Travel Cutbacks Shear Back-End Revenue

Massive travel volume drops at many corporations have resulted in subsequent hits to travel program back-end revenue streams, primarily corporate card rebates, hotel commissions and value-added tax reclaim.

Corporations vary as to how they view such back-end revenues. For some, they are reported as part of the general revenue stream attached to the department's profit and loss statement. Others use them to offset the costs of running the corporate travel program, including technology, consultant engagements and travel manager salaries.

While back-end commissions and rebates may pale in comparison to a company's overall travel budget or travel operational costs, it still could add up to a sizable chunk of change. In the case of CT100-sized firms, that chunk ventures into the millions of dollars.

By far the largest source of back-end payment is derived from corporate T&E card program rebates. According to AirPlus International president Richard Crum, the company disburses rebates on a tiered scheme. With spending down by as much as 50 percent, Crum said, some companies will fall into lower rebate buckets. In turn, "the impact will be felt centrally whether that is the travel department or procurement department or wherever those monies were allocated," he said.

Travel and Transport president and CEO Bill Tech said the super-regional TMC gives all back-end revenues back to the clients from which they came, but many are based on volumes. About one-third of the company's clients are in danger of not reaching volume thresholds for rebates.

Hotel commissions are a much smaller amount of the back-end revenue pool, as they involve the establishment of a separate ARC number through the agency, and many companies have net discount deals with their preferred vendors. "A lot of companies considered hotel commissions to be found revenue or almost a windfall," said John Caldwell, president of travel management consultancy Caldwell Associates. "The fact is that it is hard money, and in a day where hard money is being used to cover costs, the question is: How do you reduce the cost that was covered by these commissions to be equal to the reductions in commissions?"

Moog manager of travel services Kathy Hall-Zientek said back-end payments amount to about $250,000 annually, about 1 percent of the company's ARC-accredited Corporate Travel Department's $22 million total travel budget.

The Moog travel program is marketed within the company as a service department rather than a profit center, which was more prevalent in the bygone days of airline commissions. As a service department, Hall-Zientek said senior management views the additional funds as "icing on the cake," but they still are balanced against the CTD's operational costs.

"In this day and age, they don't put a lot of stock in those revenue streams because it isn't a huge source of income," Hall-Zientek said. "Does it bring in some additional revenue? Absolutely. Does it lower the cost? Yes. Compared to the spending, it's not a huge amount of money, but I don't like to give it up. I still like to go after every possible area for revenue."

With lower travel volumes, the revenue streams used to supplement travel program costs are hurting, said BlackRock vice president and global travel manager Maria McSorley. "The things that used to offset operational expenses are not there as much, so the cost is definitely going up," said McSorley, who estimated that such back-end travel revenues account for about 10 percent to 15 percent of operational expenses. "These were certain things that would impact the bottom line and we don't see those right now. It all offsets the costs of running the travel department."

Current conditions are forcing both travel management companies and corporate buyers to take further measures to cut operational costs. "The revenue the client received from the travel departments will not necessarily equalize the lower cost due to less travel," said consultant Caldwell. "The admin costs, the infrastructure costs, the personnel costs to control travel remain pretty much the same even though travel goes down. The question becomes, how do you cut back that cost where you have fewer trips and earn less revenues that may be covering those costs? That's a tough issue."

Fewer back-end commissions and other payments may negatively impact corporate travel departments, but the real pain comes from the overall corporate travel drop. "Companies and TMCs are under so much pressure due to the underlying economic situation that those changes really aren't getting much attention," said TRW Travel Consulting president Tom Wilkinson. "It would be like worrying about a leaky faucet when a hurricane has just blown your roof off."

While in the overall scheme of corporate travel budgets, back-end payments may seem less critical, at a time when corporate travel managers are fighting for every last bit of cost savings the significant hit to a revenue stream could trigger movement in travel operations, just as the loss of airline commissions once did.

"Those organizations that were on the bubble of being able to afford an onsite program have started to move away from that to an offsite model for cost-savings purposes," said Ovation Travel executive vice president Michael Steiner. "More companies are moving to a simplified transaction fee approach and getting away from a lot of the cost-plus management fee models. It's a simpler, more straightforward way to handle the business, but a lot of clients still like to have the open-book, P&L model."