OP-ED: Buyers Renegotiate As Travel Agencies Seek To Adjust

The tragic events of Sept. 11 have exacerbated an issue that began earlier this year with the economic slowdown resulting in decreased business travel. The issue from a travel management company perspective is that the decrease in transactions is causing severe financial problems for many travel companies in the corporate sector.

The question from a corporate client's perspective is: What should we do about it? If our travel company provider asks us to pay increased fees, should we succumb? How should the relationship be structured? Should we just support the theory that an agreement is an agreement?

As in most issues, there are two sides to the story. A travel management company may have some legitimate claims, yet some may be trying to profit from a situation that the industry largely created for itself.

One needs to examine the historical issues before determining a position or recommendation to senior executives in their organization. Unfortunately for many corporate travel companies, they fell in the trap of an unforeseen situation and largely played follow the leader. For the most part, two primary financial models have emerged in terms of corporate client pricing. They are transaction and management fees. The most common model employed up until recently was that direct operating expenses are entirely borne by the corporation, with a separate transaction fee charged to the corporation for support, general and overhead expenses and profit. The transaction fee normally is a fixed number. Another model, one more problematic to the travel company, is one that bundles the direct operating expenses and support, general and overhead and profit into one rolled-up transaction fee.

In my opinion, these models are enormously flawed and extremely dangerous from the travel company perspective, a situation now being realized by that community. When transactions decrease, this model does not allow the travel company to recoup the loss and, conversely, should transactions increase, it artificially rewards the travel company. It makes considerably more sense to have a tiered program, whereby the transaction fee decreases with higher transactional activity and increases with lower transactional activity.

Up until 2001, travel companies were making extremely healthy profits. How could they avoid it? Their clients' travel was increasing, the financial model had the clients absorbing virtually all costs, and they were guaranteeing themselves a profit. A senior manager of a mega agency told me that 2000 probably was the best year in the past eight or so in terms of profit. An agency owner of a large corporate travel company told me the company was more profitable than ever. Now, because of a flawed financial model, companies are laying off considerable staff and, in some cases, asking clients for more money.

So, with the knowledge that recent years were hugely profitable for travel companies and a financial model that theoretically is flawed, what does a corporate travel manager do? Do you say, "The travel company didn't request a renegotiation when transactions were increasing, so why should I support a change when transactions are down?"

The answer lies in the fundamental question of value. What kind of job is the travel company doing for you today? If, in your determination, there are issues relative to service, support, technology, etc., you should take this opportunity to bid out the business and look for a new vendor. If you are satisfied with their performance, I would enter into negotiations that would revise the current financial agreement to a long-term new agreement (with termination clause) that has a financial model that works in both increased and decreased transaction environments. This, coupled with including performance requirements in your agreement, should produce a win-win relationship.

Will Tate, located in Dallas, is vice president of travel management consulting firm Management Alternatives.