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. Last Updated: 07/27/2016

Sabre Sale Expected to Cut Air Fares




NEW YORK -- In a move that could touch off investor interest in airline stocks, the AMR Corp. said Tuesday that it would spin off its 83 percent stake in the Sabre Holdings Corp., the world's largest travel reservation company.


Analysts praised the deal, noting that AMR, the parent of American Airlines, could better control rising fees that are associated with booking tickets. Computer reservation companies, like Sabre, have continually raised their fees, leaving carriers little room to negotiate.


"This is the right move for AMR," said Samuel Buttrick, an airline analyst with PaineWebber. "We fully expect airlines to become more aggressive and innovative in finding ways to reduce reservation fees. Privately, airline executives have been fuming over these fee increases."


In the divestiture, valued at $6.2 billion, AMR will distribute its 107 million Sabre shares to its shareholders. Each AMR stockholder will receive about 0.7 share of Sabre for each of their shares. Sabre will also pay $675 million in dividends to its shareholders, including AMR.


Investors were enthusiastic about the deal. Shares of AMR increased $4.75, or 7.5 percent, to $68.50. Sabre Holdings rose $2.875, or 5.5 percent, to $54.75.


With American Airlines shedding Sabre, analysts expected the carrier to have more leeway in lowering its cost of selling tickets. Other companies that own stakes in computer reservation companies f notably UAL, the parent of United Airlines, and the Northwest Airlines Corp. f are also expected to sell their holdings, which would create more competition in the industry.


The airlines have been increasingly successful in selling tickets to customers over the Internet and forcing reductions in fees from travel agents. But carriers that owned stakes in computer reservation systems have felt compelled to use the companies.


Analysts were hopeful that the spin-off of Sabre, which was reported Tuesday in The Wall Street Journal, would attract more investors to the airline sector. Many of the stocks have increased about 10 percent since rising fuel prices pushed them to 52-week lows in late summer.


Despite the stocks' recent gains, analysts remain bullish that the momentum has only just begun. The airline sector is projected to trade at about seven times 2000 earnings, compared with 25 times earnings for the Standard & Poor's 500-stock index.


"The whole airline sector is undervalued," said Candace Browning, an airline analyst with Merrill Lynch. "There will be more short-term negatives. There is going to be a slowdown in traffic, due to Y2K. Everybody in America is going to stay home."


Even with AMR's projected gains, two other large airline stocks are expected to outperform it. Delta Air Lines has diversified, buying a 5 percent stake in Priceline.com, which tries to offer Internet users the lowest prices on goods and services.


Continental Airlines is also expected to perform well. The airline, projected to trade at about eight times 2000 earnings, should reap more revenue from its North Atlantic routes, where excess capacity hurt profits this year. Analysts also noted that Continental had made inroads in the New York market, taking market share on some routes from its competitors.