Good morning, and welcome to the Sabre Second Quarter 2019 Earnings Conference Call. Please note that today's call is being recorded and is also being broadcast live over the Internet on the Sabre Corporate website. This broadcast is the property of Sabre. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of the company is strictly prohibited. I will now turn the call over to the Senior Vice President of Investor Relations and Corporate Communications, Mr.
Barry Sievert. Please go ahead, sir.
Thank you, Olivia, and good morning, everyone. Thanks for joining us for our Q2 earnings call. This morning, we issued an earnings press release, which is available on our website at investors. Sabre.com. A slide presentation, which accompanies today's prepared remarks, is also available during this call on the IR webpage.
A replay of today's call will be available on our website later this morning. Throughout today's call, we will be presenting certain non GAAP financial measures, which have been adjusted to exclude certain items. All references during today's call to EBITDA, EBITDA Less Capitalized Software Development, operating income, EPS and net income have been adjusted for these items. The most directly comparable GAAP measures and reconciliations for non GAAP measures are available in the earnings release and other documents posted on our website at investors. Sabre.com.
We would like to advise you that our comments contain forward looking statements. These statements include, among others, disclosures of our guidance, including revenue, EBITDA, EBITDA Less Capitalized Software Development, operating income, net income, EPS, cash flow and CapEx, our medium term outlook our expected segment results the amount and effects of changes in capitalization mix and depreciation and amortization the effects of customer financial conditions and new or renewed agreements, products and implementations our expectations of industry trends and various other forward looking statements regarding our business. These statements involve risks and uncertainties that may cause actual results to differ materially from the statements made on today's conference call. Information concerning the risks and uncertainties that could affect our financial results is contained in our SEC filings, including our Q1 2019 Form 10 Q and our 2018 Form 10 ks. Participating with me on today's call are Shawn Menke, our President and Chief Executive Officer and Doug Barnett, Executive Vice President and Chief Financial Officer Dave Schurk, our Executive Vice President and President of Travel Solutions and Clinton Anderson, Executive Vice President and President of Hospitality Solutions are also with us today and will be available for Q and A after prepared remarks.
Sean will start us off and provide a review of our strategic and commercial performance and business outlook. Doug will offer additional perspective on our financial results and forward outlook, and then we will then open the call to your questions. With that, I'll turn the call over to Sean. Sean?
Great. Thanks, Barry. Good morning, everyone, and thank you for joining us today. Before we get into the details of the call, I want to take a moment and thank my Sabre team members from around the world. Over the past 2 plus years, we have made substantial progress in refocusing, reinvigorating and transforming Sabre.
Their tireless effort across the globe have allowed us to thrive as a global technology leader in retailing, distribution and fulfillment of the $1,700,000,000,000 travel marketplace in which we reside. Our business model, which is underpinned by long term contracts, renewal rates of over well over 90% and revenue streams that are tied to travel volumes, has proven resilient across economic cycles. The Sabre team should be very proud of what they have accomplished, and I am very grateful for their hard work and dedication. With that, I'm pleased to report a solid second quarter performance that was supported by our business model and commercial wins. The Q2 of 2019 marked the 6th consecutive quarter of strong gains in our GDS share.
We grew bookings 8% in our home region of North America. At Airline Solutions, we saw a 15% increase in air vision and air center commercial and operations revenue in the quarter. Our broad set of SaaS Airline Solutions continues to gain momentum following our efforts over the past 2 years and has contributed to our ability to contract approximately 75% of our current Airline Solutions revenue base through 2023. At Hospitality Solutions, we have exceeded sales targets for the 4th quarter in a row and grew revenue by 8% year over year in the quarter. We are accelerating new innovations to differentiate versus our competitors.
This includes the continued rollout of Sabre Red 360 and new lodging content innovations, including a significant expansion of properties available through our GDS. We have recently launched the new Sabre Virtual Payments platform, continued progress in our NDC efforts, brought to market the industry's 1st airline commercial platform and introduced an innovative hospitality intelligent retailing platform that opens new sources of revenue growth for our Hotell Your customers. In the quarter, we showcased our products at our Sabre Technology Exchange Conference in Las Vegas. As a result of the improvements we have made over the past 2 years, our innovations are gaining tractions with customers and we had record attendance this year from around the globe. Our momentum continued to move in a positive direction in the industry.
Taking a closer look at Travel Network, we have over 38% share and have been winning share over the past 6 quarters. We expect continued share gain and solid revenue growth over the coming years, in line with or above growth rates in global travel on a base of $2,800,000,000 in 2018. In our home region of North America, we have already lived through an era of pricing pressure and deregulation. In other places around the world where these trends are now taking place and carriers are trying to drive more direct traffic, we are relatively less exposed due to the fact the majority of our bookings are for longer haul traffic made outside of their home countries. In EMEA, we have grown our air bookings at a 3.5% CAGR over the past 3 years versus a 40 basis point decline in GDS industry bookings in the region.
Our ability to win recent major deals like Flight Centre and Carlson Wagena Travel is anchored by technology. Our technology investments create network effects that scale across hundreds of airlines and hundreds of thousands of travel agents. With the cost of direct versus indirect distribution converging, our differentiated technology is really important. Our technology leadership includes the launch of Sabre Red 360, our next generation agency desktop, our leadership in NDC and next generation retailing, including of NDC APIs with United and the rollout of our next generation storefront with Delta, lodging content expansion, new focus on our Sabre virtual payment solution in partnership with Visa and the 1st GDS to migrate all of our shopping complex to the cloud. In the Q2, we increased our booking commitments with IAPI, Turkey's leading OTA and travel services integrator, and signed a significant renewal with Travel and Transport, a large corporate travel management company.
As of quarter end, we are tracking well with respect to key conversions at Etraveli Group, a large European OTA and with respect to our deepened business relationship with Carlson Wagonlettravel. Finally, on the supplier side, we signed 14 deals in the quarter, including renewals at LOT and Air Europa and 3 new supplier agreements. Finally, as expected, our incentive fee per booking growth moderated to low single digits in the quarter. At Airline Solutions, we feel good about the progress we have made over the past 2 years and believe we have a healthy sales pipeline. We have locked in approximately 75% of our revenue through 2023.
Of total contract value up for renewal over the past 2 years, we had a strong renewal rate of 94%. We expect solid revenue growth in line with or above growth in global travel over the coming years after we anniversary some near term impacts, and we expect this new revenue will come in at high incremental margins. At Sabre Technology Exchange, we officially demoed Sabre Commercial Platform, the most significant upgrade in over 5 years. It enables 50x faster shopping experience, delivers dynamic and intelligent offers to help maximize revenue for carriers, fulfills across all channels and delivers a personalized customer experience. In the quarter, I am pleased to announce that Crew Manager continues to gain traction and we also signed and successfully implemented Crew Manager at Azul.
At Aeroplot, we signed a new deal for shopping cash in our retailing suite and a renewal and upsell of Movement Manager. Ethiopian Airlines signed a deal for Dynamic Availability, a big data solution that is part of the initial rollout of Sabre Commercial Platform. We signed other share of wallet increases at Go Air and Thin Air and key renewals at Copa, Croatia Airlines, Alaska Airlines and Air France. At Hospitality Solutions, we are the clear global leader in central reservation systems. We have over 42,000 properties live on our solutions all around the globe.
We expect continued strong growth in Hospitality Solutions revenue at a 7% to 9% rate over the next several years as we expect to continue to gain scale in our fragmented and underpenetrated market. We completed the industry's 1st and largest enterprise hotel implementation with Wyndham, including their acquisition of La Quinta, which we implemented at the start of the Q2. At Sabre Technology Exchange, we demoed the first for the first time intelligent our intelligent retailing platform, our vision for next generation hospitality retailing that enables attachments of ancillary products and experiences like concert tickets and dinner reservations to the core booking. In the second quarter, we implemented products at 100 incremental properties at new and existing customers. We closed a share of wallet increase at with coho res for Sabre Property Hub, our next generation hotel property management solutions.
Multiple other key wins and renewals were signed in the quarter, including Charisma and Hard Rock International. In terms of technology, we expect to invest over $1,000,000,000 this year in total. We are continuing to build out our global cloud landing zone and now have over 55% of our total compute footprint in the cloud, including our entire Travel Network shopping complex. In the Q2, we completed the final cutover of Travel Network's air shopping out of the Tulsa data center. All shopping requests are now being split across cloud landing zones in the U.
S. And we are now handling peak traffic of over 11,000 travel network shopping requests per second. The majority of our public cloud compute footprint is currently within the Amazon Web Services. We now have cloud landing zones set up with Microsoft Azure, supporting our multi cloud provider strategy and are preparing to deploy multiple airline solutions and hospitality solutions products there, including SabreSonic Web and our SynXis central reservation system. Later this month, we are planning to move the airline solution shopping workload out of our Tulsa data center.
Future steps will lead to the global distribution of web services gateways and seat availability, culminating in the expected launch of shopping in EMEA and or Asia Pacific next year. Before I turn it over to Doug, I want to take a moment and address our agreement to acquire Farelogix. We are continuing to engage with the U. S. Department of Justice under a second request, as well as the U.
K. Competition and Markets Authority to communicate the significant customer benefits that we believe will arise from the deal. Last November, we first announced our intent to acquire Farelogix, a recognized innovator in the travel industry with advanced offer management and NDC order delivery technology used by many of the world's leading airlines. We remain passionate about our original decision to bring our 2 organizations together and the positive impact we can have on the travel ecosystem. We expect Farelogic's complementary products offering will accelerate our delivery of the industry's first end to end airline retailing solution.
We believe together, Sabre and Farelogix can make NDC, which is currently still in early days with minimal bookings, grow into a reality that helps our airline customers become better online retailers through the creation of dynamic offers that meet the personalized demands of today's travelers. As I mentioned in the letter, I recently wrote to the top airline CEOs around the world, we intend to continue to supporting our customers' retailing and distribution strategies regardless of channel and fully support and develop Farelogic's suite of products and services including Direct Connect capabilities. We continue to engage with the regulatory authorities about the benefits of this acquisition and why we believe it is good for our customers, good for travelers and good for competition. Turning back to the quarter. The business is performing well on the strong foundation we have laid.
Our solid second quarter performance, commercial wins, leading innovation and infrastructure progress gives me confidence in raising our full year 2019 earnings guidance. And with that, I'll turn the call over to Doug to get into more of the details of our Q2 results and expectations going forward. Doug?
Thank you, Sean. Under Sabre's business model, our revenue streams are tied to travel volumes, which are resilient across economic cycles and long term contracts, sticky solutions and renewal rates are well over 90%. Let me remind you of the durability of our business model. During the Great Recession, we grew EBITDA every year and revenue grew every year except 2,009 when it was down less than 1%. Looking more closely at our Q2 results, revenue was up 2% year over year, totaling $1,000,000,000 In the Q2, recurring revenue totaled 93%.
Revenue growth was driven by solid performance across each of our businesses. Travel network revenue was up 1%, airline solutions revenue was up 3% and hospitality solutions revenue was up 8%. EBITDA Less Capitalized Software Development, which reflects our total R and D, was down 1% in the quarter. The EBITDA less capitalized software development pressure was largely driven by a modest increase in travel network incentive fee per booking. In the quarter, as expected, incentive fee per booking growth moderated to low single digits versus double digit growth over the past 8 quarters.
We continue to make good progress on our cloud migration. As I will describe in more detail later, our technology transformation is already driving leverage in the model and total technology spend was down slightly in the quarter. As previously discussed, the cost associated with our cloud migration and related technology transformation efforts are expensed as incurred instead of capitalized. So while our total technology spend went down slightly, a shift in our capitalization mix caused technology operating expenses to increase in the quarter with an equal and offsetting decrease in CapEx. We also saw an increase in depreciation and amortization related to previously capitalized technology spend as products are placed into service.
Accordingly, operating income totaled $127,000,000 in the quarter, representing an operating margin of 13%. The year over year decline in operating income reflects the near term impact to our income statement from the change in the technology expense recognition. Excluding the increase in technology operating expenses, operating income declined 4% and operating margin was down 90 basis points in the quarter. As a reminder, the capitalization shift has no impact on free cash flow. EPS totaled $0.24 in the 2nd quarter, down 5% year over year excluding the increase in technology operating expenses.
We believe our financials are reaching an inflection point. We have taken a double hit to our income statement this year related to the capitalization mix shift from the increased technology operating expenses due to a lower capitalization rate as well as increased D and A from previous capitalization. But as we look to 2020 beyond, the base will be reset. We believe we are set up for expanding EBITDA margins as we expect to realize savings from our technology initiatives. Additionally, we expect accelerating operating income and EPS growth as D and A rolls off due to expected lower capitalization.
Expected D and A savings totaled approximately $140,000,000 from 2019 to 2022. Finally, our business has generated strong free cash flow. We generated $76,000,000 of free cash flow in the 2nd quarter, and we continue to expect full year free cash flow generation of approximately $455,000,000 We returned $84,000,000 to shareholders in 2nd quarter via share repurchases and our quarterly dividend. Now, Travel Network. Revenue grew 1% in the quarter, totaling $725,000,000 This was slower than previous quarters, but in line with expectations as we begin to anniversary favorable European carrier pricing and the completion of the Flight Centre migrations.
The 2nd quarter represented our 6th quarter in a row of strong GDS share gains. Our global booking share increased by 120 basis points in the quarter, representing 38.6 percent share. We continue to gain share at large global travel management companies, including our expanded strategic agreement with CWT. GDS industry bookings declined in the quarter due to a relatively more challenging macro environment and Easter timing as well as the insolvency of Jet Airways and channel shift driven by the 3 legacy European carrier families. GDS industry bookings declined 2% in the quarter, but excluding Jet and the 3 legacy European carriers grew 1%.
The maturity and balance of our global customer footprint and new business wins have allowed us to grow faster than the overall GDS industry. Our largest book of business is in North America. We have already lived through the era of pricing pressure and deregulation in our home market, where the cost of direct and indirect distribution have converged. Our air bookings increased 1.4% in the quarter, which is in line with the 2nd quarter expectations we communicated on our previous conference call. Excluding Jet Airways and the 3 legacy European carriers, our air bookings increased 2.6% in the quarter.
Total bookings in the quarter grew 1% driven by air bookings growth and a modest decline in lodging, ground and sea bookings. Hotel bookings grew high single digits in the quarter, reflecting our focus on lodging content expansion. However, consistent with last quarter, our lower margin rail bookings declined in the quarter. We will anniversary the rail impact and expect healthy growth in lodging ground and sea bookings beginning in Q4 2019. Looking at the regional level, the health of our home market is strong.
North America is the only region that posted GDS industry growth in the Q2 and it was solid at 4%. We have over 80% share with large travel management companies in this region representing airlines' most valued customers. Our North American bookings grew 8% in the quarter, twice as fast as the GDS Industry. GDS Industry bookings declined across all other regions. In Latin America, our bookings declined due to macroeconomic weakness and volatility.
On a volume basis, Latin America is the smallest of the four regions we report and makes up less than 10% of our total worldwide bookings. As mentioned, GDS Industry bookings in Asia Pacific in the 2nd quarter were impacted by the insolvency of Jet Airways and our bookings declined accordingly. GDS bookings in India saw a double digit decline in the 2nd quarter versus double digit growth in the prior year quarter. As a reminder, we are relatively less exposed to the Indian market. In EMEA, about half of our bookings decline was driven by the impact of low margin rail bookings and about half was driven by industry softness due to the channel shift by the 3 legacy European carrier groups.
Our exposure to the impact of the 3 legacy European carrier groups is less than the other GDSs due to the fact that over 50% of our bookings from those carriers are made outside of Europe and are typically for longer haul higher yielding traffic. Jet Airways and the 3 legacy European carriers had a combined 3 point negative impact to total GDS industry growth in the quarter versus a 1 point negative impact on Sabre bookings growth. Average booking fee declined 60 basis points in the quarter, in line with our expectations communicated last quarter. This was driven by 150 basis points of negative impact from regional air mix, primarily due to faster growth in North American bookings versus a decline in international bookings. Parsales set by 100 basis point positive mix impact from the decline in low profitability rail bookings and strong growth in hotel bookings.
Remember that we have anniversaried the favorable European carrier pricing and the beneficial mix impact from the completion of the Flight Centre migrations. Incentive fee per booking normalized to the low single digit growth in the quarter as expected. We expect normal inflationary incentive fee per booking growth to remain in the low to mid single digits over the medium term. We expect margins to stabilize and in 2021, we expect margins to begin to expand. As a reminder, the high level of incentive inflation over the past 2 years was driven by large strategic deals, including renewals at 5 out of 6 of our top agencies through 2023 beyond and recent major wins at Flight Centre and CWT.
Turning back to the quarter, operating income totaled $160,000,000 representing an operating margin of 22.1%. The majority of the margin decline was driven by the impact of the shift in capitalization mix. Excluding the increase in technology operating expenses driven by the capitalization shift, operating income declined 6% and operating margin declined 180 basis points. The margin pressure was driven by incentive fee growth that outpaced booking fee growth. At Airline Solutions, after successfully navigating a heavy renewal cycle over the past 2 years, we now have locked in approximately 75% of our revenue through 2023 with a high renewal rate of 94% based on total contract value.
With our rollout of the industry's first airline commercial platform, we feel good about our competitive position, especially as we believe a large competitor is entering a heavy renewal cycle with a significant number of passengers boarded up for renewal over the next 3 years. Airline Solutions revenue totaled $212,000,000 in the second quarter, representing growth of 3%. As previously discussed, there are factors outside of our control that impacted our performance. These include the insolvency of Jet Airways and significant volume reductions at a certain Asian carrier due to an unfortunate 737 MAX incident. Additionally, the quarter was impacted by the demigrations of Philippine Airlines and Pakistan International Airlines.
Excluding these certain carriers, Airline Solutions revenue grew 12% in the quarter. SabreSonic revenue declined 3% and passengers boarded declined 8% in the quarter due to the certain carrier impacts I just mentioned. Excluding the certain carriers, passengers bordered increased 4% in the quarter. Air vision and air center revenue increased 15% in the quarter. This was largely driven by strength in our operations portfolio and upfront revenue recognition from local installs.
It reflects the success of recent innovation and progress we have made in improving our stability and product health. Our Airline Solutions business has high incremental margins. Airline Solutions operating income was down slightly versus the prior year, driven by the shift in capitalization mix. Excluding the increase in technology operating expenses, operating income growth was 61% and operating margin increased 6.60 basis points. The progress we have made improving our stability and product health and other technology initiatives provides operating leverage in the model.
We expect Airline Solutions' EBITDA margin to expand nicely over the medium term. Hospitality Solutions is the global leader in hotel central reservation systems. We have over 42,000 properties live on our solutions. This includes the industry's 1st and largest enterprise hotel implementation with Wyndham Hotels and Resorts, including their 2018 acquisition of La Quinta Inns and Suites, which we fully implemented at the start of the Q2 of this year. Hospitality Solutions revenue grew 8% in the quarter, supported by 8% growth in SynXis Software and Services revenue and a similar increase in digital marketing services revenue.
Hospitality Solutions central reservation system transactions increased 28% in the quarter, which includes the benefit of migrating La Quinta at the beginning of the quarter, as well as certain other Wyndham Hotel brands in the Q2 of last year. The shift in capitalization mix resulted in a modest operating loss for Hospitality Solutions in the quarter. Excluding the increase in technology operating expenses, we had positive operating income, up 185% versus the prior year and 4 70 basis points of operating margin expansion. In the Q2, total technology spend was $256,000,000 As a reminder, this includes the cost that we incur, whether capitalized or expense for hosting, 3rd party software and R and D. Total technology spend decreased 1% in the quarter, reflecting progress we are achieving on our cloud migration and other technology initiatives.
As Sean mentioned, we now have over 55% of our total compute footprint in the cloud. The scale and leverage we are already gaining enables us to continue to strategically invest in new products, innovations and infrastructure. We continue to expect full year 2019 technology spend growth of 3% to 4%. As discussed on our past 2 earnings call today, the costs reporting our cloud migration and other technology transformation efforts are not capitalized. This resulted in a 15 point decline in capitalization mix from 24% in the Q2 last year to 9% in the Q2 of this year.
Although neutral to free cash flow, this shift significantly impacts operating income and EBITDA. Additionally, the increase in amortization of previous capitalization resulted in a $4,000,000 headwind to 2nd quarter operating income. This is of course neutral to both EBITDA and free cash flow. As a result of the capitalization shift and increased amortization, the amount of total technology expense running through our income statement in the quarter increased by $38,000,000 or 14%. Remember, this refers to our total technology spend, less capitalized sulfur development, plus amortization of previous capitalization.
As I mentioned, our business generates strong free cash flow. 2nd quarter free cash flow totaled $76,000,000 down modestly due to working capital timing. We continue to expect full year free cash flow of approximately $455,000,000 We ended the quarter with approximately $3,000,000,000 in net debt and a leverage ratio of 2.9 times. We expect our leverage ratio to continue to naturally increase in the short term due to the change in capitalization mix. As a reminder, our target leverage ratio is 2.5 times to 3.5 times with a preference towards the lower end of that range.
Our uses of excess free cash flow are investments in the business, both internal and external dividends and share repurchases to offset dilution at a minimum. We repurchased 2,200,000 shares for approximately $46,000,000 and including our dividend returned $84,000,000 to shareholders in the second quarter. Year to date, we have returned $155,000,000 to shareholders via the repurchase of 3,700,000 shares and our regular quarterly dividends. We believe the business is performing well and better than expectations. Therefore, we are raising our full year 2019 earnings guidance.
We continue to expect total Sabre revenue growth of 3% to 5% to $3,965,000,000 to $4,045,000,000 At Travel Network, we now expect full year revenue growth of 3.5% to 5.5%. We now expect full year bookings growth of 2% to 4%, reflecting the sluggish GDS market. However, we expect continued share gain over the back half of the year to drive bookings growth that outpaces the industry. We have new agency conversions and share of wallet increases in the pipeline that have already been won and are currently being implemented. Accordingly, we expect bookings growth to accelerate in Q3 and Q4.
We are raising our expectations for full year average booking fee growth to approximately 1.5%. We previously expected average booking fee to be roughly flat across the back half of the year, but we now expect about a 1% increase. By quarter, we expect booking fee growth of approximately 150 basis points in Q3 and roughly flat in Q4. At Airline Solutions, we are raising our guidance and now expect full year revenue to be roughly flat year over year. On a quarterly basis, we expect revenue to be down in Q3 and roughly flat in Q4 due to deal timing.
At Hospitality Solutions, we continue to expect strong revenue growth of 7% to 9%. We continue to expect EBITDA of $945,000,000 to $985,000,000 and EBITDA less capitalized software development of $850,000,000 to $890,000,000 We are raising guidance for operating income and now expect full year operating income of $495,000,000 to $535,000,000 We now expect full year depreciation and amortization of 450,000,000 dollars lower than our previous expectations. Moving down to P and L. We have raised our expectations for net income and EPS and are now guiding to net income of $250,000,000 to $290,000,000 and EPS of $0.91 to $1.05 We continue to expect free cash flow generation of approximately $455,000,000 dollars or year over year growth of 3%. Remember, this represents growth of 11%, excluding a $29,000,000 insurance settlement payment received last year.
Our CapEx expectations remain unchanged at $130,000,000 to 150,000,000 Remember, our business has typical working capital seasonality that benefits the 4th quarter compared to the 1st 3 quarters of the year. In Q3, we expect free cash flow to be consistent with Q1 and Q2 average run rates with a significant quarter over quarter step up in Q4. In closing, we believe our business is solid. As we look at the rest of 2019 beyond. I have confidence in our outlook and remain confident in the underlying performance of the business.
Now back to you, Sean.
Thanks, Doug, and we'll let you take a breath and get a drink of water there. As you can see, we're pleased with how the year is progressing and would like once again thank the many colleagues around the world for their hard work and dedication. It is our strong belief that you should have growing confidence from what you're seeing in our actions and more importantly our results. Our travel network share gain demonstrates the importance of our investments in products and full cloud deployment of our shopping complex and incentive fee growth significantly decelerated in the quarter. With 15% growth in air vision and air center, commercial and operational revenue, we are starting to see improved portfolio health show up in the results.
We have migrated over 55% of our total compute footprint to the cloud and the associated savings allowed us to reinvest in further transformation efforts while posting reductions in total technology spend in the quarter. In summary, we are progressing well and have confidence in achieving our full year 2019 goals. I want to once again thank you for joining our call today and for your continued interest in Sabre. And with that, I will ask the operator to open up the call for your questions.
Thank And our first question coming from the line of John King from Bank of America. Your line is open.
Yes, thanks for taking the questions. Hi, guys. Just on the delays maybe to the process with Farelogix. I'm just wondering how you're dealing with that from an R and D perspective, whether that's going to cause you to reallocate any investments there. Perhaps Sean you can give us a view on that.
And then nice to see the improvements in the Airline Solutions business. How big relative to perhaps, say, Panasonic, how big is AirVision and AirCentre now? And maybe what's the outlook that you see in the pipeline for those modules? Thank you.
Yes. Thanks, John. Thanks for joining. On the Farelogix piece, it's a combination of things. And I think the important thing is you look at the industry and what's happening and our focus on Farelogix and their capabilities.
And I mentioned in my prepared remarks, we're still early on in this. And it relates to anything that we're doing internally and shifting of resources, it's not happening. So we continue to go down that path and work. To me, there's such positives associated with this acquisition relative to the transformation that's happening in the industry. And as we continue to move forward, talking with airlines as most, talking with agencies around the world, there's this desire to continue to move forward.
But we've also learned, and I've often talked about this, there's just a lot of work that needs to take place. And I couldn't think of a better company to be leading the charge than Sabre and what we're doing there. As it relates to the AirVision, AirCenter piece of the equation, it's smaller piece. I mean, SabreSonic is the bigger piece on what's taking place. If you go back to some of the health issues that we're having with the products, and to be pretty candid with you is really on the air center side of the equation.
And what the team has done specifically on crew, crew management, crew qualification within that product or that portfolio, is just amazing. And what you're finding is continued growth. And Dave, I don't know if you want to add any comments on either of those.
No, I was just going to I guess what I would point back to is thank you for the comments on the recognition of the improvement in the Airline Solutions business. I think one of the things we focused on was, as Sean said, focused on the health. If the health is there, then you'll start to see customers upgrade. Once they start to upgrade, as we've talked about, they get more current on versions and they can take a cross sell and up sell, of additional capability. And the growth in AirVision and AirCentre is a good reflection of the health of the portfolio and continued progression over the multi year plan that we put in place, including the October launch of the commercial platform and its competitiveness in the market.
So we feel pretty good about how those pieces are progressing right now.
John, one thing I would add, and this goes back to not only what Dave and team have done, when he was running airline solutions, But I have Clinton sitting across the table from me on the hospitality side. And the focus in bringing technology talent in, making sure that the products are healthy, what we're doing on the cloud side of the equation. I'll be honest with you, I'm blown away with what the team has been able to do at 55% of our total compute in the cloud where 2 years ago we weren't there. And what we talked about is how do we essentially take those savings and reinvest in the business. And what's nice to see and I really saw this at the Sabre Technology Exchange in Las Vegas where we had I think it was close to 1600 customers from around the world.
They were really asking us about our technology sort of evolution and what's taking place. And it's really great when you had your customers not only thinking about the products that we have, but how do they think about their own infrastructure and transformation that they're going through. So just many positive things.
Great. Thank you, guys.
Our next question coming from the line of Mark Moerdler with Bernstein Research. Your line is open.
Thanks and I also agree congrats on the improvements we're seeing. What I'd like to look at is the question of the operating margin. Operating margin has been hit by the move of technology costs from capitalized to expense as well as the flip side, the amortization of the previously capitalized tech investment. Can you give us some color on how to think about once you're through this process, what happens to margins? Does the increase in OpEx from expense tech get fully offset by the shrinkage in the amortized tech investments going away?
Yes. So Mark, you're absolutely correct. So what's happening right now, we're getting hit twice in a sense by this capitalization shift. Last year, as I mentioned, we capitalized at a capitalization rate closer to 24%, 25%. Now we're down to 9%.
So those expenses now are running through not only EBITDA, but the operating income and net income. And then you're correct, the high amortization and capitalization we previously had is now starting to hit us. As we move forward, we expect to have the capitalization rate probably moderate in this 9% to 10% range. So we'll no longer be negatively impacted by the rate change and we'll have a significant benefit from the lower amortization as you move out particularly into 2021 2022. That's why I mentioned in my comments that there is probably going to be $140,000,000 benefit between 2019 2022 from lower amortization, which absolutely drives rapid margin expansion for operating income, net income and EPS growth.
When you're just to clarify, as you get through this, once you get to whatever the normalized moment in time if there ever is one, does it basically go back to what you had before and it's just simply a shift in the way in which those costs are being recognized?
I think it will go back a little bit higher. And the only reason why I say that is, first, you're absolutely right that the actual capitalization mix and the amortization will normalize. But the fact that we expect our R and D cost to grow to lower rate than the top line will actually have more margin expansion than we would have had in the past.
Excellent. I really appreciate it. Thank you.
Thanks, Mark.
Our next question coming from the line of Matthew Yrum with Mizuho Securities. Your line is open.
Thanks very much. Given that you appear to have a good opportunity to consolidate the hospitality solutions market over the next few years, what is the opportunity to accelerate revenue beyond that 7% to 9% growth rate you mentioned?
Yes, Matt, thanks for the question. This is Clinton.
We see
a lot of opportunity in 2 primary areas. The area we're most excited about is the concept of intelligent retailing. And this is really where we are introducing a new product marketplace that allows for hoteliers to sell products and services beyond the room. One of the challenges we've had historically in the industry is that we thought about inventory as being a hotel room, at a certain rate for a length of stay. And we know that travelers are looking for a much broader set of experiences.
So the products and services you can add to that hotel room are the things that hotels can market and sell to their customers. And so this drive not only top line revenue in the form of higher conversion, higher yield, higher share of wallet, but many of these products and services are very high margin that flow to the bottom line. It also creates a very attractive guest experience, right. So it's benefiting all parties involved. So we see upside there in terms of growth acceleration.
The second thing we see is as we finish the trust migration, we now move on to a single platform. That single platform is a relatively modern tech stack and that tech stack has a set of common services for both the central reservation system as well as for our PMS system. So the single brain there gives us the ability to have single platform type economics as we grow in the future and delivers many of the benefits you've seen in other platforms, in other tech spaces that we think will allow us to compete much more effectively for hotels we're looking to have a single source of technology.
Okay. That's interesting. Thanks. And I mean, can you specifically quantify the revenue and EBITDA impacts from the, I guess, the sort of the 2 demigrations in Airline Solutions you mentioned this quarter? And will this impact increase next quarter?
Obviously, next year is all we're going to normalize those. Hold on, let me just get a number. Yes. As we mentioned, we would have had 12 you can do some math. We would have had 12% revenue growth excluding those demigrations, which obviously would have been come in at very high margins.
Okay. Thanks very much.
Our next question coming from the line of Jim Snyder with Goldman Sachs. Your line is open.
Let's go to the next question.
Next question coming from the line of Ashish Sabadra with Deutsche Bank. Your line is open.
Thanks for taking my question. Sean, any color on discussion with airlines about potential new supersonic wins, competitive wins?
Yes. Ashish, good to hear from you. I'll go back to where we were with when Dave was talking about the things that are taking place with technology. And we're not going to get into specific campaigns that we're involved in right now, but the suite of products that Dave and team have especially revitalized, they're out in the marketplace. We are having what I would consider to be encouraging conversations in many regions of the world.
And as you know, this is a long process that takes place. The other thing that continues to really begin to weigh into the conversations, and I mentioned this, I think, last year and began to plant the seed is people are really looking at going back to Farelogix, what's happening on the distribution side. There's definitely alignment with what's taking place there. But I'll let Dave add a couple of comments since he and his team are in the midst of many of these campaigns.
Yes. I would just echo what we've said in some of the comments that were there earlier, which is we've been focused on our installed base. Obviously, the best thing you can do is have your installed base healthy and satisfied and growing, which you're seeing the beginning progress of that starting to show up now as we've talked about. And then the fact that we've shipped from defense to offense. Competitively, there's a significant renewal cycle ahead of us over the next 3 years from our competition and the health of the portfolio.
I'm very excited about some of the comments and some of the customer feedback that we're seeing as they begin their upgrade journey from our installed base and that just reflects itself as Sean talked about, in conversations that are starting to pop up in different regions around the world. So pipeline positive, activity positive and it's one of those things where these are, as John said, these are I'm learning a lot over the last 2 years of exactly how challenging some of these transformations inside various airlines around the world are, but the team is well engaged and I think we're at a point now where we're very well equipped with differentiation. The technology transformation cannot be underestimated. We are the 1st and number 1 in cloud based computing in the travel industry. We're the 1st ones to move to the cloud.
We have 55% of our compute power there, As Sean mentioned and it should be underscored significantly, our entire shopping complex and the network globally is in the cloud. That makes us number 1 in shopping in the cloud as well. So, a
lot of the criticisms maybe of
the past around our technology footprint. We have made enormous strides over the last 2 years there and I'm very, very proud of the work the team has done and continues to do. And that puts us in a very positive position for these conversations. And what we see over the next couple of years is that transition and those open opportunities for renewal situations are out in the market.
Yes. Shishan, another way of looking at it, and I think it does go back to why you should focus on what's happening within the AirVision, AirCentre portfolio is that's an indication of what the team has done as it relates to the health of the product and one, the advancement of the product. If you look at it relative to why we keep talking about the cloud, not only because of what it does for us on a stability basis or cost basis, but it gives us global distribution and what I or global disbursement in that. And one of the most important things for customers is that there's not latency there because the latency can have impacts in what's taking place. And so you're beginning to see what I would say are the green shoots of really good things that are happening and the lead indicators on that is what's happening with AirCentre and AirVision.
As you would assume, there's a lot of other work that has been going on behind the scenes. A big part of it. And I think it goes back to the renewal that we announced with JetBlue and some of the things that we'll be rolling out to them. But when you look at some of the components that we talked about when I talked about Ethiopian Airlines, I talked about Aeroflot and some of the products that they're taking. These are some of the things that we have invested in on the digital commercial platform that comes together as the entire suite of products that we can take to a carrier and essentially present.
And I think you can hear just in our voice and how we're feeling about the business that we feel like we're in a much better place than where we were 2 years ago.
This is very helpful. Thanks a lot. And maybe just a quick question. Any initial thoughts on the recently announced leadership change in travel at Travelport? And then with them going private again, very early days, but how could that the combination of that could influence the competitive environment going forward?
Yes, not much. I mean, we know Greg, he's a nice guy. He's been around he's around Sabre for a number of years. I think we like a number of groups are waiting to see what the direction of new ownership and new leadership is going to be. But as I continue to talk to the team and we look at what we're doing, we're running our own race.
We feel very good about what we're doing. The customers are responding to what we're doing in the marketplace. We've seen it as it relates to the share growth and the pivot in what's happening relative to where incentive rates were, where we're getting new deals. And this is really tech focused. And we're going to continue to focus on the tech.
And we believe that's where the opportunity is. And as I mentioned, customers are responding positively.
Thanks, John. Thank you.
Thanks, Ashish.
Our next question coming from the line of Neil Speer with Redburn. Your line is open.
Thank you and congratulations on a solid quarter. Just a quick question. Sean, early on in your prepared remarks, you referenced the fact that you have experience in North America of having lived through the era of pricing pressure and deregulation. Industry? And I'm thinking here with regards to the current European Commission's investigation into the nature of the contracts you have with the carriers.
And if you lose the most favored nation clause within those contracts, would you anticipate that, that then is a catalyst for an era of pricing pressure within the European Genius market?
Yes, Neil, pretty broad question there, but let me try to walk through it. So when I talk about deregulation, was deregulation really the GDS industry that happened in the mid-2000s? I think it was about 2,005, 2,006. And really what transpired in that is that the GDSs went and they negotiated new agreements with airlines. And then in the past or what ended up happening from there is the GDSs negotiated with the travel agencies that had to do an opt in agreement.
So there's essentially a step down in fees that took place relative to the fees from airlines and then the commissions to or the incentives paid to the agency community. And that's what we talk about that if you look at the U. S. Marketplace, it has gone through that change. And I'm going to share a couple of numbers with you because I think it's pretty important relative to how we see the North American marketplace, why we feel good about our position here.
But if you look at it and this ties into because we get a lot of questions too, Neil, about just what's happening on the capacity growth side of the equation. So if you look at the North American marketplace, North American capacity, and this is going to be full service carriers as well as low cost carriers, so in total. In 2018, capacity growth was right around 5%, and you had GDS growth that was at 3.9%. And we always look at that gap. What is that gap?
Because you're going to have, specifically with growth of low cost carriers, they're growing at a higher rate. They have a higher propensity of direct booking. So that gap was about 1.1% when you look at 2018. What's interesting when we look at the first half of twenty nineteen is that capacity has slowed down, as we know, in many places around the world at 3.3%. But GDS bookings grew at 2.8%.
Point. And what that tells me is really the strong GDS marketplace in North America. And I think it goes back to some of the changes that have taken place over time. When I look at the European marketplace, part of what we're seeing, and I think this goes into what IAG, Air France KLM as well as LAPONS have been focused on is, 1, the competitive environment there, but the cost of distribution. And as we've had conversations with all three of those groups, that's a big part of what they're focused on.
And in doing that, I think this is where as you see the model evolving and then it goes back to why when we look at just the old way that we have sold and helped sell or create offers, but it's the new way as well. And I think that's the pressure that you're seeing definitely in the European marketplace. And again, we've walked you through why we're being less impacted. But I continue to see that marketplace evolving over the next several years.
Okay. Thanks very much.
Our next question coming from the line of Jeff Kelly with Oppenheimer. Your line is open.
Great. Thanks for taking my question. Just on Travel Networks margins, on your presentation, I think it said excluding the accelerating technology expense recognition, they would have been down only like 180 basis points. I mean how much of that is related to depreciation versus incentives moderating? And then on your comments on travel network margins expanding in 2021, I mean, what type of macro environment does that assume?
I mean, can they still expand? We are later in the cycle. How do margins work in a, say, potential recession or any macro week?
Sure. Yes. So with regards to the comments, what I was trying to do with regards to the what would happen if we had the same capitalization mix. That's what I was trying to do when I gave you that. The reason why the margins were down even excluding the capitalization mix in Q2 would have been the fact that as I mentioned in my opening remarks, the average booking fee dropped 60 basis points.
And there was even though it was really nice to see the growth in the incentive fee come way down, that still would impact your margins. That's what drove the margin depression even excluding the CapEx mix for TN in the second quarter. As we move forward
and we move out into
the out years, it will be nice to see we'll eventually get to the point to where the growth in average booking fee begins to almost normalize and equal what's going to happen with incentive fee and then you'll get leverage coming out of your tech spend because as tech spend grows only 1% and the top line is growing, call it, 4% to 5% plus, you'll get margin expansion. And that'll be really pretty much in any economic cycle.
Okay. Thanks for that. And then just on the comments earlier on contracts up from a legacy competitor. I mean, can you just discuss your strategy? I know you can probably give a little you probably aren't going to give us too much, but just competing against a competitor that's been entrenched with those carriers for quite some time?
And then another question I have, just Sean, Expedia and Lattanza did announce a Direct Connect NDC contract. So can you just give us your views on that announcement?
Yes. Let me take the first part of your question there. You're right, we're not going to give you specific color, But what I would just go back to is what we're focused on. And as Sean said, we're playing to our strength and our game, which is strengthening the portfolio. Leading indicator of that, as he said, is the retailing distribution space is continuing to grow, change and morph and air vision and air center are very significant part of how we differentiate that.
And so when you see the growth strength of carriers picking those pieces up, it just speaks to the interest level in moving and evolving the way a passenger service system is looked at and the way in which customers are looking at the market and how data and analytics play a significant part in kind of how they think about that retailing journey going forward. And we're going to continue to focus in that area. We're going to continue to differentiate our shopping. We're going to continue to differentiate our pricing and the optimization of how we're injecting machine learning into that capability set. So those are just things that we're going to continue to showcase and continue to try to drive forward.
And beyond that, we'll try to continue to keep the customer base as happy as possible because nothing like a good reference base to support the situation that we're in.
Thanks, Dave. And Jed, on your second question as it relates to Lufthansa and Expedia, listen, I think this is part of what we're seeing in the European marketplace is that, and we've seen this over several years, different airlines, thinking about their distribution strategy and how do they essentially go to the marketplace. And with that, I think we're going to continue to see it. We have United negotiating with Expedia right now. I think a big part of that negotiation has to do with and I think United has been vocal about this on how their products are being sold through Expedia.
It really does get into their basic economy. But it's one that I think you're going to continue to see airlines try to press ways going back to how are they lowering their distribution costs that they're selling. And if you look at the tickets that are sold through Expedia, in a lot of cases, OTAs to be low yielding tickets. So they're trying to find lower cost of distribution to be able to do that. So I think that's part of it.
The other thing that I often caution airlines with when I speak with them is the more complicated you want to make your product offering and it doesn't matter which through which distribution outlet, you have to be very careful that the normalization of that is taking place. And again, it sort of goes back to what we're focused on is that, listen, if you want to have a strategy that's going to the indirect channel, direct channel or even direct connect, We have to make sure that we have technology that supports it. And in doing that, it's why we're when we look at our broad portfolio, it's just not about distribution, but it does drive back into what the airline solutions team is doing on the PSS and how do you think about that offer creation and then how do you think about the forms of distribution and how do you fulfill that? And that's what I continue to try to educate my team on The Street on it. You got to look at this entire picture just not pieces of the picture and what's taking place and that's the strategy that we're executing too.
Thank you.
Our next question coming from the line of Jim Snyder with Goldman Sachs. Your line is open.
Good morning. Thanks for taking my question. Apologies for the difficulty before. I just want to follow-up on the earlier question to start off. In terms of some of the types of clients that might be most vulnerable to competitive takeaway by Sabre, would that be should we think about that as being some of the legacy Navitaire contract holders as being maybe most the biggest potential opportunity?
If you just kind of think forward, when might you expect to see some announcements on some of these Airline Solutions wins materialize? Is that something we can expect in the back half of this year or more a 2020 event? Thank you.
Yes. Thanks, Jim, and thanks for making your way back. So we don't comment, as you know, on where deals will land. If you find it, and I think it is a combination of opportunities that are out there, There are some that and I think we find this in any business that there are carriers that have been on what I would consider to be the larger platform for a period of time that are looking for different solutions. You spoke about the Navitaire platform and there are carriers around the world that have grown to a size.
And if you look at, in some cases, the investment structures and who their investors are, and you have essentially looking for the capability, of broader network that gets into interlining and co chairs, it opens up a different opportunity there. And what I mean by that is, when you look at the what I would consider to be the full capabilities of SabreSonic and even our competitors PSS on the higher end, it has capabilities to fulfill that. Navitaire, I don't believe has all those capabilities. So you have customers that are looking at change. Well, if you're going to make a change off of Navitaire, it's really a transition.
I don't care if it's a transition to CyberSonic, it'd be a transition to a different portfolio. So when we look at it, there's sort of a combination of different opportunities that we see out there.
That's helpful. Thanks. And then just a clarification, you're raising the Airline Solutions guidance on the air vision and air center strength you saw. Just wanted to understand if you think that level of growth is sustainable over the next 3 quarters as well or if there's any kind of one time impact in those numbers right now?
Look, there was some obviously some benefit this quarter to local installs with the new accounting treatment that benefited this quarter. That's why I gave the guidance of what we thought revenue would be in Airline Solutions for the next two quarters. So I really focus on those 2 quarters. I didn't go out all the way, obviously, Q1 of 2020.
Understand. Thank you very much.
With that, I would like to turn the call back over to Mr. Minkie for closing remarks.
Great. Once again, I want to thank everybody for joining us this morning. We continue to appreciate the interest and support and look forward to continuing to share the progress that we have going on at Sabre. Hope everybody has a great day. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Good day.