**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-Q**

 
| **ý** | **Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|------------|----------------------------------------------------------------------------------------------|

 

**For the Quarterly Period Ended March 31, 2005.**

 

**OR**

 
| **o** | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For the Transition Period From             To**

 

**Commission file number 1-12175.**

 

 

**SABREHOLDINGS CORPORATION**

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                                                    | ** ** | **75-2662240**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) | ** ** | (I.R.S. Employer Identification No.) |
| ** **                                                      | ** ** | ** **                           |
| **3150 Sabre Drive, Southlake, Texas**                          | ** ** | **76092**                            |
| (Address of principal executive offices)                        | ** ** | (Zip Code)                           |

 

Registrant’s telephone number, including areacode **(682) 605-1000**

 

**Not Applicable**

(Former name, former address and former fiscal year, if changed sincelast report)

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter periods that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý  No o

 

Indicate by checkmark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes ý  No o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

Class A Common Stock, $.01 par value—131,112,087 as of April 29, 2005

 

 

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**INDEX**

 

**SABRE HOLDINGS CORPORATION**

 

 
| PART I:   | FINANCIAL  INFORMATION                                                                             | 3  |
|-----------|----------------------------------------------------------------------------------------------------|----|
| Item 1.   | Financial Statements  (Unaudited)                                                                  | 3  |
|      | Consolidated Balance Sheets-December 31, 2004 and March 31, 2005                                   | 3  |
|      | Consolidated Statements of Income—Three months  ended March 31, 2004 and 2005                 | 4  |
|      | Consolidated Condensed Statement of  Stockholders’ Equity-December 31,2004 and March 31, 2005 | 5  |
|      | Consolidated Statements of Cash Flows—Three months ended March 31,  2004 and 2005             | 6  |
|      | Notes to  Consolidated Financial Statements                                                        | 7  |
| Item 2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations        | 21 |
| Item 3.   | Quantitative  and Qualitative Disclosures About Market Risk                                        | 43 |
| Item 4.   | Controls  and Procedures                                                                           | 44 |
| PART II:  | OTHER  INFORMATION                                                                                 | 45 |
| Item  1.  | Legal  Proceedings                                                                                 | 45 |
| Item 2.   | Unregistered Sales of Equity Securities and Use of Proceeds                                        | 45 |
| Item 3.   | Defaults Upon Senior Securities                                                                    | 46 |
| Item 4.   | Submission of Matters to a Vote of Security Holders                                                | 46 |
| Item  5.  | Other  Information                                                                                 | 46 |
| Item 6.   | Exhibits                                                                                           | 47 |
| SIGNATURE | 48                                                                                                 |

 

2

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**PART I.FINANCIAL INFORMATION**

 

***Item 1******. FinancialStatements***

 

**SABREHOLDINGS CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**(Inthousands)**

 
| ** **                                                                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| ** **                                                                                                                                        | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                        | ** ** | ** **         | ** ** | ** **            | ** ** |
| **Current  assets**                                                                                                                               |       |               |       |                  |       |
| Cash                                                                                                                                              |       | $                  | 54,021     |                  | $          | 49,671 |   |
| Marketable securities                                                                                                                             |       | 685,244            |       | 787,353               |       |
| Accounts receivable, net                                                                                                                          |       | 455,389            |       | 349,621               |       |
| Prepaid expenses                                                                                                                                  |       | 60,701             |       | 63,521                |       |
| Deferred income taxes                                                                                                                             |       | 31,354             |       | 23,349                |       |
| Total current assets                                                                                                                              |       | 1,286,709          |       | 1,273,515             |       |
|                                                                                                                                              |       |               |       |                  |       |
| **Property  and equipment**                                                                                                                       |       |               |       |                  |       |
| Buildings and leasehold improvements                                                                                                              |       | 311,273            |       | 309,635               |       |
| Furniture, fixtures and equipment                                                                                                                 |       | 35,340             |       | 33,579                |       |
| Computer equipment                                                                                                                                |       | 122,165            |       | 120,515               |       |
| Internally developed software                                                                                                                     |       | 209,187            |       | 195,638               |       |
|                                                                                                                                              |       | 677,965            |       | 659,367               |       |
| Less accumulated depreciation and  amortization                                                                                                   |       | (286,694           | )          | (272,026              | )          |
| Total property and equipment                                                                                                                      |       | 391,271            |       | 387,341               |       |
| Deferred income taxes                                                                                                                             |       | 15,815             |       | 9,955                 |       |
| Investments in joint ventures                                                                                                                     |       | 166,309            |       | 176,249               |       |
| Goodwill and intangible assets, net                                                                                                               |       | 1,028,359          |       | 988,600               |       |
| Other assets, net                                                                                                                                 |       | 194,892            |       | 182,317               |       |
| **Total  assets**                                                                                                                                 |       | $                  | 3,083,355  |                  | $          | 3,017,977 |   |
|                                                                                                                                              |       |               |       |                  |       |
| **Liabilities  and stockholders’ equity**                                                                                                    |       |               |       |                  |       |
| **Current  liabilities**                                                                                                                          |       |               |       |                  |       |
| Accounts payable                                                                                                                                  |       | $                  | 152,766    |                  | $          | 177,207 |   |
| Net rate program related liabilities                                                                                                              |       | 121,393            |       | 58,313                |       |
| Accrued compensation and related benefits                                                                                                         |       | 49,080             |       | 80,448                |       |
| Accrued subscriber incentives                                                                                                                     |       | 92,120             |       | 84,357                |       |
| Deferred revenues                                                                                                                                 |       | 27,047             |       | 24,906                |       |
| Other accrued liabilities                                                                                                                         |       | 244,113            |       | 183,061               |       |
| Total current liabilities                                                                                                                         |       | 686,519            |       | 608,292               |       |
|                                                                                                                                              |       |               |       |                  |       |
| Pensions and other postretirement benefits                                                                                                        |       | 154,502            |       | 154,537               |       |
| Other liabilities                                                                                                                                 |       | 30,048             |       | 23,101                |       |
| Minority interests                                                                                                                                |       | 12,068             |       | 5,143                 |       |
| Long-term capital lease obligation                                                                                                                |       | 158,609            |       | 161,114               |       |
| Public and other notes payable                                                                                                                    |       | 430,492            |       | 439,309               |       |
|                                                                                                                                              |       |               |       |                  |       |
| Commitments and contingencies                                                                                                                     |       |               |       |                  |       |
|                                                                                                                                              |       |               |       |                  |       |
| **Stockholders’  equity**                                                                                                                    |       |               |       |                  |       |
| Preferred stock: $0.01 par value; 20,000  shares authorized;   no shares issued                                                                   |       | —             |       | —                |       |
| Class A Common Stock: $0.01 par value;  250,000 shares authorized;   145,855 shares issued at March 31, 2005 and December 31, 2004 |       | 1,459              |       | 1,459                 |       |
| Additional paid-in capital                                                                                                                        |       | 1,272,274          |       | 1,289,574             |       |
| Retained earnings                                                                                                                                 |       | 690,147            |       | 644,360               |       |
| Accumulated other comprehensive loss                                                                                                              |       | (15,035            | )          | (9,426                | )          |
| Less treasury stock at cost; 14,816 and  12,913 shares, respectively                                                                              |       | (337,728           | )          | (299,486              | )          |
| Total stockholders’ equity                                                                                                                   |       | 1,611,117          |       | 1,626,481             |       |
| **Total  liabilities and stockholders’ equity**                                                                                              |       | $                  | 3,083,355  |                  | $          | 3,017,977 |   |

 

See Notes to ConsolidatedFinancial Statements

 

3

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**SABRE HOLDINGS CORPORATION**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited) (In thousands, except per share amounts)**

 
| ** **                                    | ** ** | **Three Months Ended** | ** **  |
|-----------------------------------------------|------------|------------------------|-------------|
| ** **                                    | ** ** | **March 31,**     | ** **  |
| ** **                                    | ** ** | **2005**               | ** **  | **2004** | ** ** |
| **Revenues**                                  | ** ** | **$**                  | **581,888** | ** ** | $ | 539,753 |   |
| Cost of revenues                              | ** ** | **338,023**            | ** **  | 311,515 |   |
| **Gross  profit**                             | ** ** | **243,865**            | ** **  | 228,238 |   |
| **Other  operating expenses**                 |       |                   | ** **  |   |   |
| Selling, general and administrative           | ** ** | **164,643**            | ** **  | 146,629 |   |
| Amortization of intangible assets             | ** ** | **8,028**              | ** **  | 12,121 |   |
|                                          |       |                   | ** **  |   |   |
| Total other operating expenses                | ** ** | **172,671**            | ** **  | 158,750 |   |
|                                          |       |                   | ** **  |   |   |
| **Operating  income**                         | ** ** | **71,194**             | ** **  | 69,488 |   |
| **Other  income (expense)**                   |       |                   | ** **  |   |   |
| Interest income                               | ** ** | **4,369**              | ** **  | 3,235 |   |
| Interest expense                              | ** ** | **(7,614**             | **)**       | (6,427 | ) |
| Gain on sale of Karavel                       | ** ** | **20,594**             | ** **  | — |   |
| Other, net                                    | ** ** | **609**                | ** **  | 428 |   |
|                                          |       |                   | ** **  |   |   |
| Total other income (expense)                  | ** ** | **17,958**             | ** **  | (2,764 | ) |
|                                          |       |                   | ** **  |   |   |
| **Income  before provision for income taxes** | ** ** | **89,152**             | ** **  | 66,724 |   |
| Provision for income taxes                    | ** ** | **31,471**             | ** **  | 23,687 |   |
|                                          |       |                   | ** **  |   |   |
| **Net  earnings**                             | ** ** | **$**                  | **57,681**  | ** ** | $ | 43,037 |   |
|                                          |       |                   | ** **  |   |   |
| **Earnings  per common share**                |       |                   | ** **  |   |   |
|                                          |       |                   | ** **  |   |   |
| Basic                                         |       | $                      | 0.44        | ** ** | $ | 0.31 |   |
|                                          |       |                   | ** **  |   |   |
| Diluted                                       |       | $                      | 0.44        | ** ** | $ | 0.31 |   |

 

See Notes to Consolidated FinancialStatements

 

4

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**SABRE HOLDINGS CORPORATION**

**CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY**

**THREE MONTHS ENDED MARCH 31, 2005**

**(Unaudited) (In thousands)**

 
| ** **                                                                                       | ** ** | ** **       | ** ** | ** **          | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **         | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------|------------|---------------------|------------|--------------|------------|-------------------|------------|--------------------|------------|------------|------------|
| ** **                                                                                       | ** ** | **Class A** | ** ** | ** **          | ** ** | ** **   | ** ** | **Other**         | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **Common**       | ** ** | **Additional Paid** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **Stock**        | ** ** | **in Capital**      | ** ** | **Earnings** | ** ** | **Loss**          | ** ** | **Treasury Stock** | ** ** | **Total**  | ** ** |
| Balance  at December 31, 2004                                                               |       | $                | 1,459      |                | $          | 1,289,574    |       | $                 | 644,360    |               | $          | (9,426     | )          | $ | (299,486 | ) | $ | 1,626,481 |   |
|                                                                                             |       |             |       |                |       |         |       |              |       |               |       |       |       |
| Issuance  of shares A common stock pursuant to:                                                  |       |             |       |                |       |         |       |              |       |               |       |       |       |
| Stock  option plans                                                                              |       | —           |       | (503                | )          | —       |       | —            |       | 1,350              |       | 847        |       |
| Restricted  stock plan                                                                           |       | —           |       | (18,714             | )          | —       |       | —            |       | 16,963             |       | (1,751     | )          |
| Employee  stock purchase plan                                                                    |       | —           |       | (837                | )          | —       |       | —            |       | 4,432              |       | 3,595      |       |
| Tax  benefit from exercise of employee stock options                                             |       | —           |       | 66                  |       | —       |       | —            |       | —             |       | 66         |       |
| Dividends,  $0.09 per common share                                                               |       | —           |       | —              |       | (11,894      | )          | —            |       | —             |       | (11,894    | )          |
| Purchases  of treasury stock                                                                     |       | —           |       | —              |       | —       |       | —            |       | (60,987            | )          | (60,987    | )          |
| Stock-based  compensation for employees                                                          |       | —           |       | 2,675               |       | —       |       | —            |       | —             |       | 2,675      |       |
| **Comprehensive income:**                                                                        |       |             |       |                |       |         |       |              |       |               |       |       |       |
| Net  earnings                                                                                    |       | —           |       | —              |       | 57,681       |       | —            |       | —             |       | 57,681     |       |
| Unrealized  loss on foreign currency forward and option contracts, net of deferred income  taxes |       | —           |       | —              |       | —       |       | (3,088            | )          | —             |       | (3,088     | )          |
| Unrealized  gain on investments, net of deferred income taxes                                    |       | —           |       | —              |       | —       |       | 401               |       | —             |       | 401        |       |
| Unrealized  foreign currency translation loss                                                    |       | —           |       | —              |       | —       |       | (3,061            | )          | —             |       | (3,061     | )          |
| Other                                                                                            |       | —           |       | —              |       | —       |       | 139               |       | —             |       | 139        |       |
| Total  comprehensive income                                                                      |       | —           |       | —              |       | —       |       | —            |       | —             |       | 52,072     |       |
| Other                                                                                            |       | —           |       | 13                  |       | —       |       | —            |       | —             |       | 13         |       |
| Balance  at March 31, 2005                                                                  |       | $                | 1,459      |                | $          | 1,272,274    |       | $                 | 690,147    |               | $          | (15,035    | )          | $ | (337,728 | ) | $ | 1,611,117 |   |

 

See Notes to Consolidated Financial Statements.

 

5

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**SABRE HOLDINGS CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited) (In thousands)**

 
| ** **                                                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| **Operating  Activities**                                                        |       |                                  |       |   |   |
| Net earnings                                                                     |       | $                                     | 57,681     |   | $ | 43,037 |   |
| Adjustments to reconcile net earnings to  cash provided by operating activities: |       |                                  |       |   |   |
| Depreciation and amortization                                                    |       | 27,135                                |       | 30,831 |   |
| Stock-based compensation for employees                                           |       | 2,675                                 |       | 3,374 |   |
| Allowance for doubtful accounts                                                  |       | 2,070                                 |       | 4,909 |   |
| Deferred income taxes                                                            |       | (12,286                               | )          | (3,700 | ) |
| Joint venture equity loss                                                        |       | 3,968                                 |       | 7,062 |   |
| Gain on sale of Karavel                                                          |       | (20,594                               | )          | — |   |
| Other                                                                            |       | (3,776                                | )          | (1,789 | ) |
| Changes in operating assets and  liabilities:                                    |       |                                  |       |   |   |
| Accounts receivable                                                              |       | (96,402                               | )          | (88,903 | ) |
| Prepaid expenses                                                                 |       | (1,901                                | )          | 549 |   |
| Other assets                                                                     |       | (16,765                               | )          | 9,878 |   |
| Accrued compensation and related benefits                                        |       | (31,264                               | )          | (4,253 | ) |
| Accounts payable and other accrued  liabilities                                  |       | 61,520                                |       | 33,591 |   |
| Net rate program related liabilities                                             |       | 63,079                                |       | 19,625 |   |
| Pensions and other postretirement benefits                                       |       | —                                |       | 2,246 |   |
| Other liabilities                                                                |       | 3,889                                 |       | (41 | ) |
| Cash provided by operating activities                                            |       | 39,029                                |       | 56,416 |   |
|                                                                             |       |                                  |       |   |   |
| **Investing  Activities**                                                        |       |                                  |       |   |   |
| Additions to property and equipment                                              |       | (17,184                               | )          | (17,744 | ) |
| Purchases of marketable securities                                               |       | (2,668,962                            | )          | (1,581,427 | ) |
| Sales of marketable securities                                                   |       | 2,771,430                             |       | 1,622,984 |   |
| Proceeds from sale of Karavel                                                    |       | 26,013                                |       | — |   |
| Loans to joint venture partners                                                  |       | (12,538                               | )          | (10,592 | ) |
| Acquisitions (net of cash acquired)                                              |       | (61,022                               | )          | — |   |
| Cash provided by investing activities                                            |       | 37,737                                |       | 13,221 |   |
|                                                                             |       |                                  |       |   |   |
| **Financing  Activities**                                                        |       |                                  |       |   |   |
| Proceeds from issuance of common stock                                           |       | 2,691                                 |       | 5,055 |   |
| Dividends paid                                                                   |       | (11,894                               | )          | (10,573 | ) |
| Purchases of treasury stock                                                      |       | (63,213                               | )          | (68,362 | ) |
| Other financing activities, net                                                  |       | —                                |       | (2,778 | ) |
| Cash used for financing activities                                               |       | (72,416                               | )          | (76,658 | ) |
|                                                                             |       |                                  |       |   |   |
| Increase (decrease) in cash                                                      |       | 4,350                                 |       | (7,021 | ) |
| Cash at beginning of period                                                      |       | 49,671                                |       | 40,862 |   |
| Cash at end of period                                                            |       | $                                     | 54,021     |   | $ | 33,841 |   |

 

See Notes to Consolidated FinancialStatements

 

6

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**SABRE HOLDINGS CORPORATION**

 

**NOTES****TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**(Unaudited)**

 

**1.****              GeneralInformation**

 

Sabre Holdings Corporation (“SabreHoldings”) is a Delaware holding company. Sabre Inc. is the principal operatingsubsidiary and sole direct subsidiary of Sabre Holdings. Sabre Inc. or itsdirect or indirect subsidiaries conduct all of our businesses. In this QuarterlyReport on Form 10-Q, references to the “company”, “we”, “our”, “ours” and “us”refer to Sabre Holdings and its consolidated subsidiaries unless otherwisestated or the context otherwise requires.

 

Weare a world leader in travel commerce, marketing travel products and providingdistribution and technology solutions for the travel industry. We operate inmultiple travel distribution channels: the travel agency channel, theconsumer-direct channel and the business-direct channel. Through our *Sabre*Ò(1) global distribution system (the “*Sabre*system” or “*Sabre*GDS”) subscribers can accessinformation about, and can book reservations for, among other things, airlinetrips, hotel stays, car rentals, cruises and tour packages. Our*Sabre Travel Network*Ô business operates the *Sabre*GDSand markets and distributes travel-related products and services through thetravel agency  and corporate channels. Weengage in consumer-direct and business-direct travel marketing and distributionthrough our *Travelocity*Ò business. In addition, our *Sabre Airline Solutions*Ô business is a leading provider of technologyand services, including development and consulting services, to airlines andother travel providers.

 

**2.****              Summary of Significant AccountingPolicies**

 

**Basis of Presentation****–**The accompanying unaudited consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States for interim financial information and with the instructionsto Form 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financial statements.In the opinion of management, these financial statements contain alladjustments, consisting of normal recurring accruals, necessary to presentfairly the financial position, results of operations and cash flows for theperiods indicated. The preparation of financial statements in accordance withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Operating results for thethree months ended March 31, 2005 are not necessarily indicative of resultsthat may be expected for any other interim period or for the year endedDecember 31, 2005.  Our quarterlyfinancial data should be read in conjunction with our consolidated financialstatements for the year ended December 31, 2004 (including the notesthereto), set forth in Sabre Holdings Corporation’s Annual Report onForm 10-K filed with the Securities and Exchange Commission on March 11,2005.

 

We consolidate all of our majority-owned subsidiaries and companiesthat are not variable interest entities over which we exercise control throughmajority voting rights.  We would alsoconsolidate all variable interest entities of which we are the primarybeneficiary.  However, no entities arecurrently consolidated due to us being the primary beneficiary throughoperating, financing agreements, or other arrangements (including variableinterests held in variable interest entities). Should we,or any of our affiliates, choose to participate in any of the futureanticipated capital calls of Zuji Holdings Limited (“Zuji”), a joint venture inwhich we are an owner accounted for under the equity method, without a pro ratacontribution from the other equity holders, we could be required to consolidateZuji under the guidance of the Financial Accounting Standards Board (“FASB”)Interpretation No. 46R, *Consolidation ofVariable Interest Entities.  *Throughdirect and indirect ownership, we have an approximately 13% equity stake inZuji.  Travelocity is a direct equityholder of 10.13% interest in Zuji. Abacus (in which we have a 35% ownership interest) holds 9.87% equityinterest in Zuji.  The remaining 80%equity stake in Zuji is owned by AGC Holdings Limited (“AGC”).  AGC and Abacus are indirectly majority-ownedby several Asia Pacific airlines.

 

Theconsolidated financial statements include our accounts after elimination of allsignificant intercompany balances and transactions.  We account for our interests in joint venturesand investments in common stock of other companies that we do

 

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(1)          Agent 59, AllstateTicketing, Assured Vantage, Direct Connect, Hotel Spotlight, GetThere, Jurni,Jurni Network, JurniCruise, MySabre, Nexion, Sabre, Sabre Airline Solutions,Sabre Holdings, the Sabre Holdings logo, Sabre Travel Network, SabreSonic,Showtickets.com, Site 59, Site59.com, SynXis, TotalTrip, Travelocity,Travelocity Business, and Travelocity.com are trademarks of affiliates of SabreHoldings Corporation.  All other trademarksare the property of their respective owners.  ©2005 Sabre Holdings Corporation. All rights reserved.

 

7

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not controlbut over which we exert significant influence using the equity method, with ourshare of their results classified as revenues. Investments in the common stock of other companies over which we do notexert significant influence are accounted for at cost.  We periodically evaluate for impairment, equityand debt in entities accounted for as cost investments by reviewing updatedfinancial information provided by the investee, including valuation informationfrom new financing transactions by the investee and information relating tocompetitors of investees when available. If we determine that a cost method investment is other than temporarily impaired,the carrying value of the investment is reduced to its estimated fairvalue.  To date, write-downs ofinvestments have been insignificant to our results of operations.

 

**Reclassifications–**Certain reclassifications have been made to the 2004financial statements to conform to the 2005 presentation.  These reclassifications are not material,either individually or in the aggregate, to our financial statements.

 

**Advertising–**Prior to 2005 certain advertising costs weredeferred within the fiscal year to future interim periods where the benefit ofthat advertising extended beyond the quarter in which they occurred.  Beginning in 2005 and all subsequent interim periods,advertising costs will be expensed as incurred with no deferral within thefiscal year.  Our current advertisingstrategy is to generate immediate interest in travel promotions and products wherereturns are more immediate than in the past when our strategy was developingoverall brand awareness.

 

This timingchange resulted in an estimated $8 million in additional selling, general andadministrative expenses for the three months ended March 31, 2005.  Net income was reduced by an estimated $5million or $.04 per share.  Due to thistiming change, we expect to recognize lower advertising expenses in subsequentquarters of 2005 than in the comparable periods of the prior year, offset byany increases in advertising volume.

 

Had weemployed the revised methodology in 2004, Travelocity’s selling, general andadministrative expenses would have been an estimated $13 million higher and netincome an estimated $8 million lower, or $.06 per share lower for the threemonths ended March 31, 2004.

 

**EarningsPer Share****–** Basicearnings per share excludes any dilutive effect of stock awards oroptions.  The number of shares used inthe diluted earnings per share calculations includes the dilutive effect of anystock awards or options.

 

The followingtable reconciles weighted average shares used in computing basic and dilutedearnings per common share (in thousands):

 
| ** **                                                                            | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                            | ** ** | **March 31,**     | ** ** |
| ** **                                                                            | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                                                  |       |                   |       |   |   |
| Denominator for basic earnings per common  share - weighted-average share             |       | 130,253                |       | 139,220 |   |
| Dilutive effect of stock awards and options                                           |       | 500                    |       | 411 |   |
|                                                                                  |       |                   |       |   |   |
| Denominator for diluted earnings per common  share - adjusted weighted-average shares |       | 130,753                |       | 139,631 |   |

 

Options topurchase approximately 18,828,873 and 17,678,404 weighted-average shares of ourcommon stock were outstanding during the three month periods ending March 31,2005 and 2004, respectively, but were excluded from the computation of dilutedearnings per share because the effect would be anti-dilutive.

 

8

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**Stock Awardsand Options –** Currently, we account for stock awardsand stock option grants using the intrinsic value method set forth inAccounting Principles Board Opinion No. 25, *Accounting for StockIssued to Employees* (“APB 25”), and related interpretations.  Generally, no compensation expense isrecognized for stock option grants to employees if the exercise price is at orabove the fair market value of the underlying stock on the date of grant.  Compensation expense relating to other stockawards is recognized over the period during which the employee renders serviceto us necessary to earn the award.

 

We have not made, and will not make, loans (including the acceptance ofpromissory notes) for the exercise of our stock options or the purchase ofSabre Holdings Corporation Class A. Common Stock, par value $0.01 per share (“CommonStock”).

 

On December16, 2004, the FASB issued Statement of Financial Accounting Standards No. 123(Revised 2004), *Share-Based Payment* (“FAS 123R”),which is a revision of FASB Statement No. 123, *Accountingfor Stock-Based Compensation*(“FAS 123”).** FAS 123 supersedes APB 25 and amends FASBStatement No. 95, *Statement of Cash Flows.*  Generally, the approach in FAS 123R issimilar to the approach  described in FAS123.  However, FAS 123R requires allshare-based payments to employees, including grants of employee stock options,to be recognized on the income statement based on their fair values.  Pro forma disclosure is no longer analternative once the standard is required to be adopted.

 

We expect toadopt FAS 123R on January 1, 2006 and we intend to use the modified prospectivemethod.  We expect the adoption of FAS123R to have a significant impact on our results of operations, although itwill have no impact on our overall financial position.  FAS 123R also requires that the benefits oftax deductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow, as required underthe current guidance.  We expect theimpact of adoption of FAS 123R to be somewhat similar to that disclosed in ourcurrent pro forma disclosures, however, levels of share-based payments grantedin the future could cause results to be different.

 

The followingtable summarizes the pro forma effect of stock-based compensation on our netearnings and net earnings per share for the three months ended March 31, 2005and 2004, as if we had accounted for such compensation at fair value (inthousands, except per share data):

 
| ** **                                                                                                                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                          | ** ** | **March 31,**     | ** ** |
| ** **                                                                                                                          | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                                                                                                |       |                   |       |   |   |
| Net earnings as reported                                                                                                            |       | $                      | 57,681     |   | $ | 43,037 |   |
| Add stock compensation expense determined  under intrinsic value method, net of income taxes                                        |       | 1,652                  |       | 2,176 |   |
| Less total stock-based employee  compensation expense determined under fair value based method for all awards,  net of income taxes |       | (8,465                 | )          | (8,566 | ) |
| Pro forma net earnings                                                                                                              |       | $                      | 50,868     |   | $ | 36,647 |   |
|                                                                                                                                |       |                   |       |   |   |
| Net earnings per common share, as reported:                                                                                         |       |                   |       |   |   |
|                                                                                                                                |       |                   |       |   |   |
| Basic                                                                                                                               |       | $                      | 0.44       |   | $ | 0.31 |   |
| Diluted                                                                                                                             |       | $                      | 0.44       |   | $ | 0.31 |   |
| Net earnings per common share, pro forma:                                                                                           |       |                   |       |   |   |
|                                                                                                                                |       |                   |       |   |   |
| Basic                                                                                                                               |       | $                      | 0.39       |   | $ | 0.26 |   |
| Diluted                                                                                                                             |       | $                      | 0.39       |   | $ | 0.26 |   |

 

9

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**CostReductions****–** We incurred approximately $4 million during2004 for a workforce reduction of which approximately $2 million remainsoutstanding as of March 31, 2005.

 

**3.****         SignificantEvents**

 

**AOLAgreement** - In 1999, we entered into an agreement withAmerica Online (“AOL”) that provided, among other things, that Travelocitywould be the exclusive reservations engine for AOL’s Internet properties. Wewere initially obligated for payments of up to $200 million and we sharedadvertising revenues and commissions with AOL. On January 21, 2004, we revisedthe terms of and extended our agreement with AOL through March 2006, with anoptional year after that.  Travelocitycontinues to be the exclusive reservations engine for AOL’s Internet propertiesunder the revised agreement.  Under therevised terms of the agreement, we benefit from more strategically alignedterms for placement within AOL’s brands. Further, we are obligated for a payment of up to $13 million for2005.  In February of 2005, AOL agreed torevise the contract terms to incorporate a formula by which the anticipated $13million payment may be reduced if AOL does not achieve certain revenue targetsunder the agreement. The revised terms also allow AOL to continue and expand inthe travel search arena through its sites and partners. The anticipatedpayment, along with the unamortized portion of fixed payments previously paidunder the original contract, is being expensed on a straight-line basis overthe remaining term of the agreement.  For2005, this expense is expected to be approximately $23 million.

 

**Yahoo!Agreement –**We have an agreement with Yahoo! wherebywe are the exclusive air, car and hotel booking engine on Yahoo! Travel. Theagreement expires December 31, 2005 and has two one-year renewals at Yahoo!’soption. We are currently in discussions with Yahoo! regarding extending therelationship beyond December 31, 2005.

 

**Gulf Air Joint Venture**- On December 31, 2004, we entered into a joint venture with Gulf Air, aleading airline carrier in the Middle East, for which we will pay $31 millionthroughout 2005, $20 million of which has been paid as of March 31, 2005. Thejoint venture, Sabre Travel Network Middle East, is owned 60% by Sabre TravelNetwork and 40% by Gulf Air and will further extend our travel network productsand services into the Middle East region. The joint venture will providetechnology services, bookable travel products and distribution services fortravel agencies, corporations and travel suppliers in the region.  In addition, Sabre Airline Solutions enteredinto a five-year revised contract with Gulf Air to provide the *SabreSonic* suite of products for passengermanagement, as well as additional operational software and consulting services.The goodwill resulting from this transaction is not deductible for taxpurposes. The results of Gulf Air will be consolidated into our financialresults. The following table summarizes the allocation of the purchase priceand the amounts allocated to goodwill (in thousands):

 

| Subscriber contracts (3 year useful life) |   | $      | 10,679 |   |
|-------------------------------------------|--------|--------|--------|--------|
| Net Assets                                |   | 517    |   |
| Goodwill                                  |   | 19,804 |   |
| Total                                     |   | $      | 31,000 |   |

 

**Acquisitionof SynXis -** On January 19, 2005, we completed theacquisition of SynXis Corporation (“SynXis”), a provider of reservationmanagement, distribution and technology services for hotels, for approximately$41 million in cash including acquisition costs, of which $37 million has beenpaid as of March 31, 2005. This acquisition enables Sabre Travel Network tofurther build on our capabilities and offerings to hoteliers, to leverage newhotel content for all of our travel agents, and to extend reservationtechnology currently used at approximately 6,000 hotels, primarily in theUnited States and Europe.  SynXis willcontinue to operate under the SynXis name as a wholly-owned subsidiary of SabreInc. The acquired goodwill is not deductible for tax purposes.  Intangible assets subject to amortization willbe amortized over their respective lives. The following table summarizes the allocation of the purchase price andthe amounts allocated to goodwill (in thousands):

 

| Assets acquired net of liabilities assumed  |   | $      | 1,732  |   |
|---------------------------------------------|--------|--------|--------|--------|
| Purchased technology (5 year useful life)   |   | 3,900  |   |
| Customer relationships (8 year useful life) |   | 10,700 |   |
| Tradenames                                  |   | 1,800  |   |
| Goodwill                                    |   | 23,000 |   |
| Total                                       |   | $      | 41,132 |   |

 

**Sale ofKaravel Investment –  **OnMarch 11, 2005, we sold our interest in Karavel SA, a French tour operator, to OpodoLimited. We received approximately $26 million (Euro 20 million) in cashproceeds in connection with the sale and recorded a $21 million gain in otherincome.

 

10

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**4.****         Pensionand Other Post Retirement Benefit Plans**

 

The componentsof net periodic benefit cost of defined benefit pension plans and other definedbenefit postretirement plans for the three months ended March 31, 2005 and 2004are presented in the tables below (in thousands).

 
| ** **                                    | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-----------------------------------------------|------------|----------------------|------------|--------------------|------------|
| **Components  of net periodic benefit cost:** | ** ** | **2005**             | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                                  |       | $                    | 1,554      |               | $          | 1,304 |   | $ | 569 |   | $ | 795 |   |
| Interest cost                                 |       | 5,451                |       | 5,003              |       | 1,982 |   | 1,871 |   |
| Expected return on plan assets                |       | (5,976               | )          | (5,608             | )          | — |   | — |   |
| Amortization of transition asset              |       | (3                   | )          | (5                 | )          | 4 |   | 4 |   |
| Amortization of prior service cost            |       | 15                   |       | 44                 |       | (3,133 | ) | 81 |   |
| Amortization of actuarial loss                |       | 1,313                |       | 706                |       | 1,373 |   | 696 |   |
|                                          |       |                 |       |               |       |   |   |   |   |
| Net periodic benefit cost                     |       | $                    | 2,354      |               | $          | 1,444 |   | $ | 795 |   | $ | 3,447 |   |

 

There were nocontributions to fund our various defined benefit pension plans during thethree months ended March 31, 2005 and 2004. We are evaluating making additional contributions during the remainderof 2005.

 

On January 21, 2005, thefinal regulations implementing the Medicare Prescription Drug, Improvement, andModernization Act of 2003 were issued.  We do not believe that the requirements of these regulations will have amaterial impact on our financial results.

 

11

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**5.****         IncomeTaxes**

 

The provisionfor income taxes relating to continuing operations differs from amountscomputed at the statutory federal income tax rate as follows (in thousands):

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **March 31,**     | ** ** |
| ** **                                                 | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Income tax provision at statutory federal  income tax rate |       | $                      | 31,203     |   | $ | 23,353 |   |
| State income taxes, net of federal benefit                 |       | 1,751                  |       | 1,780 |   |
| Other, net                                                 |       | (1,483                 | )          | (1,446 | ) |
|                                                       |       |                   |       |   |   |
| Total provision for income taxes                           |       | $                      | 31,471     |   | $ | 23,687 |   |

 

**6.****         Derivatives**

 

We are a party to certainforeign currency forward and option contracts. We have designated theseinstruments as cash flow hedges. Amounts reclassified from other comprehensiveincome to earnings due to the settlement of forward and option contracts were $2million and $4 million during the three months ended March 31, 2005 and 2004,respectively.  No hedging ineffectiveness was recorded in earningsrelating to the forwards or options during the three months ended March 31,2005 and 2004.  The estimated fair values of the foreign currency forwardand option contracts were $7 million and $12 million at March 31, 2005 andDecember 31, 2004, respectively.  Theestimated fair values of the forwards and options are included in prepaidexpenses on the Consolidated Balance Sheets.

 

We are also aparty to certain interest rate swap contracts.  We have designated theswaps as fair value hedges of our public notes payable and capital leaseobligation. No hedging ineffectiveness was recorded in earnings relating to ourinterest rate swaps during the three months ended March 31, 2005 or 2004. The estimated fair values of the interest rate swaps were a net liability of $2million at March 31, 2005  and net assetof $9 million at December 31, 2004, the values of which are included in otherliabilities and other assets, respectively, on the Consolidated Balance Sheet.

 

**7.****         Business Segments**

 

We are a worldleader in travel commerce, marketing travel products and providing distributionand technology solutions for the travel industry.  We operate in multiple travel distributionchannels: the travel agency channel, the consumer-direct channel and thecorporate or business-direct channel. Through our *Sabre* globaldistribution system (the “*Sabre*system” or “*Sabre* GDS”)subscribers can access information about, and can book reservations for, amongother things, airline trips, hotel stays, car rentals, cruises and tourpackages. Our Sabre Travel Network business operates the *Sabre* GDS and markets and distributestravel-related products and services through the travel agency and corporatechannels. We engage in consumer-direct and business-direct travel marketing anddistribution through our Travelocity business. In addition, our Sabre Airline Solutions business is a leading providerof technology and services, including development and consulting services, toairlines and other travel providers.

 

Our reportablesegments are strategic business segments that offer different products andservices and are managed separately because each business requires differentmarket strategies.  The accountingpolicies of the segments are the same as those used in our consolidatedresults.  We account for significantintersegment transactions as if the transactions were to third parties, thatis, at estimated current market prices. The majority of the intersegment revenues and cost of revenues arebetween Travelocity and Sabre Travel Network, consisting mainly of incentivespaid by Sabre Travel Network to Travelocity for transactions processed throughthe *Sabre* GDS, data processingfees paid by Travelocity to Sabre Travel Network for transactions processedthrough the *Sabre* GDS, and feespaid by Sabre Travel Network to Travelocity for corporate trips booked throughTravelocity’s online booking technology. In addition, Sabre Airline Solutions pays fees to Travelocity forairline trips booked through Travelocity’s online booking technology.

 

Personnel andrelated costs for the corporate headquarters, certain legal and professionalfees, and other corporate charges are allocated to the segments through amanagement fee based on the relative size of the segments and usage ofcorporate resources or services. Depreciation expense on the corporate headquarters buildings and relatedfacilities costs are allocated to the segments through a facility fee based onheadcount.  Benefits expense, includingpension expense, postretirement benefits, medical insurance and workers’compensation, are allocated to the segments based on headcount.  Unallocated corporate expenses include costsassociated with the corporate headquarters buildings that were not allocated tothe reportable segments as well as certain other corporate charges maintainedat the corporate level.

 

12

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The segmentoperating results are presented on a basis that excludes certain adjustingitems that are summarized below, except where noted. This presentation isconsistent with the manner in which our management assesses the operatingperformance of our business segments. Selected information for our three reportable segments for the three monthsended March 31, 2005 and 2004 follows (in thousands).

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **March 31,**     | ** ** |
| ** **                                                    | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                          |       |                   |       |   |   |
| Revenues from external customers, excluding  adjusting items: |       |                   |       |   |   |
| Sabre Travel Network                                          |       | $                      | 413,702    |   | $ | 403,573 |   |
| Travelocity                                                   |       | 109,381                |       | 83,507 |   |
| Sabre Airline Solutions                                       |       | 62,773                 |       | 59,735 |   |
| Total                                                         |       | $                      | 585,856    |   | $ | 546,815 |   |
|                                                          |       |                   |       |   |   |
| Intersegment revenues:                                        |       |                   |       |   |   |
| Sabre Travel Network                                          |       | $                      | 5,956      |   | $ | 7,539 |   |
| Travelocity                                                   |       | 41,813                 |       | 34,734 |   |
| Total                                                         |       | $                      | 47,769     |   | $ | 42,273 |   |
|                                                          |       |                   |       |   |   |
| Equity in net income/(loss) of equity  method investees:      |       |                   |       |   |   |
| Sabre Travel Network                                          |       | $                      | 149        |   | $ | (276 | ) |
| Travelocity                                                   |       | (4,117                 | )          | (6,786 | ) |
| Total                                                         |       | $                      | (3,968     | ) | $ | (7,062 | ) |
|                                                          |       |                   |       |   |   |
| Consolidated revenues:                                        |       |                   |       |   |   |
| Sabre Travel Network                                          |       | $                      | 419,807    |   | $ | 410,836 |   |
| Travelocity                                                   |       | 147,077                |       | 111,455 |   |
| Sabre Airline Solutions                                       |       | 62,773                 |       | 59,735 |   |
| Elimination of intersegment revenues                          |       | (47,769                | )          | (42,273 | ) |
| Total                                                         |       | $                      | 581,888    |   | $ | 539,753 |   |

 

13

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A summary ofthe adjusting items and reconciliation to consolidated operating income is setforth below (in thousands):

 
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                     | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Segment operating income (loss) excluding  adjusting items:                    |       |                   |       |   |   |
|                                                                           |       |                   |       |   |   |
| Sabre Travel Network                                                           |       | $                      | 81,288     |   | $ | 84,485 |   |
| Travelocity                                                                    |       | (11,780                | )          | (1,464 | ) |
| Sabre Airline Solutions                                                        |       | 9,910                  |       | (621 | ) |
| Net corporate allocations                                                      |       | 13                     |       | 670 |   |
| Total                                                                          |       | $                      | 79,431     |   | $ | 83,070 |   |
|                                                                           |       |                   |       |   |   |
| *Impact of  adjusting items on operating income – (increase) / decrease:* |       |                   |       |   |   |
|                                                                           |       |                   |       |   |   |
| Sabre Travel Network:                                                          |       |                   |       |   |   |
| Intangibles amortization                                                       |       | $                      | 5,209      |   | $ | 4,169 |   |
| Total Sabre Travel Network                                                     |       | $                      | 5,209      |   | $ | 4,169 |   |
|                                                                           |       |                   |       |   |   |
| Travelocity:                                                                   |       |                   |       |   |   |
| Intangibles amortization                                                       |       | $                      | 2,003      |   | $ | 7,462 |   |
| Stock compensation                                                             |       | 455                    |       | 1,937 |   |
| Total Travelocity                                                              |       | $                      | 2,458      |   | $ | 9,399 |   |
|                                                                           |       |                   |       |   |   |
| Sabre Airline Solutions:                                                       |       |                   |       |   |   |
| Intangibles amortization                                                       |       | $                      | 570        |   | $ | — |   |
| Total Sabre Airline Solutions                                                  |       | $                      | 570        |   | $ | — |   |
|                                                                           |       |                   |       |   |   |
| Corporate:                                                                     |       |                   |       |   |   |
| Stock compensation                                                             |       | —                 |       | 14 |   |
| Total Corporate                                                                |       | $                      | —     |   | $ | 14 |   |
|                                                                           |       |                   |       |   |   |
| Total operating income adjusting items                                         |       | $                      | 8,237      |   | $ | 13,582 |   |
|                                                                           |       |                   |       |   |   |
| Consolidated operating income (loss):                                          |       |                   |       |   |   |
| Sabre Travel Network                                                           |       | $                      | 76,079     |   | $ | 80,316 |   |
| Travelocity                                                                    |       | (14,238                | )          | (10,863 | ) |
| Sabre Airline Solutions                                                        |       | 9,340                  |       | (621 | ) |
| Net Corporate allocations                                                      |       | 13                     |       | 656 |   |
|                                                                           |       |                   |       |   |   |
| Total                                                                          |       | $                      | 71,194     |   | $ | 69,488 |   |

 

Segmentoperating income for Travelocity for 2005 includes the impact of changes in thetiming of recognizing advertising expenses within the fiscal year.  See Note 2.

 

14

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**8.****         SupplementalGuarantor/Non-Guarantor Financial Information**

 

Certainobligations of Sabre Holdings Corporation (“Sabre Holdings”) have been solelyguaranteed by its 100% owned operating subsidiary, Sabre Inc. There arecurrently no restrictions on Sabre Holdings’ ability to obtain funds from SabreInc. in the form of a dividend or loan other than typical dividend requirementsunder Delaware law.  Additionally, thereare no significant restrictions on Sabre Inc.’s ability to obtain funds fromits direct or indirect subsidiaries other than those that would exist understate or foreign law.  Sabre Inc. is thesole direct subsidiary of Sabre Holdings. All other subsidiaries are direct or indirect subsidiaries of SabreInc.  These other subsidiaries are allincluded in the non-guarantor financial statements.  The following financial information presentscondensed consolidating balance sheets, statements of income and statements ofcash flows for Sabre Holdings, Sabre Inc. and non-guarantor subsidiaries.The information has been presented as if Sabre Holdings accounted for itsownership of Sabre Inc., and Sabre Inc. accounted for its ownershipof the non-guarantor subsidiaries, using the equity method of accounting.  Certain reclassifications have been made tothe 2004 financial statements to conform to the 2005 presentation.  These reclassifications are not material,either individually or in the aggregate, to our financial statements.

 

Sabre Inc.conducts the domestic operations of both the Sabre Travel Network and SabreAirline Solutions segments.  Theoperations of the Travelocity segment, as well as the principal internationaloperations of the Sabre Travel Network segment, are conducted by thenon-guarantor subsidiaries.

 

Sabre Inc.and certain non-guarantor subsidiaries are parties to various intercompanyagreements that affect the amount of operating expenses reported in thefollowing condensed consolidating statements of income. Among other things,fees are paid by Sabre Inc. to a non-guarantor subsidiary relating to theuse of trademarks, tradenames, etc. owned by a non-guarantor subsidiary;incentive and marketing payments are made by Sabre Inc. to non-guarantorsubsidiaries relating to the use and distribution of the *Sabre*system; and payments are made by non-guarantor subsidiaries to Sabre Inc.for access to the *Sabre* system under the terms ofthese agreements.  During the threemonths ended March 31, 2005 and 2004, Sabre Inc. recognized operating expensesin connection with these agreements totaling approximately $72 million and $58million, respectively.  These amounts,and the corresponding amounts recognized by the non-guarantor subsidiaries areeliminated in consolidation.

 

15

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**UNAUDITED CONSOLIDATING CONDENSED BALANCESHEETS**

**MARCH 31, 2005**

**(in thousands)**

 
| ** **                                          | ** ** | **Sabre**    | ** ** | **Sabre**        | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Sabre**        | ** ** |
|-----------------------------------------------------|------------|--------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **Holdings** | ** ** | **Incorporated** | ** ** | **Subsidaries**   | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Assets**                                          |       |         |       |             |       |              |       |             |       |             |       |
| **Current Assets**                                  |       |         |       |             |       |              |       |             |       |             |       |
| Cash and marketable securities                      |       | $            | —     |             | $          | 667,696           |       | $                | 71,569     |             | $          | — |   | $ | 739,265 |   |
| Accounts receivable, net                            |       | —       |       | 303,750          |       | 151,639           |       | —           |       | 455,389          |       |
| Intercompany accounts receivable (payable)          |       | —       |       | (213,175         | )          | 213,175           |       | —           |       | —           |       |
| Other current assets                                |       | —       |       | 34,967           |       | 57,088            |       | —           |       | 92,055           |       |
| Total current assets                                |       | —       |       | 793,238          |       | 493,471           |       | —           |       | 1,286,709        |       |
|                                                |       |         |       |             |       |              |       |             |       |             |       |
| Property and equipment, net                         |       | —       |       | 339,494          |       | 51,777            |       | —           |       | 391,271          |       |
|                                                |       |         |       |             |       |              |       |             |       |             |       |
| Investment in subsidiaries                          |       | 731,937      |       | 1,442,618        |       | —            |       | (2,174,555       | )          | —           |       |
| Intercompany notes                                  |       | 1,293,785    |       | (1,293,785       | )          | —            |       | —           |       | —           |       |
| Investment in joint ventures                        |       | —       |       | 4,275            |       | 162,034           |       | —           |       | 166,309          |       |
| Goodwill and intangible assets, net                 |       | —       |       | 11,995           |       | 1,016,364         |       | —           |       | 1,028,359        |       |
| Other assets, net                                   |       | 6,777        |       | 120,695          |       | 83,235            |       | —           |       | 210,707          |       |
| **Total assets**                                    |       | $            | 2,032,499  |             | $          | 1,418,530         |       | $                | 1,806,881  |             | $          | (2,174,555 | ) | $ | 3,083,355 |   |
| ** **                                          |       |         |       |             |       |              |       |             |       |             |       |
| **Liabilities and stockholders’ equity**       |       |         |       |             |       |              |       |             |       |             |       |
| **Current liabilties**                              |       |         |       |             |       |              |       |             |       |             |       |
| Accounts payable and net rate related  liabilities  |       | 979          |       | 94,065           |       | 179,115           |       | —           |       | 274,159          |       |
| Accrued compensation and related benefits           |       | —       |       | 35,178           |       | 13,902            |       | —           |       | 49,080           |       |
| Other current accrued liabilities                   |       | 3,776        |       | 203,731          |       | 155,773           |       | —           |       | 363,280          |       |
| Total current liabilities                           |       | $            | 4,755      |             | $          | 332,974           |       | $                | 348,790    |             | $          |   |   | $ | 686,519 |   |
|                                                |       |         |       |             |       |              |       |             |       |             |       |
| Pensions and other postretirement benefits          |       | —       |       | 153,993          |       | 509               |       | —           |       | 154,502          |       |
| Public and other notes payable                      |       | 415,416      |       | —           |       | 15,076            |       | —           |       | 430,492          |       |
| Long-term capital lease obligation                  |       | —       |       | 158,609          |       | —            |       | —           |       | 158,609          |       |
| Other liabilities                                   |       | 1,211        |       | 41,017           |       | (12,180           | )          | —           |       | 30,048           |       |
| Minority interests                                  |       | —       |       | —           |       | 12,068            |       | —           |       | 12,068           |       |
|                                                |       |         |       |             |       |              |       |             |       |             |       |
| Total stockholders’ equity                     |       | 1,611,117    |       | 731,937          |       | 1,442,618         |       | (2,174,555       | )          | 1,611,117        |       |
| **Total liabilities and stockholders’ equity** |       | $            | 2,032,499  |             | $          | 1,418,530         |       | $                | 1,806,881  |             | $          | (2,174,555 | ) | $ | 3,083,355 |   |

 

16

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**UNAUDITED CONSOLIDATING CONDENSED BALANCESHEETS**

**DECEMBER 31, 2004**

**(in thousands)**

 
| ** **                                          | ** ** | **Sabre**    | ** ** | ** **     | ** ** | **Non-Guarantor** | ** ** | **Eliminations** | ** ** | **Sabre**        | ** ** |
|-----------------------------------------------------|------------|--------------|------------|----------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **Holdings** | ** ** | **Sabre Inc.** | ** ** | **Subsidaries**   | ** ** | **Entries**      | ** ** | **Consolidated** | ** ** |
| **Assets**                                          | ** ** | ** **   | ** ** | ** **     | ** ** | ** **        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Current Assets**                                  | ** ** | ** **   | ** ** | ** **     | ** ** | ** **        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Cash and marketable securities                      |       | $            | —     |           | $          | 766,401           |       | $                | 70,623     |             | $          | — |   | $ | 837,024 |   |
| Accounts receivable, net                            |       | —       |       | 236,160        |       | 113,461           |       | —           |       | 349,621          |       |
| Intercompany accounts receivable (payable)          |       | —       |       | (159,414       | )          | 159,414           |       | —           |       | —           |       |
| Other current assets                                |       | —       |       | 22,288         |       | 64,582            |       | —           |       | 86,870           |       |
| Total current assets                                |       | —       |       | 865,435        |       | 408,080           |       | —           |       | 1,273,515        |       |
|                                                |       |         |       |           |       |              |       |             |       |             |       |
| Property and equipment, net                         |       | —       |       | 340,964        |       | 46,377            |       | —           |       | 387,341          |       |
|                                                |       |         |       |           |       |              |       |             |       |             |       |
| Investment in subsidiaries                          |       | 692,122      |       | 1,331,046      |       | —            |       | (2,023,168       | )          | —           |       |
| Intercompany notes                                  |       | 1,361,035    |       | (1,361,035     | )          | —            |       | —           |       | —           |       |
| Investment in joint ventures                        |       | —       |       | 4,348          |       | 171,901           |       | —           |       | 176,249          |       |
| Goodwill and intangible assets, net                 |       | —       |       | 12,209         |       | 976,391           |       | —           |       | 988,600          |       |
| Other assets, net                                   |       | 15,200       |       | 109,312        |       | 67,760            |       | —           |       | 192,272          |       |
| **Total assets**                                    |       | $            | 2,068,357  |           | $          | 1,302,279         |       | $                | 1,670,509  |             | $          | (2,023,168 | ) | $ | 3,017,977 |   |
| ** **                                          | ** ** | ** **   | ** ** | ** **     | ** ** | ** **        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Liabilities and stockholders’ equity**       | ** ** | ** **   | ** ** | ** **     | ** ** | ** **        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Current liabilties**                              | ** ** | ** **   | ** ** | ** **     | ** ** | ** **        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Accounts payable and net rate related  liabilities  |       | $            | 7,790      |           | $          | 105,146           |       | $                | 122,584    |             | $          | — |   | $ | 235,520 |   |
| Accrued Compensation and related benefits           |       | —       |       | 64,386         |       | 16,062            |       | —           |       | 80,448           |       |
| Other accrued liabilities                           |       | 8,504        |       | 128,412        |       | 155,408           |       | —           |       | 292,324          |       |
| Total current liabilities                           |       | 16,294       |       | 297,944        |       | 294,054           |       | —           |       | 608,292          |       |
|                                                |       |         |       |           |       |              |       |             |       |             |       |
| Pensions and other postretirement benefits          |       | —       |       | 153,695        |       | 842               |       | —           |       | 154,537          |       |
| Public and other notes payable                      |       | 424,233      |       | —         |       | 15,076            |       | —           |       | 439,309          |       |
| Long-term capital lease obligation                  |       | —       |       | 161,114        |       | —            |       | —           |       | 161,114          |       |
| Other liabilities                                   |       | 1,349        |       | (2,596         | )          | 24,348            |       | —           |       | 23,101           |       |
| Minority interests                                  |       | —       |       | —         |       | 5,143             |       | —           |       | 5,143            |       |
|                                                |       |         |       |           |       |              |       |             |       |             |       |
| Stockholders’ equity                           |       | 1,626,481    |       | 692,122        |       | 1,331,046         |       | (2,023,168       | )          | 1,626,481        |       |
| **Total liabilities and stockholders’ equity** |       | $            | 2,068,357  |           | $          | 1,302,279         |       | $                | 1,670,509  |             | $          | (2,023,168 | ) | $ | 3,017,977 |   |

 

17

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**UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF INCOME**

**FOR THE THREE MONTHS ENDED MARCH 31, 2005**

**(in thousands)**

 
| ** **                                    | ** ** | **Sabre   Holdings** | ** ** | **Sabre Inc.** | ** ** | **Non-   Guarantor   Subsidiaries** | ** ** | **Eliminating Entries** | ** ** | **Sabre   Consolidated** | ** ** |
|-----------------------------------------------|------------|----------------------|------------|----------------|------------|-------------------------------------|------------|-------------------------|------------|--------------------------|------------|
|                                          |       |                 |       |           |       |                                |       |                    |       |                     |       |
| Revenues                                      |       | $                    | —     |           | $          | 401,273                             |       | $                       | 286,794    |                     | $          | (106,179 | ) | $ | 581,888 |   |
| Operating expenses                            |       | 946                  |       | 324,469        |       | 291,458                             |       | (106,179                | )          | 510,694                  |       |
| Operating income (loss)                       |       | (946                 | )          | 76,804         |       | (4,664                              | )          | —                  |       | 71,194                   |       |
| **Other  income (expense)**                   |       |                 |       |           |       |                                |       |                    |       |                     |       |
| Interest income                               |       | 26,122               |       | 3,221          |       | 1,844                               |       | (26,818                 | )          | 4,369                    |       |
| Interest expense                              |       | (5,158               | )          | (28,984        | )          | (290                                | )          | 26,818                  |       | (7,614                   | )          |
| Income from subsidiaries                      |       | 44,567               |       | 11,030         |       | —                              |       | (55,597                 | )          | —                   |       |
| Other, net                                    |       | —               |       | (146           | )          | 21,349                              |       | —                  |       | 21,203                   |       |
| Total other income (expense)                  |       | 65,531               |       | (14,879        | )          | 22,903                              |       | (55,597                 | )          | 17,958                   |       |
|                                          |       |                 |       |           |       |                                |       |                    |       |                     |       |
| **Income  before provision for income taxes** |       | 64,585               |       | 61,925         |       | 18,239                              |       | (55,597                 | )          | 89,152                   |       |
| Provision for income taxes                    |       | 6,904                |       | 17,358         |       | 7,209                               |       | —                  |       | 31,471                   |       |
| **Net  income**                               |       | $                    | 57,681     |           | $          | 44,567                              |       | $                       | 11,030     |                     | $          | (55,597 | ) | $ | 57,681 |   |

 

**UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF INCOME**

**FOR THE THREE MONTHS ENDED MARCH 31, 2004**

**(in thousands)**

 
| ** **                                    | ** ** | **Sabre   Holdings** | ** ** | **Sabre Inc.** | ** ** | **Non-   Guarantor   Subsidiaries** | ** ** | **Eliminating   Entries** | ** ** | **Sabre   Consolidated** | ** ** |
|-----------------------------------------------|------------|----------------------|------------|----------------|------------|-------------------------------------|------------|---------------------------|------------|--------------------------|------------|
|                                          |       |                 |       |           |       |                                |       |                      |       |                     |       |
| Revenues                                      |       | $                    | —     |           | $          | 391,215                             |       | $                         | 268,621    |                     | $          | (120,083 | ) | $ | 539,753 |   |
| Operating expenses                            |       | 1,266                |       | 336,770        |       | 252,312                             |       | (120,083                  | )          | 470,265                  |       |
|                                          |       |                 |       |           |       |                                |       |                      |       |                     |       |
| Operating income (loss)                       |       | (1,266               | )          | 54,445         |       | 16,309                              |       | —                    |       | 69,488                   |       |
| **Other  income (expense)**                   |       |                 |       |           |       |                                |       |                      |       |                     |       |
| Interest income                               |       | 25,765               |       | 2,513          |       | 2,414                               |       | (27,457                   | )          | 3,235                    |       |
| Interest expense                              |       | (4,150               | )          | (29,434        | )          | (300                                | )          | 27,457                    |       | (6,427                   | )          |
| Income from subsidiaries                      |       | 29,632               |       | 13,235         |       | —                              |       | (42,867                   | )          | —                   |       |
| Other, net                                    |       | —               |       | (350           | )          | 778                                 |       | —                    |       | 428                      |       |
| Total other income (expense)                  |       | 51,247               |       | (14,036        | )          | 2,892                               |       | (42,867                   | )          | (2,764                   | )          |
| **Income  before provision for income taxes** |       | 49,981               |       | 40,409         |       | 19,201                              |       | (42,867                   | )          | 66,724                   |       |
| Provision for income taxes                    |       | 6,944                |       | 10,777         |       | 5,966                               |       | —                    |       | 23,687                   |       |
| **Net  income**                               |       | $                    | 43,037     |           | $          | 29,632                              |       | $                         | 13,235     |                     | $          | (42,867 | ) | $ | 43,037 |   |

 

18

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**UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF CASH FLOWS**

**FOR THETHREE MONTHS ENDED MARCH 31, 2005**

**(inthousands)**

 
| ** **                                          | ** ** | ** **   | ** ** | ** ** | ** ** | **Non-**         | ** ** | ** **      | ** ** | ** **       | ** ** |
|-----------------------------------------------------|------------|--------------|------------|------------|------------|------------------|------------|-----------------|------------|------------------|------------|
| ** **                                          | ** ** | **Sabre**    | ** ** | **Sabre**  | ** ** | **Guarantor**    | ** ** | **Eliminating** | ** ** | **Sabre**        | ** ** |
| ** **                                          | ** ** | **Holdings** | ** ** | **Inc.**   | ** ** | **Subsidiaries** | ** ** | **Entries**     | ** ** | **Consolidated** | ** ** |
|                                                |       |         |       |       |       |             |       |            |       |             |       |
| **Operating  Activities**                           |       |         |       |       |       |             |       |            |       |             |       |
| Cash provided by (used for) operating  activities   |       | $            | —     |       | $          | 45,460           |       | $               | (6,431     | )                | $          | — |   | $ | 39,029 |   |
| **Investing  Activities**                           |       |         |       |       |       |             |       |            |       |             |       |
| Additions to property and equipment                 |       | —       |       | (11,444    | )          | (5,740           | )          | —          |       | (17,184          | )          |
| Net sales of marketable securities                  |       | —       |       | 92,658     |       | 9,810            |       | —          |       | 102,468          |       |
| Proceeds from sale of Karavel                       |       | —       |       | —     |       | 26,013           |       | —          |       | 26,013           |       |
| Investments and loans to joint venture  partners    |       | —       |       | —     |       | (12,538          | )          | —          |       | (12,538          | )          |
| Acquisitions (net of cash acquired)                 |       | —       |       | (61,022    | )          | —           |       | —          |       | (61,022          | )          |
| Cash provided by investing activities               |       | —       |       | 20,192     |       | 17,545           |       | —          |       | 37,737           |       |
| **Financing  Activities**                           |       |         |       |       |       |             |       |            |       |             |       |
| Proceeds from exercise of common stock              |       | 2,691        |       | —     |       | —           |       | —          |       | 2,691            |       |
| Dividends paid                                      |       | (11,894      | )          | —     |       | —           |       | —          |       | (11,894          | )          |
| Contributions/(distributions) from  affiliates, net |       | 72,416       |       | (72,416    | )          | —           |       | —          |       | —           |       |
| Purchases of treasury stock                         |       | (63,213      | )          | —     |       | —           |       | —          |       | (63,213          | )          |
| Cash used for financing activities                  |       | —       |       | (72,416    | )          | —           |       | —          |       | (72,416          | )          |
| Increase (decrease) in cash                         |       | —       |       | (6,764     | )          | 11,114           |       | —          |       | 4,350            |       |
| Cash at beginning of period                         |       | —       |       | 7,467      |       | 42,204           |       | —          |       | 49,671           |       |
| Cash at end of period                               |       | $            | —     |       | $          | 703              |       | $               | 53,318     |             | $          | — |   | $ | 54,021 |   |

 

**UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF CASH FLOWS**

**FOR THETHREE MONTHS ENDED MARCH 31, 2004**

**(inthousands)**

 
| ** **                                          | ** ** | ** **   | ** ** | ** ** | ** ** | **Non-**         | ** ** | ** **      | ** ** | ** **       | ** ** |
|-----------------------------------------------------|------------|--------------|------------|------------|------------|------------------|------------|-----------------|------------|------------------|------------|
| ** **                                          | ** ** | **Sabre**    | ** ** | **Sabre**  | ** ** | **Guarantor**    | ** ** | **Eliminating** | ** ** | **Sabre**        | ** ** |
| ** **                                          | ** ** | **Holdings** | ** ** | **Inc.**   | ** ** | **Subsidiaries** | ** ** | **Entries**     | ** ** | **Consolidated** | ** ** |
| **Operating  Activities**                           |       |         |       |       |       |             |       |            |       |             |       |
| Cash provided by operating activities               |       | $            | —     |       | $          | 44,017           |       | $               | 12,399     |             | $          | — |   | $ | 56,416 |   |
| **Investing  Activities**                           |       |         |       |       |       |             |       |            |       |             |       |
| Additions to property and equipment                 |       | —       |       | (12,470    | )          | (5,274           | )          | —          |       | (17,744          | )          |
| Net sales of marketable securities                  |       | —       |       | 39,896     |       | 1,661            |       | —          |       | 41,557           |       |
| Loans to joint venture partners                     |       | —       |       | —     |       | (10,592          | )          | —          |       | (10,592          | )          |
| Cash provided by (used for) investing  activities   |       | —       |       | 27,426     |       | (14,205          | )          | —          |       | 13,221           |       |
| **Financing  Activities**                           |       |         |       |       |       |             |       |            |       |             |       |
| Proceeds from issuance of common stock              |       | 5,055        |       | —     |       | —           |       | —          |       | 5,055            |       |
| Dividends paid                                      |       | (10,573      | )          | —     |       | —           |       | —          |       | (10,573          | )          |
| Contributions/(distributions) from  affiliates, net |       | 73,880       |       | (69,160    | )          | (4,720           | )          | —          |       | —           |       |
| Purchases of treasury stock                         |       | (68,362      | )          | —     |       | —           |       | —          |       | (68,362          | )          |
| Other financing activities, net                     |       | —       |       | —     |       | (2,778           | )          | —          |       | (2,778           | )          |
| Cash used for financing activities                  |       | —       |       | (69,160    | )          | (7,498           | )          | —          |       | (76,658          | )          |
| Increase (decrease) in cash                         |       | —       |       | 2,283      |       | (9,304           | )          | —          |       | (7,021           | )          |
| Cash at beginning of period                         |       | —       |       | 10,969     |       | 29,893           |       | —          |       | 40,862           |       |
| Cash at end of period                               |       | $            | —     |       | $          | 13,252           |       | $               | 20,589     |             | $          | — |   | $ | 33,841 |   |

 

19

----

 

**9.****        ****Subsequent Events**

 

None.

 

20

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# **Item 2**. Management’s Discussion and Analysis of FinancialCondition and Results of Operations

 

**SABRE HOLDINGS CORPORATION**

**RESULTS OF OPERATIONS**

 

The following discussion and analysis containsforward-looking statements about our plans and expectations of what may happenin the future.  Forward-lookingstatements are based on a number of assumptions and estimates that areinherently subject to significant risks and uncertainties, and our resultscould differ materially from the results anticipated by our forward-lookingstatements as a result of many known or unknown factors, including, but not limitedto, those factors discussed below in this Item under the sub-heading “RiskFactors.”

 

**Overview of Business**

 

We operate our businessthrough the following business segments:

 

**SabreTravel Network:** Our Sabre Travel Network segmentmarkets and distributes travel-related products and services through the travelagency and corporate channels. Travel agencies, both online and brick andmortar, subscribe to our services. Sabre Travel Network primarily generatesrevenues from transaction fees charged to airlines and non-air travel supplierswho distribute their products and services through the *Sabre*system.  Sabre Travel Network markets the *Sabre*GDS to associates and travel agency subscribers (online and brick and mortar)and corporations. Due to the changing nature of our business, a transactionwill now be defined as any travel reservation that generates a fee paiddirectly to us including but not limited to the following:  traditional booking fees paid by travel suppliers,non-traditional transaction fees paid by travel suppliers, transaction feespaid by travel agency subscribers, and transaction fees paid by corporationsrelated to our online booking tool. Our services provide travel agencysubscribers information about the ability to purchase travel-related productsand services from airlines, hotels, car rental companies, cruise lines andothers. We also provide travel agency office automation tools, enable travelagencies to provide services via the Internet and provide reservationmanagement, distribution and technology services to hotel properties.

 

**Travelocity:**OurTravelocity segment markets and distributes travel-related products andservices directly to individuals, including leisure travelers and businesstravelers, through Travelocity websites and contact centers, and websites ownedby its supplier and distribution partners. Travelocity customers can accessofferings, pricing and information about airlines, hotels, car rentalcompanies, cruise lines, vacation and last-minute travel packages and othertravel-related services such as show tickets and tours from *Showtickets.com**TM *which we recently acquired. For businesstravelers, *Travelocity BusinessTM*provides the integrated online corporate travel technology and full-serviceoffering of our *GetThere*âproduct along with the online expertise of Travelocity. For corporations, *Travelocity Business*offers a full service corporate travel agency and *GetThere*provides a corporate online travel reservation system that works in conjunctionwith any travel agency a company chooses.

 

Travelocityfacilitates transactions between travel suppliers and consumers for the bookingof, and payment for, travel accommodations. Travelocity generates revenue fromproviding such facilitation services equal to the total amount paid by thecustomer for products and services, minus its payment to the travel supplier.Travelocity also generates revenues from commissions or transaction fees fromtravel suppliers for the purchase of travel products and services pursuant toreservations made through our system. Additionally, Travelocity revenuesinclude service fees charged to customers and advertising revenues.

 

**Sabre Airline Solutions:**SabreAirline Solutions is a global leader in providing passenger managementsolutions, software products and related services, and consulting services tohelp airlines simplify operations and lower costs. We provide airline reservations, inventory and check-in hostingsolutions that help airlines address the challenge of building and retainingcustomer loyalty through enhanced customer centric offerings and service whilealso reducing costs.  We also supply thedecision-support software and technology necessary for airlines to improveprofitability, increase revenue, streamline operations and improve workflow.  We also offer a complete range of consultingservices to the airline industry, ranging from one time to extendedengagements. Typical engagements include projects such as achieving thenecessary standards to join an alliance, preparing for privatization andoptimizing current operations. Clients include airlines, airports,manufacturers and governments, as well as individuals, travel agencies andmembers of the financial community.

 

Inthe three months ended March 31, 2005, approximately 66.6% of our revenue wasgenerated from Sabre Travel Network, 23.4% from Travelocity and 10.0% fromSabre Airline Solutions based on segment results that include intersegmentrevenues.  For the three months endedMarch 31, 2004, revenues (including intersegment revenue) as a percentage oftotal revenues were 70.6% for Sabre Travel Network, 19.1% for Travelocity and10.3% for Sabre Airline Solutions.

 

21

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**Business Trends**

 

Potential effects of the following trends, events and uncertainties arediscussed in *Risk Factors*.

 

*Transaction Volumes. *During thethree months ended March 31, 2005, Sabre Travel Network experienced transactiongrowth of 1.9% compared to the first three months of 2004.  Transactions during the quarter weremoderately deflated by the movement of the Easter Holiday into March this year.  See *“Business Trends –Changing our Sabre Travel Network Business Model...”*

 

**Factors Influencing the Travel Industry, Particularly Airlines**.  Ourrevenues are highly dependent on the travel and transportation industries, andparticularly on airlines.  Most of ourrevenue is derived from airlines, hotel operators, car rental companies, cruiseoperators, and other suppliers in the travel and transportationindustries.  Our revenue increases anddecreases with the level of travel and transportation transactions processed byour systems.  Consequently, our revenuesare highly subject to declines in, or disruptions to, travel and transportationdue to factors entirely out of our control. In addition, we depend on a relatively small number of major airlinesfor a significant portion of our revenues. Several of these airlines are experiencing financial difficulty, some(including United Air Lines, Inc., U.S. Airways, Inc. and ATA HoldingsCorporation) have sought bankruptcy protection and still others may considerbankruptcy relief.  See “*Risk Factors*–*Our Revenues Are Highly Dependent....”*

 

*Supplier Efforts to Control Travel Distribution*. Airlines have been working aggressively for several years to diverttransactions away from GDS networks and towards alternative travel distributionchannels, including websites that they control and online travel agencies thatbook directly with those airlines.  See “*Risk Factors – Some Travel Suppliers are SeekingAlternative Distribution Models....*” The efforts of suppliers to divert transactions away from independentdistributors (such as online and conventional travel agencies using our *Sabre* GDS) towards supplier-direct channels (such as supplier-controlledwebsites and call centers) is referred to as “channel shift.”  Over the last two years, we have experienceda slowing in the rate of channel shift, which we attribute partly to ourcurrent Pricing Options for suppliers, discussed below, and partly due to arebound in corporate travel.  The slowingof channel shift is an encouraging indicator, but it is not clear if thispattern will continue over the long-term.

 

**Competition and Consolidation.**  Themarketplace for travel distribution is intensely competitive.  We routinely face new competitors and newmethods of travel distribution. Suppliers and third parties seek to create distribution systems thatbook directly with travel suppliers at a reduced cost.  Many of these alternative travel distributionchannels are in start-up or developing mode, are well-financed and have yet tofully define their functionality and costs. These new travel distribution technologies may contribute to “channelshift.”  (**See***Supplier Efforts to Control Travel Distribution*,above).  In addition, a new breed ofcompetitors is entering the travel marketplace. Both established and start up search engine companies are attempting toenter the travel marketplace by leveraging search technology to aggregatetravel search results across supplier, travel agent and other websites.  These search engines and alternative traveldistribution channels pose a threat to our businesses as they may have theeffect of diverting customers from our online sites and our *Sabre* GDS, putting pressure on ourrevenues, pricing and operating margins. We also face consolidation among suppliers, travel marketing anddistribution competitors, and online and conventional travel agencies, whichmay offer them negotiating leverage and other advantages of scale.  See “*RiskFactors*-*We face competition...”*and*“Risk Factors – Consolidation...”*

 

**PricingOptions for Suppliers***.* Primarily to ensure that our customers had access to themost comprehensive airline fares, in 2002 and 2003 we introduced alternative bookingfee pricing options, such as the *DirectConnect**ÒAvailability* 3-Year Pricing Option (“DCA 3-Year Option”), to airlines thatparticipate in the *Sabre*GDS.  Through the DCA 3-Year Pricing Option, participating airlines committedto the highest level of participation in the *Sabre*system for three years. Participating airlines provide all *Sabre* GDS users with broad access toschedules, seat availability and published fares, including web fares and otherpromotional fares but excluding certain fares such as “opaque” fares (where theairline’s identity is not disclosed until after the sale) and privatediscounts. Participating airlines also furnish generally the same customerperquisites and amenities to passengers booked through the *Sabre* GDS as those afforded through otherGDS’s and websites. Airlines selecting this option under their *Sabre* GDS participating carrier agreementsreceive a discount from our standard DCA booking fee rates which is fixed forthe term of the agreement. Our DCA 3-Year Option agreements prepared us for GDSindustry deregulation in the United States, by giving us access to virtuallyall of a participating carrier’s content and eliminating “fare confusion” inthe marketplace. *See “Computer ReservationSystem Industry Regulation”* below and “*Risk Factors—Travel Suppliers are Seeking to Bypass....”*

 

With the deregulation of the GDS industry in mid-2004,(described below under *Computer ReservationSystem Industry Regulation*), we have new flexibility to price ourservices based upon a variety of factors. We have already implemented newpricing models for some suppliers. For example, during the second quarter of2004, we completed two “opt-in” agreements with international carriers that aregenerally similar to our DCA 3-Year Pricing Option agreements. For bookingscreated in 

 

22

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theparticipating carriers’ home countries, those opt-in agreements offer a deeperdiscount than under the DCA 3-Year Pricing Option, which offers participatingairlines smaller discounts across multiple regions. These agreements providediscounts only to those *Sabre* GDSsubscribers that accept lowered customer incentive rates. As of March 31,2005, approximately 50% of our global direct air bookings were subject to ourcurrent discount pricing options (DCA 3-Year Pricing Option and “Opt-In”agreements).

 

Weare evaluating various other options for pricing our services to suppliers.Pricing options might be offered to airlines according to their operationalneeds, such as pricing that varies with the volume of an airline’s transactionsthrough the *Sabre* GDS or pricingthat differs between long-haul or short-haul trips. We will offer airlines achoice of multiple pricing schedules. Although we cannot be certain about theimpact of new pricing models on our revenues, our goal with any new models willbe to match our pricing programs with the value that we provide to supplierswhile maintaining a neutral impact to the average unit revenue in the SabreTravel Network business. Our goal is to have these new models, and newagreements with many airlines, in place before the expiration of our DCA 3-YearPricing Option agreements in 2005 and 2006. *See*“*Risk Factors – Adverse Changes In Or InterruptionsTo....*”

 

**Changing our Sabre Travel Network Business Model.**  Weare also taking actions both to strengthen our core **Sabre** GDS business withenhanced content and capabilities and to take advantage of the opportunitiesavailable in merchandising as we benefit from the insight we gain from havingtravel distribution and travel marketing assets in one integrated portfolio:

 

•                  Although the vast majority of our traveldistribution revenues are derived from booking fees paid by travel suppliers,we recently entered into agreements that do not follow this traditionalbusiness model, and we are evaluating the desirability of more of theseagreements.  For example, in 2004 weentered into an agreement in which we charge a transaction fee to the travelagency (rather than a booking fee to the travel supplier).  Due to the changing nature of our business, atransaction will now be defined as any travel reservation that generates a feepaid directly to us including but not limited to the following:  traditional booking fees paid by travel suppliers,non-traditional transaction fees paid by travel suppliers, transaction feespaid by travel agency subscribers, and transaction fees paid by corporationsrelated to our online booking tool.

•                  During 2004, we enhanced our competitiveposition by reducing our operating expenses. See “*Cost Reductions and ExpenseSavings”* below. We continue to seek ways to provide more flexibleand cost-effective distribution options to our customers.

•                  In 2004, we further developed our *Jurni Network*Ô consortia, a leisure travel agency consortiathat combines a preferred sales network and consolidated purchasing power withtechnology-driven marketing tools to sell preferred travel offerings.  *Nexion*®,a Sabre Travel Network brand, provides ticketing, operations, fulfillment supportand marketing services for all travel bookings, allowing the consortium’stravel professional members to focus on selling travel.

•                  In2004, we rolled out several new features for our *Jurni Network* offering, including the new *Jurni Custom Trip* packaging capabilitiesfrom Travelocity, *Agent*59®, which incorporates lastminute travel offerings from *Site59.com*® and *JurniCruise**TM *which provides automated shopping and bookingcapability for cruises.  All of thefeatures are available to *Jurni* agents inour InternetView point-of-sale tool.

•                  During the first quarter of 2004, we alsointroduced *Assured VantageTM*, anew program for small- to medium-sized travel agencies that offers moreagency-friendly contract terms, reducing the risk of traditional transactionvolume shortfalls, and a new structured incentive schedule that we expect willresult in a slowing of the incentive growth rate.

•                  During the third quarter of 2004, weintroduced the *Hotel SpotlightTM*program.  *Hotel Spotlight* offers premium marketing opportunities tohoteliers through the *Sabre* GDS.

•                  In 2004 we launched *MySabre*, a new web-based agent bookingportal which provides agents and suppliers with new merchandising opportunitiesat the point of sale.

•                  In January of 2005, we acquired SynXis Corporation(“SynXis”), which provides reservation management, distribution and technologyservices to approximately 6,000 hotel properties, to further expand the rangeof services we offer to hotels.

 

**Investments in Travelocity.**  The development of Travelocity continues tobe a strategic focus for us. For example, during the second quarter of 2003, welaunched a new technology platform (Travelocity*TotalTrip*) to enable the marketing of higher margin packaging  products. We are also investing and may continue to look for ways to invest indeveloping products and segments that we believe offer rapid growthopportunities, such as in the business-direct segment and online distributionin Europe and Asia.  For example:

 

•                  Inthe third quarter of 2004, *Travelocity Business*launched enhanced technologies in its service center, that integrate andautomate the corporate travel reservation process from beginning to end.

•                  Duringthe third quarter of 2004, Travelocity introduced its merchant model hotelplatform in Europe on Travelocity.co.uk and expanded this offering into Scandinaviaand Germany in the second quarter of 2005.

•                  Inthe third quarter of 2004, Travelocity acquired Las Vegas-based All State ToursInc., (“Showtickets”) a leading distributor of show tickets and tours. As partof the purchase, Travelocity acquired the *Allstate Ticketing**TM* brand andthe Web site, www.ShowTickets.com.

 

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•                  InOctober of 2004, Travelocity acquired sole control of the non-German operationsof Travelocity Europe by purchasing the 50% interest in the joint venture’snon-German operations owned by the Otto Group’s Otto Freizeit und TouristikGmbH (“Otto”).  Although we anticipatethat this acquisition will require additional investment and be dilutive overthe short term, by gaining full control over the non-German operations ofTravelocity Europe, we believe we can accelerate its growth by introducingTravelocity’s industry-leading capabilities, including dynamic packaging, ouradvanced merchant hotel program and revolutionary site designs.  Travelocity and Otto plan to continue theirjoint (50/50) ownership of the German operations of Travelocity Europe.

•                  OnJanuary 18, 2005, Travelocity entered into a put option agreement pursuant towhich it may gain control of 100% of Zuji Holdings Limited, a joint ventureoperating in the Asia Pacific region.

 

**Net Rate Hotel Program.**  In aneffort to provide additional choices to consumers, Travelocity is increasinglypromoting our net rate hotel program, commonly referred to in the industry asour “merchant model hotel program”, due to the fact that Travelocity is themerchant of record for credit card purposes. Under the merchant model, we facilitate transactions between travelsuppliers and travelers for the booking of and payment for travelaccommodations.  To facilitate theprovision of travel accommodations to travelers, we enter into agreements withtravel suppliers for the right to market their products, services and othercontent offerings at pre-determined net rates.  Merchant model travelofferings can include air travel, hotel stays, and dynamically packagedcombinations (via Travelocity***TotalTrip*and Last MinuteDeals).  We market thoseofferings to travelers at a price that includes an amount sufficient to pay thetravel supplier for its charge for providing the travel accommodations, alongwith any applicable taxes on that charge, as well as additional amountsrepresenting our service fees.  For this typeof business model, we require pre-payment by the traveler at the time ofbooking. Merchant content is beneficial for travelers because they can oftenbook travel at a price lower than regularly published offerings.  For us,the merchant model generally delivers higher service fee revenue pertransaction than comparable transactions under an agency commission booking feemodel and we experience improved operating cash flows as a result of receivingpre-payments from customers while paying suppliers after the travel occurs. We generally do not purchase and resell travel accommodations and do not haveany obligations with respect to travel accommodations listed online that do notsell.  For merchant model transactions,we recognize as revenue the amount paid by the traveler for products, fees andservices minus the amount paid to the travel supplier.

 

Ourbusiness strategy depends on merchant model bookings as a significant source offuture revenue growth and increased margins.  Our strategy calls for us toincrease or maintain the number of hotel rooms we can market under our merchantmodel hotel program, based upon arrangements we make directly with individualhotel properties and hotel chains.  Because of Travelocity’s supplierfriendly approach, which includes a two-way seamless connectivity to hotels’property management system so that reservations are not lost, its hotel programhas become successful even though it was started later than some competingprograms. One example of the success of this approach was Travelocity’sannouncement in the third quarter of 2004, that it was notified byInterContinental Hotels Group (IHG) that it was the first to be certified as anonline third party intermediary for IHG’s more than 3,500 hotels worldwide,including InterContinental Hotels and Resorts, Crowne Plaza, Holiday Inn,Holiday Inn Express, Staybridge Suites and Candlewood Suites.  Please see “*RiskFactors – Our business plans call for the significant growth of our merchantmodel business.*

 

*Cost Reductions and Expense Savings. *In the fourth quarter of 2003, we beganimplementing plans to enhance our competitive position by reducing ouroperating expenses and better aligning expenses with revenue targets.  Through these initiatives, we realized over$80 million in cost savings in 2004.  Further, as part of our cost leadershipstrategy we are, as a standard practice, evaluating efficiency opportunitiesacross the company to ensure that we optimally manage our operationalcosts.  Some of these cost-savingopportunities have involved and may continue to involve globally-sourcing someof our operations (either by contracting with companies that work for us or byexpanding our own operations abroad).  Wewill continue to pursue opportunities to reduce our operating expensesthroughout 2005.

 

**Computer Reservation System Industry Regulation.** Aspects of our travel marketing and distribution businesses are subjectto the Computer Reservation Systems (“CRS”) regulations in the European Union, Canada and Peru.  These regulations generally govern GDS servicesfor airlines and travel agencies, but not for non-airline suppliers (exceptrail suppliers in limited circumstances). Among the topics addressed in some of the current regulations are:

 

•                  no preferencing CRS displays based uponairline identity,

 

•                  equal treatment of airlines by the CRSs,

 

•                  equal participation by airlines that have anownership interest in a CRS, and

 

•                  limits on travel agency contract terms.

 

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AllCRS regulations promulgated by the U.S. Department of Transportation that wereapplicable in the United States expired on July 31, 2004.  We believe that this deregulation in theUnited States will enhance our opportunities to creatively market airlineservices and freely negotiate with travel agencies.  However, deregulation also presentschallenges associated with maintaining participation levels in the *Sabre* GDS by travel suppliers who are no longer subject toequal participation regulations.

 

TransportCanada issued final rules on May 7, 2004, eliminating all CRS regulations inCanada, except rules prohibiting screen preference and discrimination inproviding the right to participate in service enhancements.  In addition, regulators in the European Commissionare reviewing their CRS regulations for possible changes, which may includesome level of deregulation.  It is notclear whether or when any amendments in the European Union will take effect norwhat form they may take.

 

The potential effects of these trends, events and uncertainties arediscussed below under **Risk Factors**.

 

**Components of Revenues and Expenses**

 

*Revenues. *Sabre Travel Network primarily generatesrevenues from transaction fees paid directly to us related to a travelreservation including the following: traditional booking fees paid by travel suppliers, non-traditionaltransaction fees paid by travel suppliers, transaction fees paid by travelagency subscribers, and transaction fees paid by corporations related to ourbooking tool.  Sabre Travel Network earnsrevenue through equipment service charges paid by subscribers. In addition,Sabre Travel Network earns revenue through the sale of other products andservices (including the *Hotel Spotlight*program, which offers premium marketing opportunities to hoteliers through the *Sabre* GDS, the *JurniNetwork* and *Nexion* and *SynXis* offerings to hoteliers) to travel-suppliers,subscribers and other customers. Earnings (or losses as the case may be) derived from interests in jointventures and other investments are also included in revenues.  Sabre Travel Network earnsintersegment revenues from data processing fees paid by Travelocity.  Travelocitygenerates revenues from commissions or transaction fees from travel-suppliersfor the purchase of travel products and services pursuant to reservations madethrough our system. Travelocity also generates revenue from providingfacilitation services equal to the amount paid by the customer for products andservices, minus its payment to the travel supplier. Additional Travelocityrevenues include other fees charged to customers and advertising revenues fromour websites. Travelocity derives intersegment revenues from SabreTravel Network, consisting of incentives earned for Travelocity transactionsprocessed through the *Sabre* GDS,and fees paid by Sabre Travel Network for corporate trips and Sabre AirlineSolutions for airline trips booked through Travelocity’s online bookingtechnology.  Sabre Airline Solutions generates revenues from the sale of airlinereservations hosting services, inventory and check-in hosting solutions,decision-support software and technology, and airline consulting services.

 

*Cost ofRevenues. *Sabre Travel Network cost of revenues consistprimarily of customer incentives paid to subscribers, data processing chargesresulting from the operation of the *Sabre*system, and salaries and other operating expenses.  Sabre Travel Network also incursintersegment expenses paid to Travelocity for incentives for Travelocity transactionsprocessed through the *Sabre* GDS,as well as fees for corporate trips booked through Travelocity’s online bookingtechnology.  Travelocity cost of revenues consistsprimarily of customer service costs, technology costs, salaries, benefits andother employee expenses, data processing fees paid to Sabre Travel Network,credit card fees, chargebacks, fraud and customer goodwill related to ourmerchant model and depreciation and amortization charges.  Sabre Airline Solutions cost of revenues arecomprised of labor cost incurred in the development and delivery of softwareand consulting services, data processing charges paid to Sabre Travel Networkfor hosted applications, and depreciation and amortization.  Sabre Airline Solutions also incursintersegment expenses paid to Travelocity for airline trips booked throughTravelocity’s online booking technology.

 

*OperatingExpenses.*SabreTravel Network selling, general and administrative expenses and other operatingexpenses consist of salaries, benefits and employee related expenses for stafffunctions required to support the business. Travelocity selling, general and administrative and other operatingexpenses consist primarily of advertising and promotion expenses, payments madeto our distribution partners and salaries, benefits and employee relatedexpenses for staff functions required to support the business.  Sabre Airline Solutions operating expensesconsist of the costs of the sales organization and the staff functions requiredto support the business.

 

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**Financial Results**

 

The following tablepresents operating results for the three months ended March 31, 2005 and 2004(in thousands of dollars).  The segmentrevenues and cost of revenues are shown including intersegment activity.  We have included the elimination ofintersegment activity below in order to agree to the results of operationspresented in the consolidated financial statements:

 
| ** **                                 | ** ** | **Three  Months Ended March 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | **Sabre  Travel Network**              | ** ** | **Travelocity** | ** ** | **Sabre  Airline Solutions** | ** ** | **Corporate** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|                                       |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment  revenues:                         |       | $                                      | 419,807    |   | $ | 410,836 |   | $ | 147,077 |   | $ | 111,455 |   | $ | 62,773 |   | $ | 59,735 |   | $ | — |   | $ | — |   | $ | (47,769 | ) | $ | (42,273 | ) | $ | 581,888 |   | $ | 539,753 |   |
|                                       |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost  of revenues:                         |       | 273,970                                |       | 254,630 |   | 69,647 |   | 52,427 |   | 42,535 |   | 47,242 |   | (360 | ) | (511 | ) | (47,769 | ) | (42,273 | ) | 338,023 |   | 311,515 |   |
|                                       |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross  profit:                             |       | 145,837                                |       | 156,206 |   | 77,430 |   | 59,028 |   | 20,238 |   | 12,493 |   | 360 |   | 511 |   | — |   | — |   | 243,865 |   | 228,238 |   |
|                                       |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling,  general and administrative: |       | 64,463                                 |       | 71,721 |   | 89,665 |   | 62,429 |   | 10,168 |   | 12,624 |   | 347 |   | (145 | ) | — |   | — |   | 164,643 |   | 146,629 |   |
|                                       |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortization  of intangible assets:        |       | 5,295                                  |       | 4,169 |   | 2,003 |   | 7,462 |   | 730 |   | 490 |   | — |   | — |   | — |   | — |   | 8,028 |   | 12,121 |   |
|                                       |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  income (loss)                   |       | $                                      | 76,079     |   | $ | 80,316 |   | $ | (14,238 | ) | $ | (10,863 | ) | $ | 9,340 |   | $ | (621 | ) | $ | 13 |   | $ | 656 |   | $ | — |   | $ | — |   | $ | 71,194 |   | $ | 69,488 |   |

 

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***Three Months Ended March 31, 2005 and 2004***

 

Totalrevenues for the three months ended March 31, 2005 after intercompanyeliminations increased approximately $42 million or 7.8%, compared to the threemonths ended March 31, 2004, from $540 million to $582 million.  Cost of revenues after intercompanyeliminations for the three months ended March 31, 2005 increased approximately$26 million or 8.3%, compared to the three months ended March 31, 2004, from $312million to $ 338 million.

 

Management’sdiscussion and analysis of revenues, cost of revenues, selling, general andadministrative expenses, amortization of intangible assets and operating incomeby business segment are based upon segment results including intersegmentrevenues and cost of revenues of approximately $48 million and $42 million forthe three months ended March 31, 2005 and 2004, respectively.  We account for significant intersegmenttransactions as if the transactions were to third parties, that is, atestimated current market prices.  Themajority of the intersegment revenues and cost of revenues are betweenTravelocity and Sabre Travel Network, consisting mainly of incentives paid toTravelocity for Travelocity transactions processed through the *Sabre* GDS, data processing fees paid byTravelocity to Sabre Travel Network, and fees paid by Sabre Travel Network toTravelocity for corporate trips booked through Travelocity’s online bookingtechnology.  In addition, Sabre AirlineSolutions pays fees to Travelocity for airline trips booked through Travelocity’sonline booking technology.  Allintersegment revenues and corresponding cost of revenues have been eliminatedin consolidation.

 

Totalrevenues (including intersegment revenues) for the three months ended March 31,2005 increased approximately $48 million or 8.2%, as compared to the threemonths ended March 31, 2004, from $582 million to $630 million.

 

Totalcost of revenues (including intersegment cost of revenues) for the three monthsended March 31, 2005 increased  $32million or 9.0%, as compared to the three months ended March 31, 2004 from $354million to $386 million.

 

***Sabre Travel Network***

 

*Revenues*

 

Revenuesfor the three months ended March 31, 2005 increased $9 million or 2.2%, ascompared to the three months ended March 31, 2004, from $411 million to $420million.

 

•                  Transaction revenue (see “Components ofRevenues and Expenses”) increased by $9 million, or 2.5%.  This $9 million increase includes a $7million increase resulting from increased transaction volumes and a $2 millionincrease driven by a higher effective average rate per transaction resulting inpart to a recent price increase to non-DCA 3-year Option customers.  Total transactions were 91.8 million for thethree months ended March 31, 2005, an increase of 1.9% from 90.1 milliontransactions in the three months ended March 31, 2004 *(seeBusiness Trends:  Changing our SabreTravel Network Business Model.)*

 

•                  Subscriber revenue decreased by $6 million,reflecting the trend towards the adoption of third-party equipment solutions bysubscribers.

 

•                  Other revenue increased by $6 millioncompared to 2004, driven primarily by $4 million of revenue from SynXis whichwe acquired on January 19, 2005.  SynXisis a provider of reservation management, distribution and technologyservices for hotels.  The remaining $2 million relates to otherrevenue increases associated with various products.

 

*Cost of Revenues*

 

Costof revenues for the three months ended March 31, 2005 increased $19 million or7.5%, as compared to the three months ended March 31, 2004, from $255 millionto $274 million.  This increase in costof revenues consisted of a $7 million increase in subscriber support costs, an$8 million increase in technology related spending and an approximate $4million increase in other expenses.

 

The $7 million increase insubscriber support costs includes a $9 million increase in customer incentivesdriven by an increase in incentives paid to Travelocity of $5 million resultingfrom higher transaction volumes. Non-Travelocity incentives grew $5 million asa result of year-over-year growth in the average incentive per transaction drivenby competitive pressure on renewals and conversions. This growth was partiallyoffset by $1 million related to decreased non-Travelocity transaction volumes. Theincrease in incentive expense was offset by reductions in hardware support andcommunications costs of $2 million driven by migration to lower cost solutionsand the adoption of third-party solutions by subscribers.

 

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Technology related spendingincreased $8 million due to a $3 million increase from our continuing expansionof lower cost pricing and shopping functionality and other data processing costsand a $3 million increase in our operating costs relating to our phasedimplementation to open systems.  Othertechnology costs increased by $2 million.

 

Other expenses increasedapproximately $4 million driven by an increase in expense relating to thefulfillment of GetThere Trips of $2 million due to higher volumes and anincrease in other expenses of $2 million.

 

*Selling, General andAdministrative Expenses*

 

Selling,general and administrative expenses decreased by $8 million or 11.1%, from $72million for the three months ended March 31, 2004 to $64 million for the threemonths ended March 31, 2005 primarily driven by a $5 million reduction in a taxaccrual due to events occurring that decreased our potential liability fortaxes and associated interest.  Bad debtexpense decreased $3 million due to an increase in the bad debt reserve in thefirst quarter of 2004 for aging receivables of a specific carrier.

 

*Amortization of Intangible Assets*

 

Amortizationof intangible assets increased $1 million or 25.0%, from $4 million for thethree months ended March 31, 2004 to $5 million for the three months endedMarch 31, 2005.  This increase is due to intangibleswe obtained from acquisitions that took place in 2004 and 2005.

 

*Operating Income*

 

Operating income decreased $4million or 5.0%, from $80 million for three months ended March 31, 2004 to $76million for the three months ended March 31, 2005.  This decline was the result of higherincentive and data processing cost that exceeded our revenue growth.

 

***Travelocity***

 

*Revenues*

 

Revenuesfor the three months ended March 31, 2005 increased $36 million or 32.4%, ascompared to the three months ended March 31, 2004, from $111 million to $147million.  In October of 2004, we acquiredsole control of the non-German operations of Travelocity Europe, purchasing 50%of these entities (the “TEU acquisition”). The remaining 50% that we didalready own indirectly through the Travelocity Europe joint venture wasdistributed to us by the joint venture so that we now directly own 100% ofthese entities.  Since this acquisitionwe have been consolidating the results of Travelocity Europe, whereas prior toOctober 2004, 50% of these results were recorded in other revenues as equity losses.

 

•                  Transaction revenue, including TravelocityEurope, in 2005 increased $30 million or 31.2%, primarily driven by a $25million increase in non-air transaction revenue (including revenue resultingfrom sales of package offerings that include air travel as a component) and a$5 million increase in stand-alone air transaction revenue.

 

The $25 million increase in non-air transactionrevenue consisted primarily of the following:

 

•                              Packaged trip revenue increased approximately$16 million due to the growth of our Travelocity *TotalTrip* and*Last Minute Deals*offerings;

 

•                              Stand-alone hotel revenue increased $8million due to the growth of our net rate hotel program;

 

•                              All other non-air transaction revenue increased$1 million.

 

The $5 million increase in stand-alone air transaction revenue wasprimarily due to a volume increase in stand-alone air ticket sales compared tothe same period in 2004.  Our volumeincreased due to an overall increase in online travel demand and the TEUacquisition.

 

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•                  Non-transaction revenue increased $6 millionor 36.3%, consisting primarily of the following:

 

•                              Joint venture equity method losses, whichreduce our revenues, decreased by approximately $3 million.  The decreased equity losses resulted from theTEU acquisition;

 

•                              Corporate revenue, the fees paid by SabreTravel Network and Sabre Airline Solutions to Travelocity for trips bookedthrough Travelocity’s online booking technology, increased by approximately $2million due primarily to higher booking volumes;

 

•                              All other non-transaction revenue increased$1 million.

 

*Cost of Revenues*

 

Costof revenues for the three months ended March 31, 2005 increased $18 million or34.6%, as compared to the three months ended March 31, 2004, from $52 millionto $70 million.  This increase wasprimarily the result of a $7 million increase in expenses associated with thevolume growth of our net rate hotel and *TotalTrip*and*Last Minute Deals* programs, asexplained above in transaction revenue. In addition, this increase included $6 million from Travelocity Europeand Showtickets, which were acquired in the fourth quarter of 2004, and $5million related to customer service costs as a result of improved transactionvolumes.

 

*Selling, General and Administrative Expenses*

 

Selling,general and administrative expenses increased approximately $28 million or 45.2%from $62 million for the three months ended March 31, 2004 to $90 million forthe three months ended March 31, 2005, primarily due to increased advertisingand customer acquisition costs to drive additional travelers to our websites.This increase includes changes in the timing of recognizing advertisingexpenses within the fiscal year which resulted in an $8 million increase inadvertising expenses (See Note 2 to the Consolidated Financial Statements) andincludes the impact of the TEU acquisition.

 

*Amortization of Intangible Assets*

 

Amortizationof intangible assets decreased $5 million or 71.4%, from $7 million for thethree months ended March 31, 2004 to $2 million for the three months endedMarch 31, 2005.  This decrease is due to certainintangible assets becoming fully amortized in 2004.

 

*Operating loss*

 

Operatingloss increased $3 million or 27.2%, from an operating loss of $11 million forthe three months ended March 31, 2004 to an operating loss of $14 million atMarch 31, 2005.  The increase wasprimarily driven by higher advertising expenses partially resulting fromchanges in the timing of recognizing advertising cost and incremental lossesassociated with the consolidation of Travelocity Europe due to the TEUacquisition.  These increases weresubstantially offset by revenue growth and reduced intangible assetamortization.

 

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***Sabre Airline Solutions***

 

*Revenues*

 

Revenues increased approximately $3 million or 5.0%, from $60 million forthe three months ended March 31, 2004 to $63 million for the three months endedMarch 31, 2005.  This increase was drivenprimarily by a $4 million increase in product revenue.  Additionally, airline reservations hostingrevenue increased $1 million and consulting revenues increased $1 million.  This growth was dampened by a $3 milliondecline in our low margin, custom developed software business.

 

*Cost of Revenues*

 

Cost of revenues decreased approximately $4 million or 8.5%, from$47 million for the three months ended March 31, 2004 to $43 million for thethree months ended March 31, 2005.  Thisdecrease was driven primarily by a $3 million increase in capitalized salariesresulting from various software development projects and a $1 million  reduction in direct headcount related expensesdue to successful cost saving initiatives.

 

*Selling, General and Administrative Expenses*

 

Selling,general and administrative expenses decreased approximately $3 million or 23.0%,from $13 million for the three months ended March 31, 2004 to $10 million forthe three months ended March 31, 2005. This decrease was driven by a $4 million decrease in bad debt expensecaused by the receipt of payments on accounts that had been previously reserved.This decrease was somewhat offset by increases in other expenses of $1 million.

 

*Amortization of Intangible Assets*

 

Amortizationof intangible assets was flat year-over-year.

 

*Operating Income*

 

Operatingincome increased $10 million from a $1 million loss for the three months endedMarch 31, 2004 to $9 million in operating income for the three months endedMarch 31, 2005.  This increase wasprimarily driven by higher revenues and reduced cost of revenues.

 

**Interest Income*.***  Interestincome for the three months ended March 31, 2005 increased approximately $1 million as compared to the three months ended March31, 2004.  Average balances of ourshort-term investments were slightly lower, offset by slightly improved ratesof return on those balances.

 

**Interest Expense*. ***Interest expense for the three months endedMarch 31, 2005 increased approximately $1 million as compared to the three monthsended March 31, 2004 due to a higher LIBOR rate.  A portion of our fixed rate debt is swappedinto variable rate debt based on the LIBOR rate.  See Note 6 of the Consolidated FinancialStatements and *“Item 3. Quantitative and QualitativeDisclosures about Market Risk.”*

 

**Other, net.*** *Other, net income for the three months ended March 31, 2005 increasedapproximately $21 million compared to the three months ended March 31, 2004.  This change is the result of the sale of ourinvestment in Karavel SA which resulted in a $21 million gain.

 

**Income Taxes*. ***The****provision forincome taxes for the three months ended March 31, 2005 increased $7 millionas compared to the three months ended March 31, 2004, from $24 million to $31million.  This increase is due to the taxeffect of an approximately $22 million increase in pre-tax income betweenperiods.   See Note 5 to the ConsolidatedFinancial Statements for additional information regarding income taxes.

 

**Net Earnings. **Net earningsincreased $15 million or 34.0%, during the three months ended March 31, 2005 as compared to the three months ended March 31, 2004.  Mostof the increase is due to a $13 million net of tax gain on the sale of ourinterest in Karavel SA, a French tour operator.  The remainder of the increase is due to strongerrevenue growth for the quarter and successful implementation of several costinitiatives.

 

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**SABRE HOLDINGS CORPORATION**

**LIQUIDITY AND CAPITAL RESOURCES**

 

Werequire cash to pay our operating expenses, make capital expenditures, investin our products and offerings, pay dividends, repurchase shares of our Common Stockand service our debt and other long-term liabilities.  Although our primary source of funds has beenfrom our operations, we have occasionally raised external funds through thesale of stock and debt in the capital markets and in privately negotiatedtransactions.  In assessing ourliquidity, key components include our net income adjusted for non-cash andnon-operating items, and current assets and liabilities, in particular accountsreceivable, accounts payable, and accrued expenses.  For the longer term, our debt and long-termliabilities are also considered key to assessing our liquidity.

 

As of the date of thisfiling, our current cash flows from our operations, existing balances in cashand short-term investments of $739 million as of March 31, 2005 and fundsavailable under our revolving credit facility of $300 million are sufficient tofund our planned operating expenditures which include operating expenses,capital expenditures, investments in our products and offerings, interestpayments on our debt, dividends and share repurchases. We may also considerusing our funds available or possibly external sources of funds foracquisitions of, or investments in, complementary businesses, products,services and technologies when such opportunities become available. These typesof additional activities might affect our liquidity requirements or cause us toissue additional equity or debt securities.

 

In the long-term, we expectto use our existing funds and cash flows from operations to satisfy our debtand other long-term obligations.  We mayalso use our funds to retire debt as appropriate, based upon market conditionsand our desired liquidity and capital structure.  We may also consider using our fundsavailable or possibly external sources of funds for acquisitions of, orinvestments in, complementary businesses, products, services and technologieswhen such opportunities become available. These types of additional activitiesmight affect our liquidity requirements or cause us to issue additional equityor debt securities.

 

Risk factors that couldpossibly affect the availability of our internally generated funds include,among other things:

 

•                  Reduced sales due to declining bookingvolumes and lower prices under the DCA 3-Year Pricing Option,

•                  Diversion of transactions away from ourchannel offerings and other competitive pressures, and

•                  Changes in our working capital.

 

See“*Risk Factors*” for a morecomplete discussion of risk factors that might affect the availability of ourinternally generated funds.  Nonetheless,with our strong cash and short-term investments position of $739 million andworking capital of $600 million as of March 31, 2005, along with our investmentgrade credit ratings from S&P and Moody’s of BBB+ and Baa2, respectively,we have significant resources available to us and we continue to implement costcontrolling efforts that are intended to ensure our operating expenses are inline with the impacts of the factors listed above and other risk factors.

 

***Cash Investments***

 

We invest cash in highlyliquid instruments, including high credit quality money market mutual funds,certificates of deposit, banker’s acceptances, commercial paper, repurchaseagreements, mortgage-backed and receivables-backed securities and corporate andgovernment notes, including tax-exempt municipal securities. We try to investall of our excess cash in marketable securities.  Therefore, our annual investments willfluctuate depending on the levels of cash provided or used by all of our otherinvesting, operating and financing activities.

 

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***Capital Activities***

 

**Dividends.**  On January 20, 2004 weannounced a dividend of $.075 per share. We paid dividends of that same amount in all quarters of 2004.  On February 1, 2005, we announced a dividendof $.09 per share which was paid on February 28, 2005 to stockholders of recordat February 11, 2005.  On May 3, 2005, weannounced a dividend of $.09 per share payable on May 26, 2005 to stockholdersof record at May 13, 2005.  Based on aquarterly dividend of $.09 per share, and assuming that the current number ofoutstanding shares of our Common Stock remains constant for the remainder of2005, we expect to pay an aggregate of approximately $45 to $50 million for thefiscal year 2005.  Our Board of Directorscurrently intends to consider declaring and paying comparable future dividendson a regular quarterly basis, subject to our ability to pay dividends and to adetermination by management and our Board of Directors that dividends continueto be in our best interests and those of our stockholders.

 

**Repurchases of Stock. **On October 20,2003 our Board of Directors approved a share repurchase program authorizing usto repurchase up to $100 million of our Common Stock.  At December 31,2003, we had remaining authorization to repurchase approximately $72 million ofour Common Stock under this program.  During the three months ended March31, 2004, we repurchased 3,336,862 shares of our Common Stock for approximately$72 million, thereby completing the remaining authorization to repurchaseshares under that program.  On April 19, 2004 our Board of Directors approvedanother share repurchase program authorizing us to repurchase up to anadditional $100 million of our Common Stock.  We repurchased 4,038,166shares of our Common Stock under this authorization. This authorization wascompleted on November 1, 2004.  OnOctober 25, 2004, our Board of Directors approved another share repurchaseprogram authorizing us to repurchase up to an additional $100 million of ourCommon Stock. At December 31, 2004,we had repurchased 2,516,284 shares of ourCommon Stock and had remaining authorization to repurchase approximately $43million of our Common Stock under this program. We completed the remainder of this authorization on March 14, 2005 with therepurchase of 2,042,063 shares of our Common Stock during the three monthsended March 31, 2005.

 

OnMay 2, 2005, we received authorization from the Board of Directors torepurchase another $100 million of our Common Stock.  As in the past, implementation of the programis at management’s discretion and will depend on the best uses for ouravailable cash.

 

Inaddition, on October 20, 2003 our Board of Directors authorized the purchase ofshares of our Common Stock to satisfy our obligations to deliver shares underour Employee Stock Purchase Plan and our Long-Term Incentive Plan.  We didnot repurchase any shares of our Common Stock under this program during 2004.  We purchased 840,000 shares under thisauthorization in January 2005.

 

Wewill generally seek to make any future share repurchases pursuant to 10b5-1trading plans, unless such plans are terminated at the discretion ofmanagement.

 

***Financing Arrangements***

 

**Revolving Credit Agreement.** On June 15, 2004, we replaced a $300 millionrevolving credit agreement that was set to expire on September 14, 2004, with anew $300 million, senior unsecured revolving credit agreement that expires June15, 2009.  Under certain conditions, wecan request an additional $100 million under this new agreement.  Interest on this agreement is variable, basedon either the London Interbank Offered Rate (“LIBOR”) or the prime rate, at ourdiscretion, and is sensitive to our credit rating.  The LIBOR margin at the current credit ratingis equal to 0.50%. We would also pay an additional 0.125% on all borrowingsoutstanding during any period in which we have utilized more than half of thetotal amount available under the agreement. As of March 31, 2005 there are noborrowings outstanding under this agreement. Under this agreement, we are subject to covenants that could, amongother things, restrict our ability to incur additional debt and that limit ourability to pay dividends or repurchase our stock in excess of $150 million perfiscal year (unless, after giving effect to such dividends and/or repurchases,we have more than $400 million in cash and marketable securities domiciled inthe United States).   As of March 31,2005 we are in compliance with all covenants under this agreement

 

| ** **                                    | ** ** | **Requirement**    | ** ** | **Level at   March 31, 2005** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-------------------------------|------------|
|                                          |       |               |       |                          |       |
| Consolidated Leverage Ratio (Debt to  EBITDA) |       | 3 to 1 maximum     |       | 1.3 to 1                      |       |
| Consolidated Net Worth                        |       | $ 1.2 billion |       | $ 1.6 billion            |       |

 

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**Public Notes. **In August 2001, we issued through SabreHoldings Corporation $400 million in unsecured notes (“Notes”), bearinginterest at 7.35% and maturing August 1, 2011, in an underwritten publicoffering resulting in net cash proceeds to us of approximately $397million.  The Notes include certainnon-financial covenants including restrictions on incurring certain types ofdebt or entering into certain sale and leaseback transactions. As of March 31,2005, we are in compliance with all covenant requirements under thisagreement.  Sabre Inc., a 100% ownedsubsidiary of Sabre Holdings Corporation, unconditionally guarantees all debtobligations of Sabre Holdings Corporation. In conjunction with these Notes, we have entered into two interest rateswaps through 2011 for a total of  $300million, which pay us 7.35% and on which we pay a variable rate based on asix-month LIBOR plus 231 basis points.

 

**Capital Lease Obligation. **In June 2003, we entered into a ten-year master lease for our corporateheadquarters facility in Southlake, Texas, which is accounted for as a capitallease.  The interest rate on the capitallease financing is fixed at 5.37%.  Atthe inception of the lease, we recorded an asset of approximately $168 million,along with a liability of approximately $168 million, representing the presentvalue of the minimum lease payments due under the lease and the residual valueguarantee discussed below.

 

At any time during the leaseterm, we have the option to terminate the lease and purchase the properties forapproximately $179 million, plus a make-whole amount, if applicable. We alsohave the option at any time up to one year prior to lease expiration to causethe properties to be sold. If this sell option is exercised, we have guaranteedthat proceeds on a sale will be at least approximately $159 million, and we areresponsible for the first dollar loss up to approximately $159 million due to adecrease in the value of the property below approximately $179 million. If thesales proceeds exceed approximately $179 million plus any sales-relatedexpenses, we retain the excess.  Inconjunction with this lease, we have entered into a $100 million interest rateswap which pays us 5.37% and on which we pay a variable rate based on asix-month LIBOR plus 153 basis points.  Under the lease agreement, we are subject to certain covenants.  As of March 31, 2005 we are in compliancewith all covenants under this agreement including the following financialcovenant:

 

| ** **             | ** ** | **Requirement**    | ** ** | **Level at March  31, 2005** | ** ** |
|------------------------|------------|--------------------|------------|------------------------------|------------|
|                   |       |               |       |                         |       |
| Consolidated Net Worth |       | $ 1.0 billion |       | $ 1.6 billion           |       |

 

***Off-Balance Sheet Arrangements***

 

Wedo not have any relationships or agreements as of March 31, 2005 that would beconsidered an off balance sheet arrangement as defined by Item 303(a)4ii ofRegulation S-K.

 

***Cash Flows (in thousands)***

 
| ** **                            | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Cash provided by operating activities |       | $                                | 39,029     |   | $ | 56,416 |   |
| Cash provided by investing activities |       | $                                | 37,737     |   | $ | 13,221 |   |
| Cash used for financing activities    |       | $                                | (72,416    | ) | $ | (76,658 | ) |

 

**Operating Activities**.Cash provided by operating activities during the three months ended March 31,2005 was $39 million, which was primarily from net earnings of $58 millionadjusted for non-cash and non-operating items, offset by uses of cash forworking capital items totaling $18 million, which includes accounts receivable,prepaid expenses, accrued compensation and benefits, accounts payable and otheraccrued liabilities.  Non-cashadjustments are a reduction to net earnings by $1 million for the first quarterof 2005 and included depreciation and amortization of $27 million, equitylosses of $4 million in joint ventures and stock compensation expense of $3million offset by a gain on the sale of our investment in Karavel of $21million, deferred income taxes of $12 million and other non-cash adjustments of$2 million.

 

Cash provided by operating activities during the three months endedMarch 31, 2004 was $56 million, which was primarily from net earnings of $43million adjusted for non-cash and non-operating items, offset by uses of cashfor working capital items totaling $27 million, which includes accountsreceivable, prepaid expenses, accrued compensation and benefits, accountspayable and other accrued liabilities. Non-cash adjustments to net earnings of $41 million for the firstquarter of 2004 included depreciation and amortization of $31 million, equitylosses of $7 million in joint ventures, $5 million in allowances for doubtfulaccounts and stock compensation expense of $3 million offset by $4 million indeferred taxes and $1 million in other non-cash adjustments.

 

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Cash provided by operating activities decreased by $17 million in thethree months ended March 31, 2005 as compared to the year-ago period.  This decrease in cash provided by operatingactivities was due to a decrease in net income adjusted for non-cashadjustments of $27 million.  This wasoffset by an $9 million improvement from changes in our working capital.  Working capital was positively impacted bythe increased use of the net rate program offset by higher incentivecompensation payments and a one time receipt of $20 million in 2004 fromsubscriber contracts cancelled in 2003.

 

**Investing Activities**.  The $25 million increase in cash provided byinvesting activities in the three months ended March 31, 2005 as compared tothe year-ago period primarily results from a $61 million increase in net salesof our portfolio of marketable securities. Also contributing to the increase,was the $26 million of proceeds from the sale of Karavel. Offsetting theseproceeds from investing activities were $61 million of cash expenditures foracquisitions and $13 million in loans and investments to joint ventures in thefirst quarter of 2005 compared to $11 million of such expenditures in the sameperiod a year ago.

 

**Financing Activities.**  Cash used for financing activities decreased$4 million for the three months ended March 31, 2005 as compared to the sameperiod a year-ago.  This decrease wasprimarily due to a reduction in the number of shares of our Common Stock thatwe repurchased under our Board authorized plans resulting in a $5 millionreduction in cash outflows.  Offsettingthis decrease in shares of common stock repurchased was an increase individends paid of $1 million due to an increase in our dividend rate from $.075per share in the first quarter of 2004 to $.09 per share for the first quarterof 2005.

 

**Critical Accounting Policies**

 

Thediscussion and analysis of our financial condition and results of operations isbased on our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires us to make estimates andjudgments that affect our reported assets and liabilities, revenues andexpenses, and other financial information. Actual results may differsignificantly from these estimates, and our reported financial condition andresults of operations could vary under different assumptions and conditions. Inaddition, our reported financial condition and results of operations could varydue to a change in the application of a particular accounting standard.

 

Weregard an accounting estimate underlying our financial statements as a “criticalaccounting estimate” if the accounting estimate requires us to make assumptionsabout matters that are highly uncertain at the time of estimation and ifdifferent estimates that reasonably could have been used in the current period,or changes in the estimate that are reasonably likely to occur from period toperiod, would have had a material effect on the presentation of financialcondition, changes in financial condition, or results of operations.

 

Therehave been no changes to our critical accounting policies or significant changesin assumptions or estimates that would affect such policies in the three monthsended March 31, 2005. Our critical accounting policies are described under thecaption “*Management’s Discussion andAnalysis of Financial Condition and Results of Operations*” in ourAnnual Report on Form 10-K.  Oursignificant accounting policies are described in Footnote 2 of our AnnualReport on Form 10-K for the year ended December 31, 2004.

 

**Advertising –**Priorto 2005 certain of our advertising costs were deferred within the fiscal yearto future interim periods where the benefit of that advertising extended beyondthe quarter in which they occurred. Beginning in 2005 and all subsequent interim periods, advertising costswill be expensed as incurred with no deferral within the fiscal year.  Our current advertising strategy is to generateimmediate interest in travel promotions and products where returns are moreimmediate than in the past when our strategy was developing overall brandawareness.

 

This timing change resulted in an estimated $8 million in additionalselling, general and administrative expenses for the three months ended March31, 2005.  Net income was reduced by anestimated $5 million or $.04 per share. Due to this timing change, we expect to recognize lower advertisingexpenses in subsequent quarters of 2005 than in the comparable periods of theprior year, offset by any increases in advertising volume.

 

Had we employed the revised methodology in 2004, Travelocity’s selling,general and administrative expenses would have been an estimated $13 millionhigher and net income an estimated $8 million lower, or $.06 per share lowerfor the three months ended March 31, 2004.

 

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**SABRE HOLDINGS CORPORATION**

**CAUTIONARY STATEMENT**

 

Statementsin this report which are not purely historical facts or which necessarilydepend upon future events, including statements regarding our anticipations,beliefs, expectations, hopes, intentions or strategies for the future, may beforward-looking statements within the meaning of Section 21E of the SecuritiesExchange Act of 1934, as amended. All forward-looking statements in this reportare based upon information available to us on the date of this report. Weundertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.Any forward-looking statements made in this report involve risks anduncertainties that could cause actual events or results to differ materiallyfrom the events or results described in the forward-looking statements. Readersare cautioned not to place undue reliance on these forward-looking statements.In addition, oral statements made by our directors, officers and employees tothe investor and analyst communities, media representatives and others,depending upon their nature, may also constitute forward-lookingstatements.  As with the forward-lookingstatements included in this report, these forward-looking statements are bynature inherently uncertain, and actual results may differ materially as aresult of many factors including, but not limited to, those discussed below.

 

**RISK FACTORS**

 

Risks associated with an investment in our securities, and withachieving the forward-looking statements contained in this report or in ournews releases, websites, public filings, investor and analyst conferences orelsewhere, include, but are not limited to, the risk factors described below.Any of the risk factors described below could have a material adverse effect onour business, financial condition or results of operations. We may not succeedin addressing these challenges and risks.

 

**Our revenues are highly dependent on thetravel and transportation industries, and particularly on airlines, and aprolonged substantial decrease in travel transaction volumes could adverselyaffect us.**

 

Most of our revenue is derived from airlines, hotel operators, carrental companies, cruise operators and other suppliers in the travel andtransportation industries. Our revenue increases and decreases with the levelof travel and transportation activity and is therefore highly subject todeclines in or disruptions to travel and transportation due to factors entirelyout of our control. The travel industry is seasonal and our revenue variessignificantly from quarter to quarter. Factors that may adversely affect traveland transportation activity include:

 

•                  economicdownturns and recessions,

 

•                  globalsecurity issues, political instability, acts of terrorism, hostilities and war,

 

•                  increasedairport security that could reduce the convenience of air travel,

 

•                  inclementweather,

 

•                  increasedoccurrence of travel-related accidents,

 

•                  travelers’concerns about exposure to contagious diseases such as SARS or avian bird flu,

 

•                  economicand political issues in the Middle East and elsewhere, and

 

•                  thefinancial condition of travel suppliers.

 

The possibility of further terrorist attacks, hostilities and war, theresulting security measures at airports, and the financial instability of manyof the air carriers may continue to adversely affect the travel industry.Airlines may reduce the number of their flights, making fewer offeringsavailable to us.  We depend on arelatively small number of airlines for a significant portion of our revenues.  Several major airlines are experiencingliquidity problems, some (including United Airlines, Inc., U.S. Airways, Inc.,and ATA Holdings Corporation) have sought bankruptcy protection and stillothers may consider bankruptcy relief. Travelers’ perceptions of passenger security or airlines’ financialstability may have an adverse effect on demand. The financial instability of airlines or a prolonged substantialdecrease in travel transaction volumes could have an adverse impact on ourfinancial performance, operations, liquidity, or capital resources and couldimpair our ability to recover the carrying value of certain of our assets,including capitalized software, other intangible assets and goodwill.

 

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**We will also encounter risks and difficultiesfrequently experienced in rapidly evolving industries such as the travelindustry, and particularly the online travel industry.  Some of these risks relate to our ability to:**

 

•                  attractand retain customers on a cost-effective basis,

 

•                  expandand enhance our service offerings,

 

•                  operate,support, expand and develop our operations, our websites, our software and ourcommunications and other systems,

 

•                  diversifyour sources of revenue, including by entering into agreements that may reflectchanges to our *Sabre* GDS businessmodel,

 

•                  maintainand develop our existing brands and distribution channels, as well as to makecost-effective expenditures in connection with these initiatives,

 

•                  manageour relationships with important travel suppliers and other industryparticipants,

 

•                  managelitigation, including our current litigation with Northwest, and

 

•                  respondto competitive marketplace conditions.

 

If we are unsuccessful in addressing these risks or in executing ourbusiness strategy, our business, financial condition or results of operationsmay suffer.

 

**We face competition from established andemerging travel distribution channels, risks related to deregulation of the CRSindustry and possible internal channel conflict, which could divert customersto our competitors and adversely affect our results of operations.**

 

Our business includes channels of distribution that support the travelagency, business-direct and consumer-direct segments of the global traveldistribution marketplace.  In all ofthese distribution channels, we face significant competition.  In the travel agency channel, our *Sabre* GDS competes primarily against otherlarge and well-established global distribution systems, but new GDSalternatives are also being promoted in the marketplace.  With the deregulation of the CRS industry inthe United States, our CRS business will be competing in a free-marketsystem.  Our current and potentialcustomers may elect to use a competing GDS or a GDS alternative offering lowerprices.  Furthermore, one or moreairlines (other than those participating in our DCA 3-Year Pricing Option) mayelect to discontinue or to lower their levels of participation in the *Sabre* GDS. Losing access to inventory from one or more major suppliers would makethe *Sabre* GDS less attractive totravel agencies and travel purchasers, which could reduce our transaction feerevenue.  In order to gain access tosuppliers’ inventory (including suppliers for whom DCA 3-Year Pricing Optioncontracts will be expiring in 2005 and 2006), it might become necessary for usto reduce further the fees charged to suppliers, which could reduce ourtransaction fee revenue.  In addition, weface increasing competition in the travel agency channel from travel suppliersthat distribute directly to travel agencies as well as to consumers.

 

In the business-direct channel, *TravelocityBusiness* and our Sabre Travel Network’s *GetThere*âproduct compete against similar offerings from other travel agencies.  Some competitors market business travelsystems that are bundled with financial and other non-travel software systemsthat we do not offer.  As a result, ourcurrent and potential customers may choose the convenience orcost-effectiveness of our competitors’ bundled products and services, which mayincrease the pricing pressure on our *GetThere*offerings.

 

In the consumer-direct channel, our Travelocity offering competes notonly against similar offerings from affiliates of other global distributionsystems, but also with travel suppliers, online vertical search engines, and alarge number of online travel agencies.

 

Our Sabre Airline Solutions business unit competes against severalorganizations offering internal reservation system and related technologyservices to airlines. This segment is highly competitive. If we cannot competeeffectively to keep and grow this segment of business, we risk losing customersand economies of scale, which could have a negative impact on our operatingresults.

 

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We expect existing competitors, business partners and new entrants tothe travel business to constantly revise and improve their business models inresponse to challenges from competing businesses, including ours.  If these or other travel industryparticipants introduce changes or developments that we cannot meet in a timelyor cost-effective manner, our business may be adversely affected.  In addition, consumers frequently use ourwebsites for route pricing and other travel information, and then choose topurchase travel offerings from a source other than our website, includingtravel suppliers’ own websites.   Suchuse may increase our costs without producing revenue.

 

In addition, consolidation among our competitors may give ourcompetitors increased negotiating leverage with travel suppliers and greatermarketing resources, thereby providing corresponding competitive advantagesover us. Consolidation among travel suppliers, including airline mergers, mayincrease competition from distribution channels related to those suppliers andplace more leverage in the hands of those suppliers to negotiate lower transactionfees.  Consolidation among travelagencies could increase the leverage over Sabre in negotiating contract terms,such as customer incentives payable by Sabre Travel Network. If we are unableto compete effectively, competitors could divert our customers away from ourtravel distribution channels and, unless we substitute alternative revenuestreams, it could adversely affect our results of operations.

 

In certain limited circumstances, our business segments may conflictwith each other.  For example, both our *Travelocity.com*âand *Travelocity Business*Ôwebsites may compete with the travel-agency customers of Sabre Travel Networkto distribute travel to corporate or business customers.  Although we believe that our participation inboth the traveler-direct and distribution intermediary businesses is a distinctadvantage for Sabre Holdings due to synergies including greater scale of ourtechnology, customer conflicts between our offerings across businesses couldcreate issues that have the potential to adversely affect our results ofoperations.  For example, such conflictcould cause some of our current or potential travel agency customers toconsider competing GDS providers (or online websites) or other direct orindirect channels of travel distribution.

 

**Some travel suppliers are seeking alternativedistribution models, and alternative models of travel distribution areemerging, which may adversely affect our results of operations.**

 

Some travel suppliers are seeking to decrease their reliance ondistribution intermediaries, including global distribution systems such as our *Sabre* GDS. Travel suppliers may giveadvantages to distribution intermediaries in which they have an economic stakeor may create or expand commercial relationships with online and traditionaltravel agencies that work with travel suppliers to directly book travel withthose suppliers.  Many airlines, hotels,car rental companies and cruise operators have established their own traveldistribution websites.  Several suppliershave formed joint ventures that offer multi-supplier travel distributionwebsites.  From time to time, travelsuppliers offer advantages, such as bonus miles, lower transaction fees, ordiscounted prices, when their products and services are purchased from thesesupplier-related websites.  Some of theseofferings are not available to unrelated intermediaries, or thoseintermediaries must provide lower distribution pricing in exchange for accessto the offerings.  In addition, theairline industry has experienced a shift in segment share from full-servicecarriers to low-price carriers. Some low-cost carriers do not distribute theirtickets through the *Sabre* GDS orthrough other third-party intermediaries. In addition, a new breed of competitors is entering the online travelmarketplace.  Both well-establishedsearch engine companies as well as start ups are attempting to enter the onlinetravel marketplace by leveraging search technology to aggregate travel searchresults across supplier, travel agent and other travel-related websites.  These search engines and alternative traveldistribution channels have the potential to divert customers from our onlinesites and our *Sabre* GDS. Thesedevelopments put pressure on our revenues, pricing and operating margins.  See “*BusinessTrends - Supplier Efforts to Control Travel Distribution”*and*“BusinessTrends – Competition and Consolidation.”*

 

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**Adverse changes in or interruptions to ourrelationships with travel suppliers could affect our access to travel offeringsand reduce our revenues.**

 

Werely on participating carrier agreements, such as our DCA 3-Year PricingOption, with our airline suppliers, and these agreements contain terms that reduceour revenues by providing discounted pricing. None of these arrangements is exclusive and airline suppliers couldenter into, and in some cases may have entered into, similar agreements withour competitors.  In addition, most ofthe agreements we have with airline suppliers will expire by their terms withinthe next two years unless they are extended or replaced.

 

Wecannot assure you that our arrangements with travel suppliers will remain ineffect, that the net impact of these pricing options will not adversely impactrevenue, or that any of these suppliers will continue to supply us with thesame level of access to inventory of travel offerings in the future.Additionally, we cannot assure you that potential disputes with our travelsuppliers (such as our litigation with Northwest Airlines) will not affect ourbusinesses.  See “Part II - Item 1 –Legal Proceedings.”  Because our majorairline relationships represent such a large part of our business, the loss ofany of our major airline relationships, including due to the bankruptcy of anairline, could have a material negative impact on our business.  If our access to inventory or features isaffected, or our ability to offer their inventory on comparatively favorableeconomic terms is diminished, it could have a material adverse effect on ourbusiness, financial condition or results of operations.

 

**Consolidation in the travel industry andincreased competition for travel agency subscribers may result in increasedexpenses, lost transactions and reduced revenue.**

 

GDSs compete to attract and retain travel agencies.  The number of transactions produced by ourtravel agency subscriber base is an important factor in our success. Sometravel suppliers have reduced or eliminated commissions paid to travel agencies(including consumer-direct travel sites like Travelocity).  The loss of commissions causes travelagencies to become more dependent on other sources of revenues, such astraveler-paid service fees and GDS-paid incentives.  The reduction or elimination of supplier-paidcommissions has forced some smaller travel agencies to close or to combine withlarger travel agencies.  Although the *Sabre* GDS has a leading share of largetravel agencies, competition is particularly intense among global distributionsystems for larger travel agency subscribers, including online travel agencies.  Consolidation of travel agencies may resultin increased competition for these subscribers. In order to compete effectively, we may need to increase incentives,pre-pay incentives, increase spending on marketing or product development, ormake significant investments to purchase strategic assets.  In addition, consolidation among travelsuppliers, such as major hotels and airline mergers and alliances, may increasecompetition from these supplier-related distribution channels or give themadditional leverage to negotiate lower transaction fees payable to GDSoperators like Sabre Travel Network.

 

**Travelocity’s growth cannot be assured.**

 

The online travel marketplace is highly competitive, with bothindependent online travel agencies and suppliers’ proprietary websitescompeting for customers.  Our businessstrategy is dependent on expanding Travelocity’s transaction revenues, increasingits percentage of merchant transactions, maintaining the breadth of itsmerchant suppliers, developing its brand in a cost-effective manner both in theUnited States and in other growth regions (such as Europe and Asia) andincreasing its site traffic (including direct distribution as well as throughcurrent and future distribution partners). Key components of this strategyinclude the growth of revenue from our merchant model hotel business,last-minute packaging and the *TotalTrip*dynamic packaging offering.  We also planto expand the appeal of *Travelocity Business*to corporate travelers and to invest strategically in growth opportunities suchas the European and Asian marketplaces. If any of these initiatives is not successful or requires extensiveinvestment, Travelocity’s growth may be limited and it may be unable to achieveor maintain profitability.  In addition,Travelocity’s growth strategy relies on the continuing growth in the travelindustry of the internet as a distribution channel. If consumers do notcontinue to book more travel online than they currently do today or if the useof the internet as a medium of commerce for travel bookings does not continueto grow or grows more slowly than expected, our revenues and profit may beadversely affected.

 

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**Our business plans call for the significantgrowth of our net rate hotel and packaging businesses, and we may beunsuccessful in managing or expanding that business.**

 

Our business strategy is dependent upon what is commonly referred to inthe industry as our “merchant model” business, primarily our net rate hotelprogram, as a significant source of revenue growth and increased margins. Ournet rate hotel strategy is particularly dependent upon our ability to obtainthe right to market adequate hotel rooms. We remain subject to numerous risks in the operation and growth of themerchant model business.  In particular,we cannot ensure that we will continue to be successful in adding and retaininghotel properties or other suppliers in a sufficient number of domestic orinternational geographic markets.  Manyhoteliers utilize merchant model arrangements with us and with our competitorsas a channel to dispose of excess hotel rooms at discounted rates. Demand forsupplier offerings may increase as a result of increased travel and competitionfrom merchant model offerings by our competitors.  If demand increases for suppliers’ products,services and other content offerings, suppliers may limit our right to markettheir offerings or may increase the cost of those offerings.  These types of events could exert downwardpressure on the margins we expect to achieve in our merchant hotel business. Wemay be unable to achieve our financial objectives for the merchant model hotelprogram, especially if economic conditions improve or if competitionincreases.   Similar risks could alsoimpact any future merchant model programs we might explore for other types ofsupplier offerings, such as air travel.

 

**We may be unsuccessful in pursuing and integratingbusiness combinations, strategic alliances, or products and technologies, whichcould result in increased expenditures or cause us to fail to achieveanticipated cost savings or revenue growth.**

 

We are currently seeking to integrate the completed acquisitionsdescribed herein, including our acquisitions of the non-German operations ofTravelocity Europe and of SynXis Corporation. In addition, we plan to continue to examine possible businesscombinations, investments, joint ventures or other strategic alliances withother companies in order to maintain and grow revenue and marketplacepresence.  As a result of these completedor proposed transactions, our businesses will be subject to new or increasedrisks related to the nature of the transactions.  We may be unable to successfully completepotential acquisitions due to multiple factors, such as issues related toregulatory review of the proposed transactions. In addition, there are risks inherent in these types of transactions,such as: difficulty in assimilating or integrating the operations, technologyand personnel of the combined companies; disruption of our ongoing business,including loss of management focus on existing businesses and marketplacedevelopments; problems retaining key technical and managerial personnel;expenses associated with the amortization of identifiable intangible assets;additional or unanticipated operating losses, expenses or liabilities ofacquired businesses; impairment of relationships with existing employees,customers and business partners; and fluctuations in value and losses that mayarise from equity investments.  In addition,we may not be able to: identify suitable candidates for additional businesscombinations and strategic investments; obtain financing on acceptable termsfor such business combinations and strategic investments; or otherwiseconsummate such business combinations and strategic investments on acceptableterms.  To consummate such transactions,we may need to raise external funds through the sale of stock and/or debt inthe capital markets or through private placements, which might affect ourliquidity requirements.

 

**We are not certain that our ongoing costreduction plans will continue to be successful.**

 

Our strategy depends, to a substantial degree, on reducing andcontrolling operating expenses. In furtherance of this strategy, we haveengaged in ongoing, company-wide activities intended to reduce costs.  These activities include personnelreductions, reductions in personnel-related costs, programs designed to reducethe growth rate of incentive payments to travel agencies, and realigning andstreamlining operations and consolidating facilities. We cannot assure you thatour efforts will continue to result in the increased profitability, costsavings or other benefits that we expect.

 

Part of our cost reduction strategy involves leveraging our status as aglobal company to conduct some of our operations outside the United States,such as customer call centers and software development, either by contractingwith foreign companies that work for us or by expanding our own operationsoutside the United States.  These foreignoperations are subject to unique risks, including: business, political andeconomic instability in foreign locations; governments policies that couldadversely affect business and economic conditions related to our operations orbusiness; adverse political or consumer reactions in the United States;disruptions to communication and transportation services supportingglobalization; actual or threatened terrorist activities; and military actionoverseas.   Risks such as these couldadversely affect our ability to effectively implement global sourcing.

 

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**Rapid technological changes and newdistribution channels or unauthorized use of our intellectual property mayadversely affect the value of our current or future technologies to us and ourcustomers, which could cause us to increase expenditures to upgrade and protectour technology or develop and protect competing offerings in new distributionchannels.**

 

New distribution channels and technology in our industry are evolvingrapidly.  Our ability to compete and ourfuture results depend in part on our continued ability to maintain and to maketimely and cost-effective enhancements, upgrades and additions to ourtechnology in response to changes in consumer preferences and increased demandfor our products and services.  We mustalso keep pace with rapid advancements in industry technology, standards andpractices, and protect our technology. Additionally, we must maintain our ability to ensure the security andprivacy of personal information transmitted through our websites and otherdistribution channels.  Unauthorized useof our intellectual property could have a material adverse effect on us, andour legal remedies may not adequately compensate us for the damages to ourbusiness caused by such use.  Protectingour intellectual property from unauthorized use could be expensive and timeconsuming.  Maintaining flexibility torespond to technological and marketplace dynamics or to respond to evolvingsecurity and privacy requirements may require substantial expenditures andlead-time.  We cannot assure you that wewill successfully identify and develop new products or services in a timelymanner, that offerings, technologies or services developed by others will notrender our offerings obsolete or noncompetitive, or that the technologies inwhich we focus our research and development investments will achieve acceptancein the marketplace and provide a return on our investment.

 

**Our systems may suffer failures, capacityconstraints and business interruptions, which could increase our operatingcosts and cause us to lose customers.**

 

Our businesses are largely dependent on the computer data centers andnetwork systems operated for us by Electronic Data Systems Corporation and onthe global telecommunications infrastructure. We rely on several communications service suppliers and on the globalInternet to provide network access between our computer data center and callcenters and end-users of our services. Travelocity and *Site59*âare dependent upon GDS’s (the *Sabre*GDSand a third-party provider, respectively) to process their travelbookings.  We occasionally experiencesystem interruptions that make some or all of our global distribution system orother data processing services unavailable, which may prevent us from efficientlyproviding services to our customers or other third parties and which couldresult in a material adverse effect upon our businesses, financial condition orresults of operations if we lose customers or become liable to them as a resultof these interruptions (particularly if such events occur at Travelocity).  System capacity limits or constraints arisingfrom unexpected increases in our volume of business could cause interruptions,outages or delays in our services, or deterioration in their performance, orcould impair our ability to process transactions.  Much of the computer and communicationshardware upon which we depend is located in a single facility.  Our systems might be damaged or interruptedby fire, flood, power loss, telecommunications failure, break-ins, earthquakes,terrorist attacks, hostilities or war or similar events.  Computer viruses, physical or electronicbreak-ins and similar disruptions affecting the global Internet or our systemsmight cause service interruptions, delays and loss of critical data, and couldprevent us from providing our services. Problems affecting our systems might be expensive to remedy and couldsignificantly diminish our reputation and brand name and prevent us fromproviding services.  We could be harmedby outages in, or unreliability of, the data center or network systems.

 

**Our success depends on maintaining the integrity of,and upgrading the quality of, our systems and infrastructure.**

 

In order to be successful, we must provide reliable, real-time accessto our systems for our customers and suppliers while also pursuing a low-costmodel. As our operations grow in both size and scope, we will continuously needto improve and upgrade our systems and infrastructure to offer an increasingnumber of customers and travel suppliers enhanced products, services, featuresand functionality – all while maintaining the reliability and integrity of oursystems and infrastructure and while pursuing the lowest cost pertransaction.  The expansion of oursystems and infrastructure will require us to commit substantial financial,operational and technical resources before the volume of business increases,with no assurance that the volume of business will increase. Consumers andsuppliers will not tolerate a service hampered by slow delivery times, unreliableservice levels, service outages due to the installation of upgrades, orinsufficient capacity, any of which could have a material adverse effect on ourbusiness, financial condition or results of operations.

 

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**Our processing, storage, use and disclosureof personal data could give rise to liabilities as a result of governmentalregulation, conflicting legal requirements or differing views of personalprivacy rights.**

 

In our processing of travel transactions, we receive and store a largevolume of personally identifiable data. This data is increasingly subject to legislation and regulations innumerous jurisdictions around the world, including the Commission of the EuropeanUnion (“E.U. Commission”) through its Data Protection Directive and variationsof that directive in the member states of the European Union (“E.U.”).  This government action is typically intendedto protect the privacy of personal data that is collected, processed andtransmitted in or from the governing jurisdiction.  We could be adversely affected if legislationor regulations are expanded to require changes in our business practices or ifgoverning jurisdictions interpret or implement their legislation or regulationsin ways that negatively affect our business, financial condition and results ofoperations.

 

In addition, in the aftermath of the terrorist attacks ofSeptember 11, 2001 in the United States, government agencies have beencontemplating or developing initiatives to enhance national and aviationsecurity, including the Transportation Security Administration’sComputer-Assisted Passenger Prescreening System, known as CAPPS II. Theseinitiatives may result in conflicting legal requirements with respect to datahandling. As privacy and data protection has become a more sensitive issue, wemay also become exposed to potential liabilities as a result of differing viewson the privacy of travel data.  Travelbusinesses have also been subjected to investigations, lawsuits and adverse publicitydue to allegedly improper disclosure of passenger information.  These and other privacy developments that aredifficult to anticipate could adversely impact our business, financialcondition and results of operations.

 

**State and local tax issues have the potentialto have an adverse effect on our financial condition and results of operations.**

 

Some state and local taxing authorities impose taxes on the sale, useor occupancy of hotel room accommodations, which are called transient,occupancy, accommodation, sales or hotel room taxes.  Hotel operators generally collect and remitthese occupancy taxes.  Consistent withthat practice, when a customer books a net rate, or “merchant,” hotel roomthrough one of our travel services, we collect from the customer an amountsufficient to pay the hotel its room charge and the occupancy taxes on thatcharge, as well as additional amounts representing our fees.

 

We do not collect or remit occupancy taxes on our fees.  Some tax authorities claim that occupancy taxesshould be collected on some or all of the fees. We believe there are strong arguments that our fees are not subject tooccupancy taxes (although tax laws vary among the jurisdictions).  We are attempting to resolve this issue withtax authorities in various jurisdictions, but we cannot predict the resolutionin any particular jurisdiction.

 

We have established a reserve for potential occupancy tax liability,consistent with applicable accounting principles and in light of all currentfacts and circumstances.  The reserverepresents our best estimate of our contingent liability for occupancytaxes.  A variety of factors could affectany actual liability for occupancy taxes, such as the number of jurisdictionsthat prevail in either assessing additional occupancy taxes or negotiating asettlement with us, the fees potentially subject to tax in each jurisdiction,changes in applicable tax laws, and the timing of any or all of theforegoing.  The amount of our liabilityon occupancy taxes could exceed that reserve, which could have a materialadverse effect on our financial results.

 

**Regulatory developments abroad could limitour ability to compete by restricting our flexibility to respond to competitiveconditions, which could cause our customers to be diverted to our competitorsand adversely affect our revenue and results of operations.**

 

The E.U. Commission is engaged in a comprehensive review of its rulesgoverning CRS systems.  It is unclearwhen the E.U. Commission will complete its review and what changes, if any,will be made to its CRS rules.  We couldbe unfairly and adversely affected if, for example, these rules are retained asto traditional global distribution systems used by travel agencies but are notapplied to travel distribution websites owned by more than one airline.  We could also be adversely affected ifrestrictions are imposed or continued on CRS advertising and displays or ifadditional limitations are placed upon our right to contract with travel agentsor airlines.

 

We could also be adversely affected if changes to any of the foregoingCRS rules increase our cost of doing business or weaken the non-discriminatoryparticipation rules to allow one or more large airlines owning a competing CRSto discontinue or to lower its level of participation in our globaldistribution system.

 

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**Our international operations are subject toother risks, which may impede our ability to grow internationally and adverselyaffect our overall results of operations.**

 

We continually seek to expand the reach of our various businesses intointernational markets as well as to successfully integrate, operate and manageour existing and future international operations.  Our international operations are subject to anumber of risks, including, but not limited to, the following:

 

•                  changesin foreign currency exchange rates,

 

•                  competitionfrom local businesses, which may have a better understanding of, and ability tofocus on, local consumers and their preferences, as well as more establishedlocal brand recognition and better access to local financial and strategicresources,

 

•                  difficultyin developing, managing and staffing international operations as a result ofdistance, language and cultural differences,

 

•                  localeconomic and political conditions, including conditions resulting from theexisting and potential conflicts in the Middle East and the damage resultingfrom the tsunami that devastated large parts Southeast Asia,

 

•                  restrictivegovernmental actions, such as consumer and trade protection measures,

 

•                  changesin legal or regulatory requirements, including to foreign tax laws,

 

•                  limitationson the repatriation of funds,

 

•                  lesserprotection in some jurisdictions for our intellectual property, and

 

•                  lawsand policies of the U.S. affecting trade, foreign investment and loans.

 

These risks may adversely affect our ability to conduct and growbusiness internationally, which could cause us to increase expenditures andcosts, decrease our revenue growth or both.

 

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**Item 3****. Quantitative andQualitative Disclosures about Market Risk**

 

**Interest Rate Risk**

 

At March 31, 2005, ourexposure to interest rates was related primarily to our marketable securitiesportfolio.  Offsetting some of thisexposure was the fixed to floating interest rate swaps on our public notes andcapital lease.  The objectives of ourmarketable securities are safety of principal, liquidity maintenance, yield maximizationand full investment of all available funds. As such, our investment portfolio consists primarily of high creditquality money market mutual funds, certificates of deposit, bankers’acceptances, commercial paper, mortgage-backed and receivables-backedsecurities and corporate and government notes, including tax-exempt municipalsecurities.  If short-term interest rateshad been 10% lower during the three months ended March 31, 2005, our interestincome from marketable securities would have decreased by approximately $0.3million.  This amount was determined byapplying the hypothetical interest rate change to our average balance ofmarketable securities during the three months ended March 31, 2005.

 

AtMarch 31, 2005 we had obligations under fixed rate notes of $400 million (“Notes”)and a $168 million capital lease obligation. We entered into fixed to floating interest rate swaps related to $300million of the outstanding Notes, effectively converting $300 million of the$400 million fixed rate Notes into floating rate obligations.  We also entered into a fixed to floatinginterest rate swap that effectively converts $100 million of the capital leaseobligation into a floating rate obligation (see Note 6 to the ConsolidatedFinancial Statements for additional details on the swaps).  If short-term interest rates had been 10%higher during the three months ended March 31, 2005, our interest expense wouldhave increased by approximately $0.3 million. This amount was determined byapplying the hypothetical interest rate change to our floating rate borrowingsbalance during three months ended March 31, 2005. If our mix of interestrate-sensitive assets and liabilities changes significantly, we may enter intoadditional derivative transactions to manage our net interest rate exposure.

 

**Foreign Currency Risk**

 

We have various operations outside of the United States, primarily inNorth America, South America, Europe, Australia and Asia.  As a result ofthese business activities, we are exposed to foreign currency risk. Because a significant portion of our business is transacted in the UnitedStates dollar, these exposures have historically related to a small portion ofour overall operations.  Nevertheless, during times of devaluation of theU.S. dollar, such as in 2003 and 2004, the increase in our foreign expenses canhave a negative impact on our operating results.  To reduce the impact ofthis earnings volatility, we hedge a portion of our foreign currency exposureby entering into foreign currency forward contracts on our three largest foreigncurrency exposures.  These forward contracts, totaling $115 million atDecember 31, 2004 and $118 million at March 31, 2005, represent obligations topurchase foreign currencies at a predetermined exchange rate, to fund a portionof our expenses that are denominated in foreign currencies.   In December 2004, we purchased foreigncurrency denominated government bonds to function as a hedge of a portion ofour 2005 foreign currency exposure.  Toprotect these bond investments from foreign currency risk, we purchased putoptions on the currencies in which the government bonds are denominated.  These options give us the right to sell theforeign currencies at predetermined prices. The result of an immediate 10% devaluation of the U.S. dollar in 2005from March 31, 2005 levels relative to our primary foreign currency exposureswould result in a negative U.S. dollar impact of approximately$3.0 million for the remainder of 2005, net of hedge instrumentsoutstanding.  This sensitivity analysis was prepared based upon 2005projections of our primary foreign currency-denominated expenses and foreigncurrency forwards and foreign currency denominated bonds outstanding as ofMarch 31, 2005.

 

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**Item 4****. Controls and Procedures**

 

***Controls Evaluation and Related CEOand CFO Certifications.***    Our management, with the participation of ourprincipal executive officer (“CEO”) and principal financial officer (“CFO”)conducted an evaluation of the effectiveness of the design and operation of ourdisclosure controls and procedures as of the end of the period covered by thisQuarterly Report. The controls evaluation was conducted by our DisclosureControls Council, comprised of senior representatives from our Finance,Accounting, Internal Audit, Tax, Investor Relations, Corporate Communicationsand Legal Departments under the supervision of our CEO and CFO.

 

Attachedas exhibits to this Quarterly Report are certifications of our CEO and our CFO,which are required in accordance with Rule 13a-14 of the SecuritiesExchange Act of 1934, as amended (“Exchange Act”). This “Controls andProcedures” section includes the information concerning the controls evaluationreferred to in the certifications, and it should be read in conjunction with thecertifications for a more complete understanding of the topics presented.

 

***Limitations on the Effectiveness ofControls.***    Wedo not expect that our disclosure controls and procedures will prevent allerrors and all fraud. A system of controls and procedures, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of the system are met. Because of the limitations in allsuch systems, no evaluation can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected.Furthermore, the design of any system of controls and procedures is based inpart upon certain assumptions about the likelihood of future events, and therecan be no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions, regardless of how unlikely. Because ofthese inherent limitations in a cost-effective system of controls andprocedures, misstatements or omissions due to error or fraud may occur and notbe detected.

 

***Scope of the Controls Evaluation.***    The evaluation of ourdisclosure controls and procedures included a review of their objectives anddesign, the Company’s implementation of the controls and procedures and the effectof the controls and procedures on the information generated for use in thisQuarterly Report. In the course of the evaluation, we sought to identifywhether we had any data errors, control problems or acts of fraud and toconfirm that appropriate corrective action, including process improvements,were being undertaken if needed. This type of evaluation is performed on aquarterly basis so that conclusions concerning the effectiveness of ourdisclosure controls and procedures can be reported in our Quarterly Reports onForm 10-Q, which supplement our disclosures made in our Annual Report onForm 10-K. Many of the components of our disclosure controls andprocedures are also evaluated by our Internal Audit Department, our LegalDepartment and by personnel in our Finance organization. The overall goals ofthese various evaluation activities are to monitor our disclosure controls andprocedures on an ongoing basis, and to maintain them as dynamic systems thatchange as conditions warrant.

 

***Conclusions regarding disclosurecontrols.***    Basedon the required evaluation of our disclosure controls and procedures, our CEOand CFO have concluded that, as of March 31, 2005, we maintain disclosurecontrols and procedures that are effective in providing reasonable assurancethat information required to be disclosed by us in the reports that we file orsubmit under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicated toour management, including our CEO and CFO, as appropriate to allow timelydecisions regarding required disclosure.

 

***Changes in internal controls overfinancial reporting.***    Duringthe three months ended March 31, 2005, there was no change in our internalcontrol over financial reporting (or in other factors) that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II****: OTHER INFORMATION**

 

***Item 1. LegalProceedings***

 

Thelitigation matters described below involve issues or claims that may be ofparticular interest to the Company’s stockholders, regardless of whether any ofthese matters may be material to the financial position or operations of theCompany based upon the standard set forth in the SEC’s rules.

 

Weare party to two lawsuits (which as described below have now been consolidatedin federal court in Fort Worth, Texas) against Northwest Airlines, Inc. (“Northwest”)related to Northwest’s August 24, 2004 announcement and implementation onSeptember 1, 2004 of a fare supplement for travel reservation bookingsmade through a GDS (including the *Sabre*GDS) by traditional travel agencies and some online travel sites (such asTravelocity). We notified Northwest that it was in breach of the parties’Participating Carrier Distribution and Services Agreement (“PCA”), as amendedby the DCA 3-Year Option Agreement. We also took commercial steps, which webelieved were reasonable under the DCA 3-Year Option Agreement and PCA, inorder to enforce both agreements.

 

TheCompany sued Northwest on August 24, 2004 in Sabre Inc. v. NorthwestAirlines, Inc., Civil Action 4-04-CV-612-Y in the Fort Worth Division ofthe United States District Court for the Northern District of Texas(hereinafter the “Fort Worth Action”). We allege that Northwest breached thePCA, as amended by the DCA 3-Year Option Agreement. Among other things, the DCA3-Year Option Agreement requires that Northwest provide us with fares and othercontent for the *Sabre* GDS thatNorthwest makes available through other channels of ticket distribution. Webelieve that Northwest breached the DCA 3-Year Option Agreement by imposing acharge on tickets booked on the *Sabre*GDS but not on other channels of ticket distribution. We seek monetary damages,attorneys fees, and to compel Northwest to adhere to the terms of theiragreements.

 

OnAugust 25, 2004, Northwest sued Sabre Holdings Corporation,Sabre Inc. and Sabre Travel International Ltd. in a separate actionstyled Northwest Airlines Corporation v. Sabre Inc. et al., CauseNo. 04-CV-03889 in Minneapolis federal court (hereinafter the “MinneapolisAction”). The Minneapolis Action related to the same factual events describedabove. In its complaint filed on August 25, 2004, Northwest asserted thatwe breached our PCA with Northwest by our commercial actions in response toNorthwest’s August 24, 2004 breach of the PCA. On September 27, 2004,Northwest filed an amended complaint in the same cause number addingallegations that we had violated Section 2 of the Sherman Act, claimingthat we had monopoly power, and also asserting claims against us for allegedinterference with prospective contractual relations, deceptive trade practices,fraud, false advertising under the federal Lanham Act, and for a declaratoryjudgment that Sabre, and not Northwest, is in breach of the PCA. Northwestalleges that it has suffered unspecified damages. Northwest seeks trebledamages under the antitrust laws, attorneys fees, to have the court declarethat we breached the parties’ agreement and violated federal and statestatutes, and to enjoin us from certain conduct.

 

OnNovember 9, 2004, the Court in the Fort Worth Action rejected Northwest’smotion to transfer that case to the federal court in Minneapolis, followingwhich Northwest agreed to have the Minneapolis Action transferred to FortWorth. The two cases have now been consolidated before the Court in Fort Worth.On January 13, 2005, the Company filed a motion with the Court to dismissNorthwest’s antitrust claims and its claims under various Minnesota state statutesand tort law theories.  That motion hasnow been fully briefed and is ripe for decision by the Court.  In addition, both parties are pursuing thediscovery process in the litigation.

 

Weare unable to estimate the amount of the loss, if any, that might arise fromthis litigation.

 

***Item 2. UnregisteredSales of Equity Securities and Use of Proceeds***

 

(a) – (b)  None.

 

(c)          Thefollowing table provides information about purchases by the company (and itsaffiliated purchasers) during the three months ended March 31, 2005 of equitysecurities that are registered by the company pursuant to Section 12 of theExchange Act.

 

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### **ISSUER PURCHASES OFEQUITY SECURITIES**

 
| **Period**                          | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Weighted  Average  Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased  as Part of a  Publicly  Announced  Programs** | ** ** | **Maximum Dollar  Value of Shares  That May Yet be  Purchased Under  the Programs** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| January 01/01/05 – 01/31/05    |       | 1,368,800                              |       | $                                            | 20.94      |                                                                               | 1,368,800  |                                                                                | $          | 32,267,745 |   |
| February 02/01/05 – 02/28/05   |       | 998,000                                |       | $                                            | 21.15      |                                                                               | 998,000    |                                                                                | $          | 11,155,869 |   |
| March 03/01/05 – 03/31/05      |       | 515,263                                |       | $                                            | 21.65      |                                                                               | 515,263    |                                                                                | $          | 0 |   |
| Total 1st Quarter 2005  Repurchases |       | 2,882,063                              |       | $                                            | 21.14      |                                                                               | 2,882,063  |                                                                                |       |   |

 

OnOctober 25, 2004, our Board of Directors approved another share repurchaseprogram authorizing us to repurchase up to an additional $100 million of ourCommon Stock.  This program was announcedon October 28, 2004. We completed this authorization in March 2005 with thepurchase of 2,042,063 shares of our Common Stock during the first three monthsof 2005.  All purchases were made throughthe open market pursuant to 10b5-1 trading plans.

 

OnMay 2, 2005, we received authorization from the Board of Directors torepurchase another $100 million of our Common Stock.  As in the past, implementation of the programis at management’s discretion and will depend on the best uses for ouravailable cash.

 

OnOctober 20, 2003 our Board of Directors issued a standing annualauthorization to purchase shares of our common stock to satisfy our obligationsto deliver shares under our Employee Stock Purchase Plan and our Long-TermIncentive Plan (the “Alternative Share Settlement Program”).  We purchased 840,000 shares of our CommonStock under this authorization in January 2005 through the open market pursuantto 10b5-1 trading plans.

 

Weexpect that the timing, volume and price of any future repurchases of ourCommon Stock will be made pursuant to trading plans that we intend asqualifying under Rule 10b5-1, unless such plans are terminated at thediscretion of management.

 

***Item 3. DefaultsUpon Senior Securities***

 

None.

 

***Item 4. Submissionof Matters to a Vote of Security Holders***

 

None.

 

***Item 5. Other Information***

 

Item 5. Other Information

 

(a)  The Company disclosed in our Quarterly Reporton Form 10-Q for the period ended September 30, 2004 that during the period1999 to April 2003 the Company used an affiliate of Ernst & Young LLP(“E&Y”) in China to pay invoices, disburse payroll and calculate certainpayroll tax liabilities for China branch offices of Sabre Inc. and ABACUSInternational Ltd. (“China services”). E&Y subsequently completed a global review of services that itsnon-U.S. affiliates provide to U.S. public companies, to determine if therewere instances similar to the ones discovered in China.  On April 28, 2005 E&Y notified the AuditCommittee of our Board of Directors (“Audit Committee”) that during the periodMarch 1994 to November 2004 the Company used Ernst & Young’s Kuwaitiaffiliate to provide tax compliance services and pay tax authorities bycertified check on behalf of the Company. E&Y’s Kuwaiti affiliate has since discontinued handling funds onbehalf of the Company.

 

As part of its ongoingoversight of E&Y’s independence, our Audit Committee determined that theservices provided in China and Kuwait did not impair E&Y’s independentstatus as the Company’s external auditor. In making this determination, the Audit Committee considered the deminimis amount of money involved, the fact that the accounts in question weremaintained on an imprest basis and the funds were disbursed promptly and didnot accumulate, the ministerial nature of the services, the absence ofinvolvement by personnel of E&Y’s Kuwaiti and Chinese affiliates in theconsolidated audit of the Company, and that the activities and operationsinvolved were immaterial to the consolidated financial statements of theCompany.

 

(b)  None.

 

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***Item 6. Exhibits***

 

Thefollowing exhibits are included herein:

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                      |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                            |
| 3.1                 |       | Restated  Certificate of Incorporation of Sabre Holdings Corporation (1)                                                                                                                                        |
| 3.2                 |       | Restated  Bylaws of Sabre Holdings Corporation (2)                                                                                                                                                              |
| 10.1                |       | Form  of Restricted Stock Grant Agreement for Executive Officers (5)                                                                                                                                            |
| 10.2                |       | Form  of 2005 Stock Option Agreement for Executive Officers (6)                                                                                                                                                 |
| 10.3                |       | Put  Option Agreement by and among AGC Holdings Limited, Abacus International PTE  Ltd., Travelocity.com L.P., and Zuji Holdings Limited dated January 17, 2005  (7)                                            |
| 10.4                |       | Bonus  Criteria for Executive Officers (8)                                                                                                                                                                      |
| 10.5                |       | Form  of Severance Agreement with respect to Thomas Klein (9)                                                                                                                                                   |
| 12.1                |       | Computation  of Ratio of Earnings to Fixed Charges (3)                                                                                                                                                          |
| 31.1                |       | Written  statement pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to Section  302 of the Sarbanes-Oxley Act of 2002, dated May 6, 2005, signed by Michael S.  Gilliland as Chief Executive Officer (3)   |
| 31.2                |       | Written  statement pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to Section  302 of the Sarbanes-Oxley Act of 2002, dated May 6, 2005, signed by Jeffery  M. Jackson as Chief Financial Officer (3)     |
| 32.1                |       | Written  statement pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002, dated May 6, 2005, signed by Michael  S. Gilliland as Chief Executive Officer (4) |
| 32.2                |       | Written  statement pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002, dated May 6, 2005, signed by Jeffery  M. Jackson as Chief Financial Officer (4)   |

 

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(1) Incorporated by reference to Exhibit 3.1to our report on Form 10-Q for the quarter ended June 30, 2000.

 

(2) Incorporated by reference to Exhibit 3.2to our report on Form 10-Q for the quarter ended June 30, 2001.

 

(3) Filed herewith.

 

(4) Sabre Holdings Corporation is furnishing,but not filing, the written statements pursuant to Title 18 United States Code1350, as added by Section 906 to the Sarbanes-Oxley Act  of 2002, of Michael S. Gilliland, the ChiefExecutive Officer of Sabre Holdings Corporation and Jeffery M. Jackson, theChief Financial Officer of Sabre Holdings Corporation.

 

(5) Incorporated by reference to Exhibit10.26 to our report on Form 10-K for the year ended December 31, 2004.

 

(6) Incorporated by reference to Exhibit10.27 to our report on Form 10-K for the year ended December 31, 2004.

 

(7) Incorporated by reference to Exhibit10.38 to our report on Form 10-K for the year ended December 31, 2004.

 

(8) Incorporated by reference to Exhibit10.17 to our report on Form 10-K for the year ended December 31, 2004.

 

(9) Incorporated by reference to Exhibit10.16 to our report on Form 10-K for the year ended December 31, 2004.

 

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**Signature**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| Date:  May 6, 2005 | SABRE  HOLDINGS CORPORATION |
|--------------------|-----------------------------|
|               |                        |   |
|               |                        |   |
|               | By:                         | /s/ JEFFERY M. JACKSON |
|               |                        | Jeffery M. Jackson*Executive Vice President, Chief Financial Officer  and Treasurer  (Principal Financial Officer)* |

 
|   |   |                                                                                   |
|--------|--------|----------------------------------------------------------------------------------------|
|   |   |                                                                                   |
|   | By:    | /s/ MARK K. MILLER                                                                     |
|   |   | Mark K. Miller

*Senior Vice President and Controller  (Principal Accounting Officer)* |

 

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