Cos. Eye CRS Bonus

<B> Cos. Eye CRS Bonus</B>
<I>Fee-Based Environment Brings CRS Rebates To The Bargaining Table</I>

By Cheryl Rosen

<I>New Orleans</I> - A low rumble of off-the-record speculation at ACTE X offered enticing bait for travel managers trawling for cost savings in a net-net-net environment. If you have not talked to your travel agency about sharing with you the segment fee bonuses it receives from its CRS partners, the bayou buzz said, you might just want to open those agency books again.

"Few travel managers are even aware of this, and only a smaller number have gotten money back," one Association of Corporate Travel Executives conference attendee told BTN. "The agencies have considered that revenue stream non-negotiable--some passed it through if you insisted, but some flatly refused.

"But CRS productivity bonuses are a revenue stream to agencies, and in an era of full pass-through of revenues and commissions, some travel managers are looking at them as negotiable. One travel manager here in New Orleans told me that he has $100,000 in CRS fees on the table."

"At 75 cents a segment," said another, "CRS overrides can get up to 100 grand a year--up to a travel manager's full salary--awfully fast. And we're talking about per year here."

Indeed, a number of ACTE insiders agreed, the issue of CRS productivity bonuses is coming to the table, as travel managers at the largest corporations increasingly are focused on removing commissions and overrides of all kinds from their travel contracts.

On the CRS side, one insider said he would welcome direct deals with corporate customers--and feels they would benefit not just travel managers and the CRSs, but the industry as a whole.

"More than half of all the booking fees the CRSs are paid get passed back to travel agencies as incentives for using us," he said. "If we could stop incentivizing agencies, the airlines could save half their CRS costs. Travel managers should be saying they want net CRS the same way they are talking net air fares, and force the CRSs to have the same discipline in stripping out overrides and commissions that the airline industry now has."

BTC president Kevin Mitchell noted that the productivity bonuses paid by the CRSs to agencies were one item on the original agenda of the Business Travel Contractors Corp., the now-defunct group of corporate travel buyers who banded together in an attempt to negotiate net deals with the airlines.

"It was part of BTCC's concept to address that, but we dropped it, along with frequent flier miles, because we didn't want to start World War III," Mitchell said.

Still, he added, it's an issue worthy of follow-up. "In a net fare environment, there's 50 to 75 cents in CRS bonuses on the table per segment, and a ticket can easily be four segments," he said. "A corporation's revenue is an asset--and when an agency uses that asset to generate a revenue stream, that revenue should belong to the corporation in a net environment."

Mitchell said that one current BTC participant--who declined to be identified for this story--recently has approached its travel agency regarding the issue. "The travel manager said, 'Hey, there's money out there and that's ours if we're in a transaction environment.' The travel agency said, 'No, we don't see it that way,' but then they came back and made it right, and today the today the company is receiving 50 cents a segment," Mitchell said. "It's worth $50,000 a year to them, and they would never have known about it were it not for the analysis BTCC did."

Indeed, Mitchell said, BTC members in 1999 plan to put all their CRS volumes together on a single CRS contract.

"If customers who are not airlines and do not own CRSs band together, they will be able to take over responsibility for their CRS, put it out to bid and get the average $7 per-trip CRS fee down to $2-3," Mitchell said. "This has been on our list of things since to since Day One."

While some downplayed the significance of the revenues involved, others called them significant--and agreed that many travel managers are not aware of the fact that their agency is receiving segment fee bonuses at all.

Jack O'Neill, Maritz Travel's corporate vice president for airline partnerships and marketing services, disputed the value in travel managers negotiating CRS overrides. While acknowledging that at one time Maritz had such agreements with its CRS partners, he said their main purpose was not to produce a revenue stream, but simply to underwrite the cost of CRS hardware and less productive offices, like many onsites at corporate locations. As the agency developed proprietary technology of its own, much of it aimed at Maritz's huge incentive and motivation business, it gave up productivity-based contracts with its CRS vendors in favor of unbundled contracts that allowed it the flexibility to choose its own hardware.

"Obviously in the current environment the airlines are keenly interested in marketing corporate contracts, and what's crept into that in the last 12 to 18 months is that the carriers are increasingly trying to make discounts contingent on the use of their CRS," O'Neill said. "So CRS contracts for corporate customers are suddenly an issue, and there is a lot of curiosity about whether they should hold the contract themselves. But we have had some large customers, particularly high-tech clients, look at it, and so far none have found that it makes sense to take the risk."

Even when Maritz did have productivity contracts with the CRSs, he maintained, "They were not big bucks. Ours was in the range of 10 to 25 cents, if I recall correctly. It's hard for me to imagine any mega-agency having a much more lucrative agreement than that. We looked at ours as helping us avoid the cost of hardware, not as earning big incentives."

But one agency executive acknowledged that his company passes through the "significant revenue stream" it receives from CRS bonuses to about half of its corporate customers--but not to the other half.

"As we moved to fee-based contracts, we decided that in a pure partnership, where the corporation assumes all the financial risk, we should prorate the segment fee bonuses we earn and pass them along, and we do that in all our new contracts," he said. "But I honestly can't say that we went back and audited our existing contracts.

"We didn't actually go to our owners and ask them if we should call up all those clients and offer to send them back money they weren't even asking for."

In all, he said, the money the agency earns in segment fee bonuses from the CRSs adds up to fully "10 percent of our bottom-line profits."

But he cautioned that gators lurk beneath the deceptively smooth surface of demanding a pass-through of CRS productivity bonuses. A single corporate account that "goes into the CRS to check for low fares every two hours, or gives sets to meeting planners who do not use them," for example, can actually cause the agency to lose the productivity bonus it earns on its whole business, he noted.

Others said that the issue begins with terminology: almost everyone who spoke with BTN pointed out that the correct term is not overrides but "segment fee bonuses" or "productivity bonuses"--though the definitions offered for the two always seemed to come back to payments by a vendor for selling its product beyond a given minimum. Still, the industry does not appear to think of these bonuses as intrinsically included in the "airline commissions and overrides" they have agreed to share with corporate customers.

Said one travel manager, "CRS fees are not technically commissions or overrides--they are a revenue stream." And, he added, "If you take that revenue stream away from the agency, you'll have to make it whole again in some other way."

Perhaps so. But some noted that in an open-book environment, CRS bonuses should at least be discussed in the bright light of day.

"I've never heard CRS productivity incentives referred to as overrides," said John Heilner, vice president of Management Alternatives of Stamford, Conn., and formerly with Thomas Cook and TWA. "Overrides are for moving volume. But in effect, I guess that is the same thing. Big agencies do receive them based on the number of segments produced, either for absolute segments or for average segments per CRT. We've advised several of our clients to bring it up with their agencies. But the agencies never bring it up themselves."

Heilner also said, though, that like all overrides, the point here is to reward big volume--and that it is often in the travel manager's best interest to leave the overriding to its travel agency.

"If you are a two- or three-million-dollar air volume account, it's probably not worth pursuing. But if your volume is more than $10 million, it's one more thing on the table. And we have been advising large clients to put it in the mix," Heilner said.

Travel industry attorney Jeff Miller of Columbia, Md., noted that some corporate configurations make it easy to track CRS bonuses--but that in many cases it's extremely difficult for an agency to break out what one customer deserves from its total client mix.

"I don't disagree with the concept in theory, but I don't think it works in many cases," Miller said. "If you have on-site, dedicated CRS equipment--where you can track your own travel volume rather than pro-rating it out of the agency's total volume--you're better off. But if there are five sets dedicated to your account among 50 in an agency's central res center, it would be difficult to track how much market share is yours. In theory, it's fine, but in practice, it's impossible."

Agencies also earn large CRS bonuses for converting a corporate customer from one CRS system to another, "sometimes as much as $1 a segment"--many noted. "Those the corporate account should be able to share," Miller said.

<B>Typical Bonus Amounts</B>

Miller said the CRS segment fee bonuses he has negotiated for agencies look like the following "typical contract": If the agency books 200 segments per computer reservation terminal per month, it gets its CRS equipment free. For every booking between 201 and 275, it gets a bonus of 25 to 50 cents per segment; bookings 276 through 400 get 75 cents per segment. Over 400, the incentive falls to "maybe another nickel per segment."

Insiders noted that a "segment" is defined as one air segment or a hotel or car booking. At one agency, for example, the average business trip includes 2.3 air segments, and travelers also book a hotel or car about 50 percent of the time. Corporate customers therefore average a total of 3.3 segments per trip.

Seventy-five cents times 3.3 segments on every ticket may sound like a tempting bonus for a travel manager to pursue, but Miller pointed out that there are, of course, two sides to every contract. Along with the bonuses come the risks: long-term commitments, cancellation fees and penalties for failure to deliver.

"If I were an agency, I'd say, 'If you want the segment fees, you take the risk and you sign the CRS contract yourself.' If you have more than $20 million in volume, especially if it's concentrated in a few cities, you'd be better off being your own travel agency and cutting your own deals with the airlines," he said.

But that's not something Miller--or many others with whom BTN spoke--recommended for most corporations. One travel agency executive said he has two corporate customers whohave happily lived for some time with CRS contracts of their own. But he also has a third that found itself in a bind when, part-way through a five-year contract with one CRS, his company merged with one that had a different preferred airline--and a different CRS.

"It's a two-edged sword," he said. "A large agency can usually negotiate away liquidated damages with a CRS when a corporate customer has to cancel its contract--maybe the agency can move a new customer onto that CRS to take its place. But a single corporation really has no recourse."

Others agreed that as travel managers move to more direct connections with suppliers, broader airline and CRS contracts can mitigate the emphasis on productivity bonuses for them.

At Charles Schwab & Co. Inc. in San Francisco, for instance, "we have our own ARC plates and our own CRS contract, but we do not get a rebate from the CRS," said corporate travel manager Bob Grant. "Productivity bonuses were an issue I chose not to pursue, since we were focusing on Sabre BTS as an end-to-end technology solution. I've heard rebates can be 25 cents a segment after you meet a certain minimum threshold, but most corporations are not getting them, and most are not even aware of them."

Meanwhile, BTC's Mitchell, a longtime defender of competition in the airline industry, called CRS bonuses "the agencies' last opportunity to have a revenue stream to fund technology development" and warned that interrupting that revenue stream will leave the airlines and CRSs as the sole providers of travel technology.

"I don't think it's a secret that the airlines would like to develop the technology and not have the agencies do it," he said, "and I don't think that's good, ultimately, for the consumer or the corporation.