Sabre Corp (SABR) 2004 Q3 法說會逐字稿

Good morning. Welcome to the Sabre Holdings third quarter 2004 earnings conference call. At this point all of your phone lines are muted or in at listen-only mode. Later during the earnings release there will be opportunities for your questions and those instructions will be given at that time. Just as a note, if you should require any assistance during our conference you may reach an AT&T operator by pressing star then zero on your phone keypad. As a reminder today's call is being recorded. With that being said let's get right to this quarter's agenda. Here with opening remarks is Ms. Karen Fugate, Vice President of Investor Relations.

Good morning everyone. Here are Sam Gilliland, our CEO, Jeff Jackson, our Chief Financial Officer and Michelle Peluso, CEO, Travelocity. Sam will review highlights for the quarter. Jeff will review our results in more detail, and Michelle will provide an update on Travelocity.

I'd like to remind all of you that some of our comments on matters such as our forecasted revenues, earnings, bookings, operating margins, and cash flow, contracts for business, and trend information will constitute forward-looking statements. These matters are subject to a number of factors that could cause actual results to differ materially from our expectations. Those factors are described in the risk factors section in the Company's most recent Form 10-Q filing with the SEC. The Company undertakes no obligation to publicly update or revise any forward-looking statements. We have provided a detailed explanation and reconciliation of our adjusting items and nonGAAP financial measures in an earnings press release and on our website.

I would like to turn the call over to Sam.

Thank you, Karen. Thank you all for joining us. It was a challenging quarter for much of the industry but we performed very well, exceeding the top end of our earnings estimate for the quarter. Travelocity was profitable for the second quarter in a row. We delivered overall revenue growth of approximately 5% on an adjusted basis and 3% on a GAAP basis. We executed well on our cost management initiatives. Travel demand remained strong in the quarter, though as anticipated, Travel Network year-over-year bookings growth flattened in the quarter, the comparison reflects the travel rebound seen in a year ago quarter. We continued to make progress in our plan to build up our retailing merchandising focus, and to generate greater value from the GDS.

Jeff Jackson will provide more detail on the quarterly financials in a few minutes, but first I would like to cover some key highlights of our businesses. The over arching theme is this. We're getting good traction for our focus across the portfolio and results for travel suppliers. Our approach is simple, we believe what is good for travelers is also good for suppliers. The reverse is also true, bring consumers the right combination of travel products and services and we'll help our suppliers move more product. That is the merchandising challenge, but one that we are in a unique positioned to address with our complete range of packaging and distribution technologies. We've been working very hard to convey that message to suppliers in every segment of the travel market, and we're seeing results today in the improved yields we are delivering for hoteliers, and in the share gains we're driving for specific airlines.

Let's take a closer look at how this supplier focused approach played out in the quarter. Starting with Travelocity, we made good strides in strengthening our high margin merchant business and expanding our reach. Our collaborative approach to working with hotels, led to Travelocity's recent certification as the first on-line third-party intermediary for Inter-Continental Hotels Group. IHG has of the most recognized and respected brands, and we're pleased to deepen our relationship with them. Travelocity business also continued to see momentum, signing suppliers as diverse as Lufthansa and Spirit Air, to bring unique discounts to its customers. We also signed a number of large and mid-sized corporate customers, including Aetna and another fortune 100 account, and finally, furthering our opportunities for global expansion and believing that a consolidated global approach to suppliers is not only good for suppliers, but also for customers. We acquired the remaining stake of the non-German assets of our Travelocity Europe joint venture. Michelle will talk about this in more detail in a few minutes, so I would just add this move positions us well in a high-growth market place.

Moving on to Sabre Travel Network. We continue to believe that the Sabre GDS provides tremendous distribution value for suppliers, as well as some increasingly powerful merchandising capabilities. That's reflected in the progress of a number of exciting initiatives. In August, we announced the launch of the hotel spotlight program which offers a premium marketing opportunities to hoteliers that provide full content through the Sabre GDS. We've received very positive feedback from the hotels, and are pleased with results so far. We currently have about 20 merchandising initiatives in various stages of market testing for our Travel Network business.

These initiatives which include a Air Hotel and specially content suppliers, combine display changes with unique product, agent rewards and promotions. And we expect that the results of these tests will give us insight needed to develop new offerings. We continue to grow and strengthen Jurni Network, our leisure agency consortium. Again an approach to move share on behalf of the suppliers, more than 40 travel suppliers participate in the Jurni Network Preferred Supplier programs. In September we released a new cruise shopping and booking capability that allows Jurni members to search across Cruise lines and compare published and blocked space rates. We also strengthened (Nexian) our host agency service which we acquired late last year. Nexian has now become the largest, fully automated agency in the U.S. with the acquisition last quarter of iTASN, a Boston based host agency with 300 agents. I will point out that 55% of Nexian's gross sales come from members booking our preferred suppliers. Over time our target is to get that percentage above 65%.

We're confident in our ability to use our technology base, templed with the defined mix of preferred travel product, marketing, education and awareness programs, to deliver clear advantage to our supplier partners and travel agency customers. So far I have primarily provided examples of our progress and generating additional value for non-air suppliers in both online and offline channels, but that clearly begs the question of airline relationships and where we go from here, particularly in light of the Northwest Airlines in August. There's no question that many airlines around the world are in financial distress, and are looking for every opportunity to reduce their costs, including their cost of distribution. We took the lead on this with our DTA 3 Program, offering airlines the opportunity to reduce distribution costs by 10 to 15% and our competitors followed. We haven't stopped there, we continue to develop new models, models that better align value to price. With new regulation we have much more flexibility today to provide merchandising opportunities to our airline customers and to provide pricing alternatives. We can now base pricing on a variety of factors around specific characteristics and need of an individual airline, such as the volume of share of an airline bookings to the Sabre GDS, or whether it's a long-haul or short-haul carrier. Some of the models include lower booking fees in exchange for lower incentives. The Canadian market is one example. We have already begun discussions with some of the airlines about some of these pricing options. Our intention is to roll out the entire pricing innovation over the next few years while maintaining neutral earnings for the Travel Network business. We will communicate an aggregate basis on these new models and their financial impact as they are rolled out.

I know you are hearing a lot these days about GDS alternatives. The truth is many of these models have been around for ten years, and while they gained little or no attraction in the marketplace over that period. The rekindled interest today is part of what is driving us to continue to innovate our business models. We're looking at our pricing models, product options, and cost structure to determine better ways to serve our airline customers. Much in the same way we drove innovation for hoteliers by leveraging our GDS technology, we must do the same for airlines. Sabre has a long history of driving industry transformation and evolving to meet the changing needs of the marketplace, that will obviously continue.

It is important we create ways for the airlines and all of our customers to improve their businesses and benefit from the enormous distribution breadth that the Sabre GDS provides. Clearly, that breath comes in large part from the brick and mortar agency segment, which will continue to be a large and meaningful channel for the long term. In fact, we continue to see this swelling of channel shift, that shift of GDS air bookings to supplier direct booking channels. Third quarter showed channel shift below 2 points, consistent with last quarter and you will recall that we've been seeing that number is steadily ramp down over the past year or so, moving on to get there we had another record-breaking quarter in corporate booking volume, and signed a number of new customers and renewals. Yet there is new customer wins totaled 200 million in annual air spent. We also rolled out significant differentiators, including the industry's first fully automated on-line ticket exchange.

Sabre airline solutions. And the software products and services business we continue to build out our portfolio was small acquisitions and also sign major software product deals. But the lengthy sales cycle remains a concern, as you can imagine the financial health of the airlines has had an impact our software business. On the other hand, the reservation side of the business continued to thrive both in signing new customers and in the volume driven by existing customers, with year-over-year passenger volume growing at 11%.

Before we go to Jeff Jackson, I should mention that this morning we announced another share repurchase program of $100 million. And on Tuesday, we announced a continuation of our quarterly dividend of 7.5 cents per share. We are pleased to continue to enhance shareholder returns through both stock buybacks and dividends. With that, let's go to Jeff for details on the financials.

Thanks Sam. I'll start my remarks with revenue performance for the third quarter. Total company revenue for the third quarter was 544 million growth of 5% unadjusted basis, and 3% on a GAAP basis. You may recall in the third quarter of last year on a GAAP basis we recognized approximately $8 million in warrant revenue after the termination of our agreement with our former hotel supplier. Earnings per share excluding special items were 41 cents, compared to 24 cents in the year ago quarter. And earnings per share on GAAP basis were 49 cents, compared to 18 cents in the year ago quarter. Our GAAP earnings include a reversal of previously accrued tax of 18 million, relating to a change in our federal income tax treatment of up front subscriber incentives.

Next I'll move on to revenue and operating metrics by business unit and I will start with Travelocity. For the third quarter Travelocity's gross travel booked was 1.2 billion, year over year growth of 15%. We believe the abundance of lower air fares and the impact of hurricanes dampened this growth rate by approximately 7 points. Travelocity had total revenue of 139 million, growth of 33% on an adjusted basis and 24% on a GAAP basis. Transaction revenue was 121 million, strong year-over-year growth of 51%. Included in transaction revenue was an $8 million adjustment for the aging of the supplier liability account, of which 5 million is attributable to merchant products sold through December 2003. Which provided further detail in the reconciliation in our 8-K filing earlier today. Consistent with industry practice, we expect to continue recognizing this type of revenue as we grow our merchant business. Total transaction revenue as a percent of gross travel booked was 10%, up approximately 1.5 points from the second quarter. Non-transaction revenue was 18 million for the quarter as significant year over year decline, primarily due to continuing investments in Travelocity's international joint ventures, and the loss of warrants from our former hotel supplier contract, that ended last October. Now, let me discuss Travelocity transaction revenue in greater depth.

On the air side. Transaction revenue grew 8%. While on the non-air side, transaction revenue continued its strong growth rate of 89% for the quarter, taking our non-air transaction revenue one step further, packaging revenue grew 106% year over year. Packaging revenue as a % of total transaction revenue was 24%, 1.5 higher than last quarter and well above the top end of our 15 to 20% expectation for year end. On the hotel side total room nights across the entire Travelocity network were up 61% year-over-year, versus 59% in the second quarter. Lastly, 42% of total transaction revenue was merchant. This compares to 35% in our second quarter.

Next, I'll move on to Sabre airline solutions. Third quarter revenue for airline solutions was 60 million, growth of 2%. Revenue growth was dampened by the continued year-over-year decline in the products and services side of our business, due to decreased software spending in the airline industry. However, we saw strong growth from passenger solutions, our reservations hosting business, as revenue grew more than 10% on a year-over-year basis. Finally, Sabre Travel Network had revenue in the quarter of 388 million, a decline of 1%. Total Global bookings presses in the quarter were 97 million, of which direct bookings represented 80 million, and non-direct bookings represented 17 million. Each had year-over-year growth of approximately 1%.

Breaking down total global bookings, our U.S. and bookings grew 1%, while international bookings ended up the quarter down slightly. Air bookings were down less than 1% while non air bookings grew 8%. Of these growth rates show considerable competitive strength. Our worldwide air booking share September year-to-date was 36%, up 1 point from the year ago quarter and remaining on track for a full year expectation.

Now, I will turn my remarks to expenses, operating income and margin for the quarter. I'll start with expenses. On an adjusted basis total Company expenses declined year-over-year by 5 million, and on a GAAP basis declined by 16 million. Primary drivers of this year-over-year decrease, include favorable headcount related expenses and a positive variance in technology spend and related expenses. These positive variances were partially offset by the anticipated growth in advertising and promotion expense at Travelocity.

Moving on to operating income for the quarter, total company operating income excluding adjusting items was 90 million, and operating margin was a healthy 16.5%. Total Company operating income on a GAAP basis was 77 million, was up 14% operating margin. Travelocity's operating income improved by $20 million for the second quarter in a row. On an adjusted basis operating income was approximately 10 million with a margin of 7%, and on a GAAP basis op inc was 1 million, a 0.6% margin. Sabre Travel Network had adjusted operating income of 78 million, reflecting a 20% margin. Operating income on a GAAP basis was 74 million, with a 19% margin. And Sabre airline solutions had operating income of 3 million with an operating margin of 5%. Lower than anticipated operating income in this quarter, is attributed to weak software sales revenue, and an increase in airline customer bad debt reserves.

Now turning to other financial data for the quarter. Adjusted EBITDA was 107 million, and GAAP net income was 67 million. Free cash flow for the quarter was 75 million, and cash provided by operating activities was 32 million. During the third quarter we spent approximately 64 million from our April 2004 share repurchase authorization and repurchased 2.6 million shares. Year-to-date we have returned over 213 million to our shareholders in the form of dividend and share repurchase. 41 million in dividend payment and 172 million in share repurchases.

Now, I will turn my remarks to our outlook for the fourth quarter and full year 2004. For the fourth quarter, we expect revenue to be in the range of 490 million to 510 million or growth of 5 to 9% year-over-year. We expect earnings per share on an adjusted basis to be in the range of 17 to 21 cents and earnings per share on a GAAP basis to be in the range of 13 to 17 cents. This EPS range includes the dilutive effect of approximately 2 to 3 cents from our Travelocity/Europe acquisition. It also includes the impact of severance and retention and related costs of approximately 3 million, which we expect to incur from the transition of certain operations to Sabre offices in Latin America.

Now, turning to full year outlook by business unit. We're tightening our Sabre Travel Network revenue growth expectation from 2 to 3% to approximately 2% on an adjusted basis. And flat on a GAAP basis, versus growth of 1%. Due to tight cost controls, we are increasing our margin expectations from mid-teens to high teens on both an adjusted and a GAAP basis. These projections take into consideration our year-over-year bookings growth assumptions of 6% for total global bookings, and 4% for direct bookings. For Travelocity our revenue projections remain unchanged. We expect revenue growth of greater than 30% on an adjusted basis and greater than 27% on a GAAP basis. However, we're tightening Travelocity's adjusted operating margin to be approximately 3%, versus the 3 to 5% range previously provided. This was driven by the dilutive impact of the Travelocity year of acquisition. On a GAAP basis, we expect Travelocity to have a loss of approximately 18 million. Finally, in Sabre airline solutions we expect revenue growth for the full year in the mid single digits, and operating margin in the high single digits. These are lower than the previous estimates for the reasons I mentioned earlier.

We're updating our total Company revenue projection to include the revision to airline solutions, and a tightening of our Travel Network range. On an adjusted basis we now expect revenue growth to be approximately 7%, versus our previous projection of 7 to 9%, and on a GAAP basis to be approximately 5%, versus previous range of 5 to 7%.

We continue to expect full year earnings per share to be in the range of $1.40 to $1.50 on an adjusted basis, and an updating our GAAP EPS range to be $1.34 to $1.44. And again, this includes the dilutive impact of approximately 2 to 3 cents from our Travelocity/Europe acquisition, and the impact of severance, retention and related costs of approximately 3 million. We expect full year EBITDA to be approximately 390 million and GAAP net income to be approximately 185 million. We continue to project free year cash flow to be greater than 200 million, and cash flow from operations to be greater than 370 million. Now, I'd like to turn it over to Michelle.

Thank you, Jeff. Good morning everyone. I am pleased to report another strong quarter for Travelocity. I would like to spend the next several minutes on two things. I will walk you through our performance against the key operational metrics we've been reporting on, and here I think you'll find our execution has been focused and successful. I will also take you through a new phase of innovation that Travelocity has embarked upon, one we call On-line Travel Version 2, a vision for how we will grow into a different kind of company, one that does not exist in our industry today.

We have spent the last two years on a path of disciplined execution against the must-haves and online travel. These must have the products, the relationships, and the business model which will serve as our platform for sustainable growth. We've moved from being a company that outsources its merchant hotel program, to one with a leapfrog product in the marketplace. We have progressed from being a company without dynamic packaging capabilities to one with industry leading products, not only in tradition and dynamic packaging, but with a unique last minute product unreplicated in the marketplace. Finally, we've moved from being a company who's revenue line was heavily reliant on published air sales, to one with a much more diversified revenue streams, while continuing to innovate in the air space, a topic which I'll cover in a bit more detail later. We're proud of our track record in executing against all of these must-haves, they were and are crucial to establishing a base of healthy transaction economics upon which to grow. You'll see strong growth in the key metrics by which we track our success in the realm of must-haves. Things like room night growth, Transaction revenue growth and non-air revenue growth. But on-line travel V2, is a vision for a new kind of growth, and indeed for a new kind of company. I will speak more directly to this vision, and how we're executing against it in a few minutes.

Before I do that let's turn to our performance in the third quarter. As I mentioned at the outset this was another strong quarter for us one which reinforces the turnaround we've engineered in our core business over the last three quarters. Overall revenue grew 33% versus prior year on an adjusted basis, and 24% on a GAAP basis in line with the guidance we laid out at the beginning of 2004. As Jeff discussed, we were again profitable for the full quarter on a GAAP and adjusted basis, and are profitable year-to-date as well on an adjusted basis. Travelocity's underlying economics are healthy and sustainable reflected in the growth we see in our key merchant and package businesses, our solid transaction economics and robust visitor sessions. Our most important performance metric is transaction revenue, those revenues derived from our core business of selling travel products and services. Overall, transaction revenue grew 51% versus same quarter last year, bolstered by strong growth in non-air transaction revenue. We continued our success in hotels this quarter with hotel room nights growing at 61% versus prior year.

Our merchant program now has 14,000 properties operational, as our industry leading hotel connectivity and supplier friendly stance, continue to attract new partners. On that note, Sam mentioned the announcement by IHG that Travelocity was the first online agency to be certified as an approved vendor. I won't linger on this too much, except to say we strongly feel our supplier friendly hotel model, driven by direct connectivity, automated reservation delivery, timely payment, and conscientious relationship building is serving us well. The innovative and differentiated approach we've taken will mean as occupancy rates rise, the suppliers become more selective about the distribution channels they employ Travelocity will continue to be a partner of choice. As Jeff mentioned, we continue to see solid growth in total trip transactions, which grew 33% over last quarter. During the third quarter, we also added merchant car and over 400 travel extras extras into the total trip booking path. That covers some of the key operational metrics for the quarter.

I now like to take a moment to discuss our European operations. Earlier in the quarter we announced the buy-in of our European operations with the exception of Germany. We're bullish and growth opportunities in Europe and are obviously pleased to have full ownership of the upside potential in these arenas. Under the capable leadership of Damon (Tusonne), we are and will continue to be in investment mode in Europe, as we rationalize the technology and operation platforms and introduce new products to the region. In 2005 we'll invest in Europe at levels comparable to what we've discussed for the fourth quarter 2004. First on our priority list, will be to roll out our new merchant hotel product, now live in the UK, which will deploy to other countries throughout 2005. We expect this to improve our margins and provide additional distribution for our hotel partners. Initial reception of our merchant program in the U.K. has been strong.

Overall hotel transactions are up, the U.K. merchant mix is higher than it was at the comparable stage of development domestically, and our own merchant inventory is already outselling that of our third party inventory providers. I want to turn back to the vision I outlined at the beginning of this call, how to transform Travelocity and help shape the industry in process. Before I go any further, I want to make one thing crystal clear, we will continue our relentless focus on operational excellence in our core business, Product Manufacturing innovating and supplier relationships, and delivering maximum consumer value. We will also be taking Travelocity to a new place, this is Online Travel V2. So what exactly do we mean? First and foremost, On-line Travel V2 means will uphold Travelocity's role as agent and retailer, and delivering on the promise that the best trips start here. Over the last year On-line travel has been separating into two camps. There are those that want to lead travel to more profitable place, a place which delivers more consumer and supplier value, we're clearly in that camp, and their those were actively in the business of commoditizing travel, or reducing travel planning to a research base comparison process.

We will continue to be laser focused on delivering the maximum breadth of product at prices equal to or better than any in the marketplace. Let me hit this point hard. Price matters. In our recent study using an independent software tool, says that in 170 top domestic air markets we meet or beat expedient Orbit's prices about 90% of the time. Competitive pricing is only a ticket to play in our industry. We won't let ourselves become just one among many price providers in an anonymous marketplace for travel products. Nor do we think a thin-layered price search engine is all the consumers want, delivering real consumer value requires more.

What is that more is the second pillar of Online Travel V2 differentiation. Travelocity will differentiate itself by being a leader in customer advocacy. We firmly established our leading credentials in customer advocacy over the last two years. Our innovations have optimized the value we create for suppliers and for travelers. We see it in our seamless hotel connectivity, which not only reduces hoteliers labor costs, but ensures that our customers arrive to a property that has their room waiting. The right room at the correct rate. And we see it in our new air path, Flight Navigator, now in late stage development. Flight Navigator will provide consumers not only with more options, and more relevant prices and timetables, but also the fare notes, the information consumers need to distinguish between flights in those frequent cases where real differences beyond price exist. The Flight Navigator will also give suppliers the channel where their own innovations and product differentiation can shine.

Our brands and our points of customer interaction will stand for something new, will be involved in more aspects of travel experience from dreaming and planning to a focus ground presence in our key destinations. We recently acquired Allstate Tours, and its show tickets.com brand, the largest distributor of show and tour tickets in Las Vegas, they have a strong brandable ground presence from the moment travelers land at McCarren airport to the lobbies of their favorite casinos. We already begun to change the game in travel purchasing. When you buy a flight to New York, our Netflix partnership will give you some classic New York films to watch before you go, and our alliance with Apple's I-Tunes recommends and lets you sample five songs about New York to listen to on your flight. In Online Travel V2, consumers will no longer be indifferent as to where and from whom they buy their travels. Service will be differentiator, ground presence will be a differentiator, and customer advocacy will be a differentiator. Travelocity will broaden the idea of consumer value beyond price.

Third, and finally we will use customer knowledge intelligently to expand our distribution footprint beyond those channels in which you see us today. We will identify our own high-value customers and differentiate our products and our services for them. From the Home page they see, to the Bon Voyage email they receive, to the contact center support they rely on. We already have a leadership position here by our preferred program, but I expect it to do more with this. Also it will identify attractive customer segments currently underserved by online retailers, and build on the power that affinity groups in influencing customer behavior. Travelocity partner Network be a key asset in our evolution, and our recent deal with AARP through which we will come the official supplier of travel to the 35 million members, is just the first you will see us undertake. By leveraging our own and external customer knowledge, by identifying high-value travelers, and by aligning ourselves with the social networks that are most important to them, we expect to be the beneficiary of a significant loyalty dividend of the coming months and years. You'll hear us talking about On-line Travel V2 for some time to come, it is a long-term strategic direction we're taking, but as I stated at the outset you will not, I repeat, not ever see us take our eyes off the fundamentals.

I'm going to wrap up here on the last year you've seen our business turnaround we've turned the corner on profitability, steadily gained share, and rejuvenated our brand. Behind these successes as is the case with all hungry innovative companies is an amazing team of people, and I talk confidently about our vision for Online Travel V2, it's not only confidence in idea, it's confidence in the energy, talent and passion of our team to execute against that idea. You'll see this team continue to focus on the fundamentals and you'll also see them continuously reinvent online travel. Now, I would like to turn it back to Sam.

Thanks Michele. Before we go to Q and A, I would like to wrap up with a few comments on the year thus far. I told you all in January that 2004 was clearly in all about execution, driving more predictable revenue and expanding our earnings. We laid out a number of initiatives to build up our merchandising capabilities for Travelocity and the offline channels. To capitalize on deregulation, and enhance the GDS business. And to reduce costs for competitive advantage. We remain on track to deliver on that plan. We will talk with you about our 2005 outlook on our call planned for early December, and I think you can expect more of the same operating excellence from this team.

On the December call we will lay out our objectives for '05 and the associated proof points. We will no doubt capitalize on opportunities in the coming year. And we will need to continue to address challenges in our business, pricing pressure GDS alternatives, new entrants, and you will see that we will address these opportunities and challenges, as we have in the past several years. We will be aggressive, we will lead and we will be disciplined. I am confident in that, because we have a strong management team, dedicated employees, and increasingly we are building strength through our partnerships with travel suppliers. Finally, you'll see us continue to balance our shareholder return between investments in companywide growth initiatives, and capital returns such as dividends and share repurchase. And with that, we'll go to Q&A.

Very good and thank you. Ladies and gentlemen as we just heard if you have questions and comments please feel free to queue up at this point simply press star, one on your phone keypad. (OPERATOR INSTRUCTIONS) And representing Bear Stearns our first question comes from Jim Kissane.

Sam, can you elaborate on your comments regarding the GDS pricing strategy. I think you said you expected to be neutral to earnings over time, does that mean that GDS won't grow cash flow over time?

No, I don't think that's what I was saying, first of all. But secondly, let me just talk about pricing and our approach to pricing. We have and this really predates deregulation by probably 18 months. We have been reviewing our of pricing models of looking at how we should approach the market anticipating deregulation, and so we have a number, we have a menu of pricing models that airlines will be able to choose from, based on the characteristics of that airline, and so as you would have seen in the past where we had the same price for every airline, it was all very public pricing type of approach to the marketplace. We can work individually with airlines based on the characteristics of the airline. So the example I'd give is, Latin America you've got a short-haul carrier who's average fares are very low. What can we do to help them in terms of delivering value in that market that's more aligned with the value they deliver to their customers? So there are opportunities to charge something different there than we might charge for say a long-haul segment. So you will see us with a number of different pricing approaches and I think what you also see, is a much larger menu of options to airlines that's reflective of the portfolio. So, an example of that would be a low-cost carrier that we serve today who has -- will be taking advantage of our reservation system in the near future, early next year, whose website features hotels from Travelocity, who purchases software from our airline solutions business, who takes advantage, full advantage of the distribution capabilities of the Sabre GDS, we can bring all of those types of products to bear in our discussions with the airlines, and our full intent is to do just that, and we can do that again on an individual basis, and I think that is the good news of the flexibility deregulation brings.

The comment on neutral to earnings and being able to grow cash flow with those new strategies?

Let me just clarify that comment. It is a comment on our pricing structure relative to our price point today. It is not intended to comment on the margins of the overall business, or anything about growth in cash flow, or anything like that 2005 and beyond. Does that help?

Helpful. Another question. The hurricane obviously had a impact on Travelocity do you have a sense or can you quantify the impact on total bookings for the GDS?

I think we've spent a fair amount of time understanding the impact on Travelocity. We don't have enumeration of the impact of our larger business.

A question for Michelle. Marketing spending trends at Travelocity, did you pull back on marketing as business got a little softer?

What we announced in the second quarter was that we anticipated having more advertising expense in the back half and we did, and we don't advertise for the specific quarter as you know advertising cycles take a while and so, the way we think about it is laying a foundation to go into a wave season for the first quarter of next year, which is clearly the important time period for us, but we spent at the levels we anticipated and talked about briefly on the second quarter call.

Thank you.

Thank you very much. Next Tom Underwood, Legg Mason, please go ahead. And one moment, please. We will have your line open in just a second, Mr. Underwood.

Can you hear me?

OK. Please go ahead.

A couple of things. First just a clarification of Jeff's comment, they now expect about a 3% adjusted operating income for Travelocity for the year, does that imply about 2 to 4 million-dollar operating loss in the fourth quarter, and if so, what is the impact from Europe to that number?

Well, let me answer this second question first. We haven't talked specifically about operating earnings for the fourth quarter so I will let you do your calculations on your own. But I did say that, and I will repeat it, that the change in the range was due to the diluted impact of the acquisition of the TEU, or the non-German part of TEU, and then in separate comments that that was 2 to 3 cents dilutive.

Just in terms of trends based on the third quarter, to comment on revenue per transaction on the air side, and revenue per transaction on the merchant hotel side, how those trended, and also if you're seeing any material changes to conversion rates at the Travelocity URL either up or down?

We don't talk about specific margins for transactions but I will say that our margins on the hotel business continue to be healthy, and we see no material changes in that business. And with respect to Travelocity URL, we had a very healthy visitor session growth this quarter, and continued to outgrow our portal partners in the overall business.

Tom is silent now so we assume that he still has --

I have more questions if they're going to keep the line open, but I figured others would have questions.

Tom, why don't you ask one more question and then we will move on.

Just following up on Jim's question regarding pricing. For your non-DCA suppliers, when you look at the pricing in December, can you give us any sort of feel as to in aggregate? I know it is deregulating, and it will be different for airline what in aggregate for non-DCA what you think we'll see in terms of pricing?

Not yet, I think you'll hear more from us in terms of our views of next year December.

Great.

Thank you very much, Mr. Underwood. Next we go to the line of Brian Egger, Harris Nesbitt.

Good morning. Just two questions. The first is the increase in Travelocity revenue per gross booking, a little striking in the quarter, was a little surprised that even after accounting for the shift in your merchant, agent mix of transactions, I thought you might be able to comment on that. I also want to know if you could be speak to some of the recent controversy about the Medisearch engines and some of the pushbacks in Travelocity and others have made against the potential commiditization of travel supply by that technology?

On revenue per gross booking, that continues to reflect two things. Gross bookings is a little bit dampened by all the low air fare sales going on right now, so that does dampen our gross booking number maybe even more than some of our competitors, that have lost gross bookings derived from air, but also you clearly see us continue to expand our packaging business, our hotel business, our merchant hotel product, and all of those provide us with better revenue per trip, so you do see us continue to grow that business aggressively, and we are proud of the accomplishments, Total Trips about a year old and doing quite well.

On the Medisearch side. For us it's a pretty simple equation, we ask three questions. Is a good for consumers? Is it good for suppliers? Is it good for Travelocity? , and on all three of those we don't think the answer is yes. We think the answer is no on all of them, and so we are leaders in the industry we are going to lead aggressively, and to make sure that Travelocity and the industry stays healthy. We're not participating in a Medisearch engines, and we're working closely with our supplier partners who are coming to us, with their thoughts and concerns about it and asking us our opinion and how we see it.

The other thing I would just add to that, Brian, I guess we see the Medisearch arena, if you will emerging with still lots of questions on price points, on how it will actually play out in the marketplace, and I think we see it both as a challenge by the industry, as you think about commoditization that Michelle has talked about, and yet we also see there are some opportunities. We are or can be a very rich data source in the marketplace, both in terms of not only in terms of what people are shopping for, but also in terms of what people are booking, and so we do see some opportunity there, but I think more largely we are concerned about the commoditization that these types of tools bring.

Thanks, very much.

Thank you very much Mr. Egger. Next we go to the line of April Henry with Morgan Stanley.

Hi. Could you go into a little more detail on the seven points of the market growth loss or rather the gross booking loss that you attribute to low fares and weather, can you just give us a sense of how much of it was low fare versus the weather?

As we were doing the math there our estimates and these are really estimates based on how we look to those markets. It looked like about 5 points came from and dampened airfares and about 2 points came from the hurricanes in the southeast United States.

On a revenue basis it would be slightly higher on obviously the air fare doesn't reflect a revenue, and it would probably be slightly higher on the weather side because there's a lot of package business and hotel business in Florida and the Caribbean.

This same analysis for your revenues what do you think your impact was on the growth rate, fare would have been up higher?

The air fares there wouldn't be anything. Again our revenue on air is that driven by the price of the air ticket and on the weather side it would probably be a bit higher, 1 point or 2 higher.

A point or two higher than the two points on revenue? And then with respect to the air fare abundance is that something you're still seeing going on in the current quarter?

Well, we don't know yet, however, you are seeing as we are that the fares are making their way up at least in some markets that there has been some success in taking fares up, related to the high fuel prices so we will see as we get further into the quarter but our information so far is the same anecdotal information you're seeing and reading in the newspapers.

Thank you.

Thank you very much Ms. Henry. We go to the line of Michael Millman, Soleil Securities. Please go ahead.

Wanted to but to follow up on Medisearch, I guess it's surprising because you are promoting the fact that in 170 markets you had the lowest, or at the lowest prices which would seem to give you some advantage on those searches, and also maybe you can give us some notion as to if indeed you are not a participant in the Medisearch does this represents a big disadvantage vis-a-vis the competition may opt to use that to promote their businesses?

What I said earlier I think is really critical which is price does matter, but prices is not the only thing that matters. Customer advocacy and other things matter, so we never want to be in a position where we're trying to reduce all of Travelocity to just the lowest price and that's the only thing consumers can find when they come to Travelocity. So, that's our concern with the Medisearch engines, and I know it's suppliers concerns as well. We are always actively looking at all of these new channels and asking ourselves the same three simple questions I talked about earlier; good for consumers, good for suppliers, is it good for Travelocity? So we'll always evaluate it and see. Our competitors have taken a pretty active stance against not participating in these models as well, so I don't think it provides us with the problem. Remember, these are still very early days.

Do you think if indeed most of the competitors aren't on it but one is, that this will give them a lead that they will get significant amount of business just by being there?

Sure. Michael, I care about building a business that's great for next quarter, and also several years from now, we have to be careful we don't participate in places that we think ultimately are commodtizing online travel and/or Travelocity. So I don't feel that it's a significant disadvantage to not be in these engines at this time. Matter of fact there are lots of great and healthy places to advertise Travelocity offline, on-line search, other areas, and we will continue to pursue those aggressively. I think our partnership with AARP, helps us reach customers that are needed online improvises with great growth avenues as well.

I think the other point to make is we are very disciplined financially and the investments we make in on-line search, so we evaluate this, we evaluate other opportunities and we look for the best return on our advertising dollars, our paid search dollars, and we will just continue that approach in the marketplace.

Could you talk a little bit more about the incentives where they were in the third quarter vis-a-vis a year ago, where you see them in the fourth quarter, maybe?

We haven't really commented specific to either the third or fourth quarter, simply stated for the full year, those expenses will be, those incentives expenses will be about 450 million. They were at about 400 million last year so about a 12% increase in those costs on a year-over-year basis.

Can you tell us what the year-over-year trends have been, at 12% is that consistent throughout the year, or is that trending up or down?

I can tell you that if you look year-over-year 2003 to 2002, certainly than incentive growth was in at the mid to high teens, and so it has come down to the 12% range this year, and we continue to have programs that are focused on not only providing more product but in the process also improving our incentive situation, so we've talked in past calls about assured advantage and that program has been quite successful in the lower end of the market in providing a mix of improved product offerings to those agencies, more flexible contracts in return for lower incentive, so continue to focus on that. Continue to make progress there. You also see as an example in the Canadian market we talked about the fact we had an opt-in model with Air Canada, and it has been quite successful in attracting agencies to that model, the opt-in model. So you see opportunities to take incentives down, in that case price down with Air Canada.

I would say Michael, just as we manage this internally we focus much more on the longer term trends. There is seasonality stuff going on, we miss our plan one quarter we blow it away the next, so it's this longer term trend coupled with structural changes such as a lower incentive model, like Sam cited in Canada I suggest as you think about it, you think about it on a longer term trend basis as well.

Thank you.

Next in queue we go to the line of Scott Kessler with Standard and Poor's.

I am surprised that no one has asked the question, I'm about to ask which is, what are your comments about the pending transaction involving the Cendant, and Orbits and how you think that is going to impact both your company and the competitive landscape. Thanks a lot.

Well, I think first of all, we don't typically comment on acquisitions from our competitors except perhaps from the valuation perspective. I guess in this case that transaction, or the announced transaction makes us feel even better about our Travelocity asset and its value.

Okay. Thank you.

Thank you very much, Mr. Kessler. Representing CIBC our next question comes from Paul Keung. Please go ahead.

Looking at the be to your talking about the on pricing customer advocacy in CRM, do you believe you need to spend more on Travelocity such that you may have to defer your profitability targets the next couple years?

We're not talking guidance for 2005 and beyond, we'll talk about that on the December call, but I think the big opportunity for us is to take some of the things we've already been doing customer advocacy, and our preferred program and turn those into areas to really drive loyalty with customers. So I think the foundation is already in place it's really about emphasizing that in all the messaging were doing, and lining up lot of our own internal process to deliver on that promise. So I don't think it's necessarily about spending more, I think it's about being the wiser in how we are using our spend.

And then Sam, a number of airlines you mentioned maybe cutting back capacity into the first half of next year, do you think that will have any sort of impact on your business going into next year at all?

Well, I think what really drives our businesses travel demands, so I think there will be some airlines that take capacity out, some that add it back in, depending on their competitive situation but I think the bookings will remain. So we hit less of a kind of a cyclical impact as capacity goes up and down, just simply because travel demand typically remains more constant or grows at a fairly steady rate, so I don't see a specific impact there.

You mentioned a new menu pricing for on the legacy GDS Business, the question is when can we start seeing some of the selections coming out the timing, first half of next year or back half of next year?

We're in the midst of discussing with a number of airlines already and I think you will begin to see more from us over the next 6 to 12 months. I think clearly we view these as a new and better models. They are more reflective of the value we're delivering as opposed to simply offering up the same price to everyone. So I think you'll begin to see those over the next 6 to 12 months.

Thanks a lot.

We go to the line now of Jerry Gallant with Haberman Financial.

Thank you, good morning. Can you tell us whether you've begun to process expedient transactions yet?

We have not commented and this is really a mutual agreement with the folks at expedient. We haven't commented a lot of the nature of the terms of the relationship, so as we have mentioned before it is a five-year deal. We don't expect there to be significant impact from that deal this year. We have been in development on our connection between Sabre GDS and expedient up and there is still more work to do there. So that is all we have said at this point, and all we'll say.

Okay. I believe you said earlier in the year you expected the transaction flow to start in the fourth quarter but if you're not ready to comment. Let me ask a different question which is, do you have any plans to enter our offer an opaque travel product? Obviously your largest competitor bought one of last year, Orbits which has been precluded from offering their own opaque product. As I understand the terms there, once Cendant acquires them, they won't have that restriction anymore so I'm just curious about your views on that.

We actually have opaque products if you think about it. Our packaging product gives opacity to suppliers in terms of the price point, we think those kind of products give consumers great pricing, which is what consumers are after in the opaque model, but at the same time they actually merchandise destinations, it's not just about the price, it's convenience for the consumer, it's great for the supplier because we can actually merchandise the supplier brand as well as the destination, so we think those kind of models, you know where consumers are after is not necessarily the game of trying to figure out which airline or how many stops they will have along their journey, they're getting a great price, and we think we can do that exceedingly well with our packaging products and we're focusing there.

Okay. I will take that as a no for now. Thank you very much.

Thank you Mr. Gallant. And ladies and gentlemen, once again if there any questions or comments please take this opportunity to queue up by pressing star one on your phone. Next in queue is Eddie Costa (ph) with Schumway Capital.

I just have a quick question. I didn't hear what the EBITDA guidance was for the year?

I'm sorry the question was for the year?

I thought you said 390 but --

That's right, approximately 390 on an adjusted basis.

And for Sabre Travel Network revenue growth is 3%. That right?

2%.

Approximately 2%.

Thanks.

Thank you very much Mr. Costa, and with that Mr. Gilliland and host panel, I will turn the call back to you, there are no further questions.

Thank you very much everyone.

We will talk to you in early December.

Ladies and gentlemen your host is making today's conference available for digitized replay for two weeks starting at 12:30 CDT October 28th all the way through 11:59 p.m. CST November the 11th. To access AT&T's Executive Teleconference service please dial 800-475-6701 and at the voice prompt enter today's conference ID of 750188. Internationally you may access the replay as well by dialing the 320-365-3844 again with the conference ID of 750188. That does conclude our earnings conference for this quarter. Thank you very much for your participation as well as for using AT&T's Executive teleconference service. You may now disconnect.