<B> Carriers Sell Off CRS</B>
<I>Galileo Airline Owners To Sell Their Shares In Second Public Offering</I>
By Mary Ann McNulty
<i>Rosemont, Ill.</i> - Four airline owners of Galileo International--US Airways, United, KLM and TAP Air Portugal--last week announced their intentions to cash in their stock and terminate or reduce their CRS ownership. Within the week, Galileo's board had responded by authorizing the repurchase of $500 million worth of its stock on the open market or through privately negotiated deals.
The airlines' public offering--valued at more than $1.8 billion at last Monday's closing price of $52.56--would put two-thirds of the global distribution company in play, with just one-third left in the hands of the remaining eight airline owners. Currently, 11 airlines own 64.9 percent of the stock.
More than 35 million shares of Galileo International, 31.2 percent of the company, will be offered by the end of June, as US Airways, KLM and TAP divest. United said it wants to sell just over half of its 32 percent stake, keeping enough to retain its status as the largest airline owner.
News of the planned stock sale began when US Airways asked Galileo to put up for sale all of its 7 million shares, valued at more than $368 million at last Monday's price.
When Galileo told its other airline owners of the directive, in accordance with shareholder agreements, United said it would sell about 17.5 million shares, worth about $900 million. KLM said it would sell all of its 10.7 million shares, 10.2 percent of the company, valued at $562 million, and TAP added all 88,000 of its shares, worth $4.6 million.
Wall Street didn't take the news well. Galileo stock prices dropped to a Wednesday close of $48.63 per share. On Thursday, its Board authorized the buy-back of up to $500 million worth of shares, "to be accumulated by the company...for possible resale and for other general corporate purposes," Galileo said in a formal statement. It quoted Galileo chairman, president and CEO James Barlett as saying that "the latest authorization provides management with the flexibility to repurchase shares from time to time at our discretion. We continue to believe Galileo represents an attractive investment and that this will help to further build shareholder value."
For the airlines that are selling, "basically, this is a way to raise cash," said John Pincavage, airline and global distribution system industry analyst for Warburg Dillon Reed in New York. Both Galileo and Sabre reported higher earnings for the first quarter due to their stock sales, he pointed out. But another factor could well be the growth of global airline alliances.
"Galileo will be the engine driving one of those alliances--I'd guess the Star Alliance," he said. "For KLM, which is not in that alliance, maybe this is the beginning of the move away from that engine. The same case could be made for US Airways."
Timothy O'Neil-Dunne, a former Worldspan executive and e-commerce consultant with T2N International Ltd., agreed. "In building their alliances, the airlines have realized two things: One, each alliance has multiple partners with different CRS/GDS affiliations and two, the CRSs in fact did not add any value in making the alliances work," he said. "Thus, CRS companies have become irrelevant in an alliance world."
Explaining United's decision, senior vice president and CFO Douglas Hacker said the airline is "continuing a divestiture program started in 1988 that is consistent with the evolutionary trends of airline distribution programs. This intention to sell follows the successful transaction United completed in 1998 to sell Apollo Travel Services for $540 million to Galileo."
The Galileo ownership changes aren't the only distancing in this distribution evolution, though. Earlier this year, United and US Airways discontinued selling the Apollo system, for which Galileo took over all sales (<I>BTN,</I> Feb. 22). United also has put its internal hosting business--long handled by Galileo--out for bid.
Even though it owns 6.7 percent of Galileo, US Airways last year outsourced all of its IT needs to Sabre in a 25-year, multibillion-dollar technology agreement (<I>BTN,</I> July 8, 1997). As part of the contract, Sabre purchased $47 million of IT assets from US Airways, hired 600 former employees and granted the airline 6 million shares of stock options.
Even as some sell, though, at least one airline, Swissair, is standing behind its ownership of Galileo. "We're not selling anything," spokesman Urs Peter Naef told Reuters.
Richard Eastman, president of The Eastman Group in Newport Beach, called this "a significant watershed issue in travel distribution, showing recognition by the airlines that the GDSs no longer provide either the only gateway to buyers, nor necessarily the most cost-efficient solution. Airline seats are increasingly a commodity product, and the manufacturing and inventory tracking needs of seats is increasingly disparate with the evolving information demands of the buying traveler."
He noted that American Airlines sold 17.8 percent of Sabre in a 1996 IPO and now is considering spinning off Travelocity as well. Amadeus announced plans for an IPO last year, but put them on hold when the market went cold.