Sabre Holdings Climbs

Shares of Sabre Holdings (NYSE: TSG  ) surged yesterday, as the travel services company hiked its earnings expectations for the first quarter and the year, citing robust travel bookings and lower expenses in the quarter.

The firm, which sees first-quarter earnings coming in at $0.32 to $0.35 per share before special items, versus previous expectations of $0.24 to $0.27, expects expenses to return to more normal levels throughout the year. Nevertheless, Sabre evidently believes strong trends will continue in 2004, as it bumped up full-year forecasts to the $1.25-to-$1.35 range versus prior guidance of $1.15 to $1.25.

The upswing in travel is good news for Sabre. Like other players in the industry, it's suffered through a trying couple of years. Overall, revenue declined slightly in 2003, while operating earnings were off almost 48%. The coming year will be a welcome improvement.

While the improved travel environment is a positive sign, Sabre still has a long-term challenge in its Sabre Travel Network business, which accounted for 71% of revenue last year. Travel agencies subscribe to the unit's Sabre Global Distribution System, or GDS, to find available fares from carriers such as Northwest Airlines (Nasdaq: NWAC  ) , Delta Air Lines (NYSE: DNT  ) , and Continental Airlines (NYSE: CAL  ) , which in turn pay booking fees to Sabre for travel bought through the system. Traditionally, GDS providers have been able to push through regular fee increases, but that's starting to change.

Airlines increasingly have been clamoring for fee reductions and fighting the GDS model by offering special fares on their own websites. In response, Sabre rolled out a discount pricing option in 2002 that allowed airlines to lock in a reduced price over three years in exchange for access to all fares, including Web offers. The option helped maintain Sabre's GDS business, but airlines aren't likely to stop applying pressure on the booking fee issue.

Thankfully, Sabre's own online site, Travelocity, is growing. Sabre expects Travelocity to be profitable in the second quarter. Outside of Travelocity, though, Sabre Travel Network's presence in the burgeoning online booking space, which also uses GDS services, is less impressive. Instead, competitor Worldspan serves several major Web travel outfits, with a client list that includes InterActiveCorp's (Nasdaq: IACI  ) Expedia and Hotwire, as well as Priceline (Nasdaq: PCLN  ) and Orbitz (Nasdaq: ORBZ  ) .

For now, Sabre has reason to be happy. Even with the threat to its GDS side, the rise in travel will be a boon to near-term results.

Which small, undervalued companies does Tom Gardner think have the potential to take off? Take a free, 30-day trial to Motley Fool Hidden Gems to find out.

Fool contributor Brian Gorman is a freelance writer living in Chicago, Ill. He does not own shares of any companies mentioned here.