Blackstone goes public, then gets taken private by a rival who decides to chop it into pieces. All outside of the public glare…



CFares guarantees competitive pricing


Meta-search engine cFares.com is offering airlines a guarantee they can beat their competitors with a lower fare on a particular route.


Through its patent-pending Dynamic Pricing Engine, an airline can write a business rule in relation to competitors’ fares. The result is that cFares keeps changing that airline’s fares on the site so the pricing will be a set amount – $5 or $10 – below a competitor’s.


Alternatively, even if the airline doesn’t seek to offer the lowest fare, it can still choose to be in the running when cFares users consider which airline to book. In that case, the airline can set its fares $7 above a competitor, for example, regardless of how the competitor changes its pricing on the route.


Through a bidding process, cFares gives an airline an exclusive on the route, enabling it to change its fares in relation to those of other airlines on the website for that market.


The airline with the exclusive deal gets reports about consumer buying patterns and competitors’ fares on the site, although rivals aren’t identified.


“CFares gathers all of the information from the point of sale, including what the customer purchases and how each airline’s fare stacks up to its competitors’ fares as well as other attributes such as departure/arrival times and stops,” said Vajid Jafri, chairman and chief executive officer of cFares.

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