Travel management company officials often point out that their share of the typical travel and entertainment budget is but a few percentage points. They say TMCs help companies save more money on such bigger ticket items as air travel and lodging than they themselves cost, and question why their expense line should be meticulously scrutinized.
"Because we can," could be one perfectly legitimate answer from a procurement department.
There are multiple philosophies on the matter, but most agree that procurement officials should understand what goes into TMC pricing even if they ultimately decline to break it out in agreements. Awareness can help buyers foresee such shifts in pricing as those currently underway in the United States, in which TMCs are raising client fees to cover what are effectively increases in TMC technology expenses. Moreover, the financial and operating structures of TMCs and their client agreements can impact usage of the client's preferred-supplier deals with airlines, hotels and other suppliers.
TMCs and clients also need to define and price the increasingly murky duties of account managers and/or TMC "consultants," as well as such services as enterprise resource planning integration, policy management help and strategy development.
Historically, vendors paid more to TMCs. As of 1994, travel agency commissions represented just over 9 percent of airline passenger revenue, up from 5 percent in 1979, according to the National Commission to Ensure Consumer Information and Choice in the Airline Industry. Agencies had begun passing to clients "rebates," and airlines decided to take action. Starting 12 years ago, a nearly annual succession of cuts brought base commissions to zero by 2002.
REVENUE IN TRANSFORMATION | 1999 | 2001 | | Portion of Amex revenue*
derived from clients | 19% | 70% | |
*U.S. Business Travel Only Source: American Express investor presentation Airline commission reductions forced TMCs to charge clients for services. American Express was not alone. While substantially all its revenue previously came from vendors, Navigant International said 68 percent in 2005 was paid by clients. |
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As a result, agencies turned to customers for revenues. According to the American Society of Travel Agents, less than 3 percent of agencies charged fees to clients before 1995. By 2002, the figure was more than 95 percent. Specifically for corporate TMCs, a few pricing variations emerged.
As described in Securities and Exchange Commission filings by Navigant International, (before it was acquired this year by Carlson Wagonlit Travel), two basic structures exist: management fees and service fees. With the former, Navigant passed to clients "a significant portion" of supplier-paid revenues. The TMC added commissions received and deducted direct costs, overhead and profit. Any positive balance went to the customer, and the customer paid any negative balance to Navigant. In service-fee arrangements, Navigant "typically" kept all revenues. In scenarios where clients negotiated net agreements with vendors, commissions and revenues were eliminated.
Not all TMCs view compensation structures in the same way. Some, for example, do pass back revenues on service fee arrangements. Some build in overhead and profit while others measure overhead, profit and expenses. Management fees may be allocated several ways, including as a percentage of travel sales, a flat payment or a transaction fee.
Above all, buyers and TMCs should clearly define which, if any, supplier-paid revenues are passed to the customer, what are the key elements of the fee structure and what is a transaction.
"The standard for a transaction seems to be, more and more, anything that creates an invoice, which would be a passenger name record that could comprise air, hotel or car, all of the above or only one of them," said Management Alternatives president Carol Ann Salcito.
Noting that "the definition must include whether or not refunds, voids, rail, 'hotel only' and reissues are counted as transactions," Consulting Strategies principal Mark Walton described two possible definitions as the "issuance of a ticket" or "a trip, regardless of the number of tickets required."
TYPICAL TMC REVENUE BREAKOUT Base airline
commissions | Negligible in U.S. | | Base hotel
commissions | Negligible | | | Airline overrides | 1-2%
(assumes 50-60% net net deals) | | | Hotel overrides | Negligible | | | Car overrides | Negligible | | | GDS income | Roughly $0.50 to $1 per segment for large TMCs (was $1-$2 before 2006 changes) | |
Source: Consulting Strategies, ProMedia.travel reports In addition to miscellaneous fees, such as those for charging transaction pricing to individual traveler cards, and smaller revenue streams like those generated by technology distribution deals, per-transaction profit is typically $5 to $10. |
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What Navigant called service-fee contracts can be the simplest in that they lack revenue pass-through to the client. If supplier revenues fall, the TMC may increase its fees. However, if clients already are set up to receive the pass-through, as in many of Navigant's management contracts, that income to the client simply falls.
Such pass-through or "open book" setups may or may not apply to all revenue types. These schemes almost always pass through what's left of "base" airline commissions. But "override" commissions and GDS "incentive" pass-throughs are less common.
This year, global distribution system technology firms effectively reduced by roughly $2 per ticket the incentives they pay TMCs. Some TMCs announced an equivalent increase in transaction prices, implying they typically were not passing such revenues through to clients.
"A lot of customers have asked, but most TMCs have not provided those revenues," said Earl Foster of Ask Mr. Foster Consulting. "If the TMCs insist on having a charge back to the clients, then I think the clients will say, 'Fine, now I want to see GDS revenues.' It's finally on the table."
The question of GDS revenues has been brewing for some time. Speaking to the NCECIC in 2002, consultant John Caldwell said client uncertainty about that income "can produce the same type of skepticism as exists with carrier overrides paid to larger agencies."
Organizations can and do improve visibility of GDS income by signing their own GDS contracts--or even taking in house agency contracts and operations--but such moves have both cons and pros, tend to counter outsourcing theories and never represent core functions.
GDS incentive payments represent the latest revenue stream to generate suspicion among clients, but they are not the largest. For several years, corporate buyers have watched airline override commissions. In lodging, the ongoing 10 percent base commission and fast-rising room rates have made hotel bookings the most lucrative for TMCs. Travel Analytics, recently bought by TRX, in 2002 estimated that the largest TMCs earned overrides of 1 to 2 percent of annual air volume.
"Increasing the agency's potential for overrides … sets up a strong potential conflict of interest," wrote Travel Analytics principal Scott Gillespie in 2002. "Who is the agency really serving--the airline or its corporate customers? It seems clear that the travel agency still has a vested interest in steering your travelers to its preferred airlines, especially if your company can give significant volume to these airlines."
Meanwhile, some have accused TMCs of selling reservations system display positioning to the hotels and "preferencing" their own hotel programs without full consideration of clients' preferred programs.
TMC PRICING MENU | TRADITIONAL (AGENT) SERVICES | | Blended
transactions | For all services except such non-recurring items as after hour calls, visa/passport, etc. | | Non-Blended
transactions | Base transaction not including each additional service element | | | Changes | Possibly seperate charges for exchanges, refunds, and/or voids | | | Other | After-hours calls, international rates, VIP bookings | | | ONLINE SERVICES | | | Online blended | One price combined regardless of touch points | | | Online touchless | Can save significant cost for TMC | | Online assisted
(touched)* | Charges for each help call in addition to a flat online fee | | Online assisted (changes)* | | | ADDITIONAL SERVICES | | | • | Account management* | | • | Data reporting* | | • | Meeting planning | | • | Paper ticket deliver |
| | • | Consulting multiple components* | | • | Onsite services* | | • | Visa/passport |
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*Not all agencies have separate charges for these items Source: Consulting Strategies, TRW Consulting, National Business Travel Association This itemization lists commonly used services, which can vary significantly. The choice of some items excludes others; for example, blended transactions would exclude non-blended pricing; online blended would exclude online touchless pricing options. |
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With certain arrangements, clients and TMCs need to determine what is a fair profit. This of course requires an understanding of costs, which differ depending on a number of factors. The largest of these is labor. For Navigant, labor represented 57 percent of operating costs in 2005. A smaller TMC that Navigant acquired, Northwestern Travel Management, showed salary and payroll taxes at 73 percent of total expenses in its 2003 fiscal year.
Labor expenses can vary depending on whether the account employs an on-site operation or a call center, which also impacts overhead. Technology is an increasing expense for most TMCs, and can vary depending on agreements with tech vendors. For one TMC, bookings through a certain online booking tool cost it more than $3, versus just over $1 using another tool.
"Consultants used to know cost per transaction and we knew salaries, so we negotiated by saying we're not paying more than x amount," said TRW Consulting president Tom Wilkinson. "With automation, TMCs legitimately need to recoup their investment, and we can never know the costs of their financing to pay for these systems."
There are multiple perspectives on how closely buyers should manage agency revenues, costs and fees. Some providers, including so-called Internet TMCs, tout their lower, bundled fees. Ostensibly, no iTMC client is receiving vendor revenues.
"I used to be a huge proponent of managing industry revenues, but not anymore," said Wilkinson. "It's an interesting question, whether a company should be going after them. The purchasing manager's gut says 'Yes.' But since it's so easy to overestimate for all but the very largest accounts, it can be more cost-effective to have the agency keep them and cut the transaction fees."
TCG Consulting's Albert Taras called "embarrassing ... this whole need to explore the agency's profit. We buy the notion that the agency cost as a percentage of travel is really 1.8 to 5 percent, and the cost to audit the revenue flow means you're better off managing elsewhere."
Some travel management companies have made a marketing mantra out of the roughly 97 percent spent on air, car, hotel and other categories.
Yet, "any good procurement professional must know the numbers behind the product," said Philips International global travel supply market manager John Guarneri. "We have to fully understand the TMC's income stream."