Eye On The Override

By BTN / April 11, 1999

Eye On The Override

<H3>Buyers Analyze The Triple Net Equation</H3>

BTN editors recently discussed the state of overrides with travel buyers Val Cordell of Oracle, Michael Cox of Thomson Publishing, Bob Grant of Charles Schwab and Andy Menkes of Republic National Bank, as well as consultant Harold Seligman of Management Alternatives and agency executive Danny Hood of WorldTravel Partners-BTI Americas.

BTN: Harold, is the override basically 2 to 3 percent as we've said in the past?

Seligman: Well, it varies a little bit more than that.

BTN: How high can it get?

Seligman: Certain foreign flag carriers can get into double digits on international travel. It depends on the marketplace. Eighteen months ago across the Pacific you could not get a deal on business class fares or first class fares--there just wasn't enough space--so overrides were more traditional. But I will bet if you went to any of the carriers flying the Pacific today and said, "we are going to give you all of our business and it is a significant amount of business," that override number could increase dramatically.

Andy Menkes: Sometimes back-end incentives are presented as overrides that are intended for the corporation but passed through to the agency so that also is a challenge with definition.

BTN: So have you buyers been trying to leverage those international overrides?

Menkes: It is a number that is out there but it's been my preference since last summer to go net with preferreds. This way your preferred looks like a preferred to the end user because cost center management is really paying the freight and we are really operating cost centers whether we admit it or not. As commissions continue to decline it becomes more disciplined, but one of the advantages of net, as Harold has been saying, is that for the first time the employees who are spending your money can see the value of your program.

BTN: So it is not an enticement for you to negotiate?

Menkes: No, I think overrides belong with the agency community, not with the corporate community. I think it is up to the corporation to get the best deal it can with its travel management partner and then if the airlines want to continue to pay overrides to the larger agencies, that is a business model that they are entitled to maintain.

Val Cordell: With that said, I also think the agency has the responsibility to work with the corporations that drive market share. Particularly to the extent that the international flag carrier may not be one of the preferreds, but you want to get the benefit of what they are offering today. I have not heard it is double digit and frankly I am a little bit shocked and am going to go back and look at those.

Seligman: The problem that you have is that you may erode the market share requirement for a few dollars off on the foreign flag carrier, which could undermine your domestic and international relationship with your preferred carrier.

BTN: Why are so many rebate checks still being written?

Seligman: So long as you have an industry that includes a commission structure, there will always be some players on rebate to justify their existence. I have several clients who have absolutely refused to go to net fares because they want the largest rebate check that they can get. They understand the economics but also the internal desire to outsource activities. If they cannot justify their existence financially, they realize they'll be out of a job.

BTN: What percentage of the market do they represent?

Seligman: I couldn't begin to tell you. We did have one airline bid recently where the client could have had triple net fares for the asking because they do buy huge volume.

BTN: Is that override, commission and card?

Seligman: No.

BTN: Override, commission and CRS?

Seligman: No, I consider the three major elements: override, commission and corporate discount. So long as there are commissions, there are some partnership situations in certain industries where they would rather have the rebate and bill the customer for the full fare and just pocket the rebate amongst the partners. In certain business practices, they just are not interested in net fares.

BTN: Is that characteristic of smaller or larger accounts?

Seligman: Both. I can think of several very, very large accounts in that mode. You take a business that passes through its travel costs to its customers and buys $30 million to $50 million a year. Those corporate discounts and agency rebates, even if they only add up to 15 or 20 percent, are still $4.5 to $6 million a year that is split up amongst the partners.

Cordell: We have a large contingency of consultants within Oracle--in fact they are easily 40 or 50 percent of our business--and this has been a real struggle for me. We did go net net in June of last year and one of the reasons was to give cost centers the benefits of the discounts. It is less cumbersome than trying to redistribute rebates. We had to educate upper management for the first time on the economics of the industry, which is quite the exercise, but once they understood the flow of money they realized they'd rather not have the cash in their pocket. It did present a tremendous problem for us with consultants rebilling our customers. Essentially they are getting the full benefit of our net net deals.

BTN: Can you define what you mean by consultants?

Cordell: They are sales consultants that help Oracle employees install and operate our applications. So these companies, that are generally smaller than we are, are getting a tremendous advantage by our consultants going through Oracle Travel. Some of them require that our consultants go through their travel agency, but otherwise right now we are passing through the discount and paying for the operation.

BTN: Are you getting back all commissions and overrides?

Cordell: No. I set up a contract in June in which about 70 percent of our air is the triple net in Harold's definition. We still are getting something on the back end to offset some of the agency costs through those other airlines that we don't have the net net deals on. We are looking at some kickers on the back end in addition to the overrides we now get on the front end for a couple of the airline deals. So we are still getting some money coming in to offset some of the costs.We are still paying the agency, though.

BTN: How are you tracking overrides for the 70 percent on which you get the full override?

Cordell: I would have to audit the agency to be absolutely certain but, based on the numbers and backtracking, it appears that they are relatively accurate.

BTN: So they look at numbers with you?

Cordell: Oh, yes. It is a pretty open book.

Menkes: We are actually doing okay in that. Last August we became the first Airlines Reporting Corp.-accredited Corporate Travel Department. I opted at that time to go net with all the preferred airlines, so we are also at that 70 percent number, that is 70 percent of all of our sales are triple net. We rolled the corporate discount, the agency that was being paid and the override that was allegedly being paid into a lump net number. By virtue of having our own ARC number, it is impossible for an airline to pay an override on that business because there is no agency payment any more. We appear from a recording standpoint as the agency. We still use a travel agency--we pay them a fee for services provided but we are not impacted anymore by that rebating because the difference in ticket price between a preferred airline and a non-preferred is now more obvious. So we are not seeking any rebates from non-preferred airlines. It is just whatever commissions they happen to pay.

BTN: As far as overrides are concerned, how do you know you are getting the full override?

Menkes: For lack of a better word, we are avoiding the override, in that we would only want to receive an override from a preferred airline. As of last summer we went net with all the preferreds so I knew, based on the agency deal we had in place at that time, the value of that override in terms of percentage of sales.

BTN: Had they opened their books to you?

Menkes: They were open if I wanted to look. I accepted their calculation at face value, having been on the agency side, so it wasn't necessary to audit it. But base commission was X, corporate discount was Y and the override was Z, and Z was the hardest number to validate. When I took X,Y and Z and came up with the triple net, in my view the net that we got was better than the sum of those three components.

BTN: Bob, please tell us how Schwab is operating on a net fare basis.

Bob Grant: We are running almost 86 percent of our total volume at net--no commissions at all, no other pieces added or subtracted. We are very successful in developing programs that are global nets, we can use them in any direction from any point for any fare type for any city pair. It's a flat out discount that recognizes the value of the volume that we are buying in a very committed way from preferred vendors.

BTN: How does it work at Thomson?

Michael Cox: At Thomson we have net net, as well as corporate discounts with two, net with one. The goal with my three was to bring my cost of travel services to zero so that I am not a profit center anymore; I am a cost center. I am actually swinging a little further into the cost section, so I am looking at two other net deals which will maximize my nets. If I am in a cost situation anyway I might as well go all the way.

BTN: So how much of your volume do nets account for?

Cox: Right now it's about 37 percent.

BTN: When did you actually go to triple net?

Cox: It's been about a year now. As a matter of fact all three came about the same time.

BTN: Was that a big internal sell?

Cox: No. The rebate was always unplanned income. Thomson is made up of 200 companies, so when you are taking a good size rebate and breaking it out by 200, it's cigar money basically for a lot of the companies. The two net deals sitting on my table will swing us to about $1 million in cost. While it is cigar money when it is revenue, when it is cost it is certainly not, which makes it more of a challenge.

Seligman: It is amazing. The ink changes the opinions of many people.

Grant: It is interesting. We went through the budget process this year and I had picked up an additional net and forecast that my actual cash flow would go down. The budgeting people said, "if we take into account this increase in discount for a loss of dollars, your expenses will grow by such a large percentage that they will cut your budget." So they give me a fictitious number for income that I couldn't possibly make.

Cordell: We had to do the same thing too. Keep the GL within year over year.

BTN: Michael, how did you know a year ago when you put this deal together that you were getting the full overrides?

Cox: Well, how about this, I am still not sure I am getting the full override. I am still getting it passed through from the agency.

BTN: So it's just a matter of trust?

Cox: Exactly what it comes down to.

Cordell: Having been on the agency side, you would think you could back into that number relatively easily. I think in some cases it is just a function of the agency not having good tracking and not even really pulling their client base together properly to do distribution.

Seligman: We point the finger at the travel agency as being the culprit in this, but it is really the airlines that are more at fault. Having been a tour operator where negotiating was the name of the game, we had an airline discount that we could identify off of the ticket price. The airlines paid my printing bill, my advertising agency, they paid so many other things that the discount off the air ticket itself was only a fraction of the total discount. The other things were of greater value than was the percentage discount off the face value of the ticket.

Cordell: That's a good point. Some of the other things wrapped into your airline contract include upgrade programs. It is an annual question we ask, "What does this cost us in our contract?" If I said, "No, I don't want these," they are not going to up my discount. I have already gone there and tried, so you are right there is some value add that is difficult to calculate.

BTN: What percentage of your clients now are getting back overrides?

Danny Hood: Like everyone said, probably about 70 percent of our client base is fee based. Some of our commission-based accounts were happy to ride the horse 'til it dies. With the international cap, obviously a lot of those horses died and travel departments went from a profit center to a cost center. A lot of our clients have gone to net nets--at least double nets and 70 percent of their fares are net net. We put that on top of our commission programs and override programs on the other 30 percent of the carriers and give that back in 100 percent fee-based contracts.

BTN: So 70 percent of your clients are on fees. How many of them are getting the override back?

Hood: The ones that have gone net net are still getting the overrides on say the 30 percent of the carriers in a pure fee base where we are paid our direct costs plus an overhead factor plus a management fee. That is where it gets more complex, dealing line item by line item with what your overhead should be, how to pass on R&D costs for companies that want you to build the next software. Most companies aren't willing to pay that R&D line item so we really try to package the management fee and overhead. Management fees and direct costs plus a transaction fee, those are our two preferred methods.

BTN: As far as companies on net net though?

Hood: That is probably half the 70 and moving more toward that way. We pioneered a few things. In 1994, when Dell Computers was our client, American Airlines gave them the first systemwide net nets, and when you looked at that deal--before all the commission caps--if you were getting a 10 percent base and a 3 percent override, you got a 13 percent add-on to your point of sale discount. I think it is smart of people who have gone net nets, because with every commission cut and cap, the add-ons are lower and I think everyone can relate to that.

BTN: How can travel managers know they are getting the whole override? We have heard of cases where there are overrides on top of overrides--do you know of that from your experience?

Hood: I happen to know some competitors that make it hard to track overrides, but I have always said we have about eight or 10 audits of overrides by our clients every year. Most, like Andy and Val were saying, trust us to actually put the dollars that came in on the table. I think it is something that is really more easily auditable than some of the travel companies have said, because you really get a quarterly override check, you put it in the bank, there is a copy of that check that we obtain. There are all the ARC numbers that contribute to that number, and you know your volume on that carrier and that ARC number as it relates to the total, so it is really much easier to audit than most people allow. Some say, "it is against our airline agency agreements to divulge contracts." Well, you don't have to show someone your contract, you can show them your check and their ARC number.

Seligman: We have had experience with virtually every large agency and, as Danny said, some of them make it more difficult than need be. But if the client is of size they can pick up the phone and call the airline. It has never been refused, never. The airlines have always granted it.

Hood: I think one thing that is complicated in an override agreement or a CRS agreement when you are trying to track those numbers is knowing your volume on that carrier and what that ARC number contributed as part of that check. We've never penalized someone for an underride, where they actually didn't make good market shares on that carrier.

BTN: In talking to the airlines, do you find that there is consistency in revenue shares?

Cordell: No

BTN: What do you have to do?

Seligman: You have to spell out where you would like to see the discounts and then you negotiate from there.

Cordell: I have to tell you, I have not had a lot of success in any entity divulging to me what the CRS piece would be. The credit card piece I think is pretty out there but I haven't pursued it. I just don't know where you would find accurate numbers on the CRS unless you had your own ARC number and your own lease with those companies. Has anyone else had any success in that?

Seligman: We have some instances of CRS fees being a part of the package for clients willing in some way to fund the purchases. There is consideration given for charge card fees as well, but they are small numbers relative to the three discounts that we focus on typically in negotiations.

Menkes: That is why this is a good opportunity to define triple net. The most visible financial opportunities to a corporation have been the base commissions, which agencies have been rebating a part of over time and now they are returning all of it in exchange for a management fee. There is the corporate discount that is available to the corporation and is taken usually at the point of sale. And then there are the back-end incentives, which are a variety of financial arrangements between the airline and the corporation that involve the payment of a check. Those three taken out of the equation can be exchanged for a net fare. So I think it is a good definition of triple net, knowing that there are other avenues that you can address such as GDS or credit card.

BTN: Have you seen any new fee-based hybrids develop, along the lines of cost-plus or revenue sharing?

Hood: Most of our deals are management fees, transaction fees or a direct cost plus transaction fee hybrid. One category that is evolving is sourcing companies, like Mitchell Madison, getting involved in bids, like what we went through with A.T. Kearney. We went through a non-sourcing bid with them last year where they put everything out to bid and T&E was just part of the business process.

Sourcing companies sometimes like to do it a little differently. One sourcing company likes a return on cost where, if you have business travel agents or meetings agents, the philosophy is to take a percent of your costs as your fee. That has some new challenges to it, but that is about the only other type of fee I have seen in the past few months

BTN: So what is the range for corporate discount?

Menkes: Zero to double digit.

Cordell: Easily double digit on the net nets. I really have seen such a disparity depending on which region you are in and particularly where it is pretty heavily hubbed. Reliant as we are, it's pretty difficult, but then I will talk to somebody in New York who has a significantly higher discount than I do with less market share, but I recognize that the competition here forces that.

BTN: How low is it in fortress hub?

Seligman: Down to zero and they make it much more difficult to achieve market share in fortress hub markets than in competitve markets. I've seen some contracts where they've asked for 100 percent of the travel. They can't deliver that.

Cordell: An area where the agency is providing great value to me is where they are able to tell me that, "airline one is 75 percent and you only gave them 60, but frankly your seats were not available." Armed with that kind of information, going back to an airline and asking for more is pretty effective. But to answer your question, I think in hub markets we are going to see the old equivalent of 10 plus three.

Grant: I don't have a contract that is market specific or fare type specific. It is a flat-out discount on all fares, all city pairs, all types, and I think the vendors got comfortable with that because I wasn't shifting to buy 21-day advance tickets. The percentage of my sales were still unrestricted fares anyway so they didn't have a lot to lose, plus a net was minimal. I've seen a growing number of discounts in the 20 to 30 percent range but everybody's afraid to say what they've got for fear someone has a better discount. I don't have anything domestically that does over 30 percent.

Cordell: Neither do I.

Cox: I have one that's city-pair specific.

Grant: I think I could have traded in specific markets and said, "I will shift this and I will give it to you in exchange for this," but I tried to be prudent about the deals that I have. I don't to have so much overlapping that I can't provide good loyal direction to the people who are willing to give it to me. I picked up one deal this past week in an international market that is a 60 percent discount on business class on a city-pair deal. My carrier called to say, "we need to let you know that this is out there in the marketplace and want to know what you think we should do?" And I said, "I don't need to do anything in the marketplace, but you'd better match it for me." It was short term, but it was a very compelling argument.

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