Dave Gilbert here, Editor of Smart Money.
Let’s start today’s issue off with a story.
Two men sitting next to each other on a flight started to chat, as is often the case. Except this is back in 1953, these weren’t just any two men, and their conversation ended up changing an entire industry.
One man, C.R. Smith, happened to be the CEO of American Airlines Group Inc. (AAL), which of course was the airline they were flying. The other man was also named Smith, Blair Smith, though they weren’t related. He was a sales executive with International Business Machines (IBM).
The conversation made its way to the frustrations of the day. Blair was having difficulty making a sale, and C.R. was frustrated with the slow pace of the airline reservations process that relied on manual systems and old-fashioned phone calls. A single reservation could take an hour.
The two didn’t stop talking when the flight landed. In fact, C.R. took Blair to the reservation center at the airport. And as they say, the rest is history. American Airlines and IBM soon partnered on what would become the beginning of reservation automation.
Now, we can do all of this in mere moments. Remembering that might help ease the stress a little bit when your cursor spins for a few seconds and it seems like forever.
With Americans eager to travel and numbers on the rise, there may be an investment opportunity in what is now the backbone of the modern online reservation system. A backbone that is controlled by only a few companies…
Americans Are On the Go
After grinding to a halt in 2020 amid COVID-19 lockdowns, the travel industry has made a sharp recovery.
Higher prices don’t seem to be slowing things either. Gasoline is hitting all-time highs, and yet AAA projected 39.2 million people would travel 50 miles or more over Memorial Day weekend. That would be 8.3% more than last year and in line with 2017 levels. (The final numbers aren’t out yet.)
It bodes well for the rest of the summer, according to AAA Travel Senior Vice President Paula Twidale:
Memorial Day is always a good predictor of what’s to come for summer travel. Based on our projections, summer travel isn’t just heating up, it will be on fire. People are overdue for a vacation and they are looking to catch up on some much-needed R&R in the coming months.
Same for air travel. According to Hopper, a travel data software company, average round trip airfares for Memorial Day increased by $28 to $394. And yet, the number of passengers going through TSA checkpoints Friday through Monday increased 28.5% over last year to 8.8 million.
For perspective, that is also 675% more people passing through checkpoints than Memorial Day weekend of 2020.
This travel rebound trend is something Eric Fry has watched closely for more than a year. With more travelers come increased related bookings, like hotels, rental homes, and rental cars. And with that comes the potential to make money.
All of those bookings, whether made by consumer Carl at his computer or Travel Agent Anna at her office, are done online. Here’s a “who’s who” of travel industry websites…
- Booking Holdings Inc. (BKNG): Kayak, Agoda, Priceline, CheapFlights, Momondo, OpenTable, RentalCars
- Expedia Group Inc. (EXPE): Orbitz, Travelocity, Hotels.com, TripAdvisor.com, SeatGuru.com, Cheaptickets.com
- Alphabet Inc. (GOOGL)
- Hilton Worldwide Holdings Inc. (HLT)
- Marriott International Inc. (MAR)
- Hyatt Hotels Corp. (H)
And on and on.
Those websites are the facing pages we see, but for the reservations to be made and the systems to talk to each other, they all must pass through a global distribution system, or GDS for short.
The Gateway to Reservations… and Profits, Too
Travel is chaotic enough, but without a GDS it would be unbearable. The GDS allows costumers to find availabilities, make reservations, and pay for them. This is one area Eric has focused his research.
Here’s a good definition from siteminder.com:
A GDS is a worldwide conduit between travel bookers and suppliers, such as hotels and other accommodation providers. It communicates live product, price and availability data to travel agents and online booking engines, and allows for automated transactions.
Only three companies dominate the travel industry’s global distributions systems. Spain-based Amadeus IT Group SA (AMADY) is the largest of the three. It processes about 40% of travel bookings worldwide. Dallas area-based Sabre Corp. (SABR) is No. 2, with a 35% market share. And privately held Travelport is No. 3, with a 22% market share.
I’ll save you the trouble of adding those up. Together these three make up 97% of all travel bookings worldwide.
The companies generate revenues from the volume of transactions, not the dollar value of those transactions. So when travel activity increases, revenues also increase.
As Eric has pointed out, Sabre, the U.S.-based GDS, recently reported its first profitable quarter in more than two years, while also reporting the highest sales and profit margins since the pandemic struck.
He also likes the company’s commitment to the future…
The company has not been simply sitting on its hands during the last year, waiting for the inevitable recovery.
Instead, it has taken decisive steps to fortify its competitive moat by expanding its client roster and beefing up its industry-leading IT capabilities.
For example, Sabre has collaborated with Google to migrate its IT infrastructure to Google Cloud. Sabre followed up that initiative by partnering with Google last fall to develop an artificial intelligence (AI)-driven technology platform that is an industry first.
And yet, despite the upbeat results and remarks, the stock has tumbled since the earnings announcement.
Eric admits that the pandemic and its effects “have dragged on far longer than I initially anticipated. And then, just at the moment the clouds finally seemed to be parting, Russia invaded Ukraine and China imposed new COVID lockdowns.”
But keeping his eye on the macro trend, which his track record shows is clearly a profitable thing to do, Eric expects Sabre to “flourish anew… once the travel recovery becomes and undeniable reality.”
Sitting on the sidelines now means you could miss one of the most powerful opportunities he’s seen in years. He was talking about this opportunity in 2021, and the wild events of 2022 have only confirmed his analysis that this could be a rare wealth-building moment.