Introduction to Corporate Travel Departments

A CTD is the most cost effective method for managing a large business travel program. Most companies outsource their travel operations to external travel agencies, paying them fees, which include the agency's profit, overhead and many other indirect costs. Some companies receive reimbursements for agency commissions earned from their bookings. Financial reconciliations are done by the agency. This arrangement breeds several conflicts of interest and other inefficiencies that are costly for the company as identified further below.

Firms can now significantly reduce costs and enhance service by replacing their travel agency with an independent, airline-accredited travel department called a CTD (Corporate Travel Department). The CTD establishes a direct purchasing relationship between the company and its travel suppliers. The accrediting body, ARC (Airline Reporting Corporation) authorizes the company to function as its own "travel agency" and control it's financial settlement. ARC is owned by the nation's major airlines.

There are approximately 200 CTDs with annual airline spends ranging from hundreds of thousands to hundreds of millions. Several others have applied for accreditation. Most important is that very few companies activating CTDs have gone back to being agency managed in the decade CTDs have existed. A list of CTD pros and cons are below.

PROS: The most compelling aspect of a CTD is that, unlike most business decisions, there are no negative tradeoffs. CTDs simultaneously:

maximize cost performance (through the elimination of unnecessary agency costs and the reduction of travel supplier pricing)
service quality (travel department staff serve only one master, the host company)
travel program control (enforcement of company travel policy is absolute, supplier relationships are direct)

CONS: There are three major objections to becoming a CTD and responses for each.

CTDs are a non-core activity. (Business travel is a non-core activity for most firms, but an essential one. Why insert an outside intermediary whose primary objective is to maximize their profit from the relationship? Why not use the best option available to manage this essential activity?)
Many firms are reluctant to hire additional personnel. (Some or all CTD staffing can be service contracted, as can all other CTD functions.)
The process of establishing a CTD is complex. (A specialized consultant can facilitate this process. Travel Consultants Group specializes only in CTDs and does not receive compensation from any other source than our CTD clients.)

The Conflicts and Costs of Dealing with Travel Agencies

A contracted-agency relationship is fundamentally a profit center for the agency with several conflicting agendas for the client. Most companies pay transaction or management fees to travel agencies with commissions sometimes being rebated back to the company. The agency controls this entire financial process. The agents themselves, whether located on-site or off, have a dual loyalty to the client and the agency. This results in the following conflicts of interest, which can be very costly to the client:

The fee process exists to compensate agencies. It is an expensive and often confusing system imposed to speed collection of client fees. Reconciliation of these fees is a costly and time-consuming process for clients especially when there are multiple ticketing changes and other agency fees. It is difficult to validate the accuracy of agency fees paid and any commissions reimbursed.

Agencies benefit from the new fee-based environment. There are two predominant types of fee-based arrangements; transaction fees and management fees, both of which heavily favor the agency as detailed below. Most agencies also levy additional charges for voids, refunds, exchanges, waivers, upgrades and other services.

Transaction fees benefit agencies when ticketing volume is high. (The more tickets that are issued, the more the agency earns.) Transaction fees are usually charged regardless of whether the ticket is ever used. These fees accumulate, especially if frequent rebooking occurs. The airlines' shortened ticketing deadlines have severely exasperated this problem by increasing the number of tickets that need to be voided and reissued. Split tickets often generate multiple ticketing fees.

Management fees benefit agencies when travel spend is high. (The higher the client's dollar travel volume, the more the agency earns.) With a management fee, the client pays the agency a percentage of their travel spend. This creates a disincentive for the agency to minimize supplier pricing.

Online booking fees are higher with agencies. Online booking fees from travel agencies often include their profit, overhead and other agency cost components. The cost of live support is additional, sometimes as high as an agent-initiated booking. There is little control over what causes an online reservation to revert to becoming an "agent-assisted" reservation. (i.e. Did the traveler require a complex reservation change or did they simple add a note for the agent to try to find them a better seat?)

Commission reimbursements to clients are slow and incomplete. While agencies collect their full fees immediately, client reimbursements are usually delayed and deficient. Hotel commissions, the largest sources of client reimbursements, are often paid through master accounts making it difficult for agencies to identify commissions from individual bookings to allocate them back to their respective clients. Clients receive commissions based on a relationship of trust with the agency and can lose hotel commissions due to any of the following reasons. The commission item is applicable but not produced by the supplier, produced but not collected by the agency, collected but not allocated by the agency, or allocated by the agency but not paid. There is little incentive and limited resources for the agency to collect and reimburse client commissions as evidenced in the large disparity between commission rebates quoted in RFPs versus those actually paid.

Other travel agency revenue sources that conflict with the interests of their clients:

Airline Overrides: (The higher the spend on the agency's preferred airlines, the more it earns.) Agencies earn overrides at increasing percentages based on their market share with a particular airline in comparison with other agencies in their geographic region. Since these earning targets "float", every agency must blindly drive as much volume as possible into their top few airline partners. Non-GDS bookings rarely count toward their goals. Due to the magnitude of these override earnings, it is essential that agencies influence all of their agents to book the agency's preferred airlines.

(note: If overrides are rebated back to clients, it is challenging for them to validate that their share is accurate, since most agencies protect the confidentiality of their override agreements.)

Reissue of unused airline tickets: Agencies do not earn additional overrides on reissued tickets, but they can earn additional overrides on newly issued tickets. The agency is compensated for issuing new tickets versus reissuing unused ones.

GDS earnings: Agencies receive compensation for long-term agreements with their reservations systems called GDS (Global Distribution Systems). These contracts include upfront signing bonuses and ongoing booking incentives (pay per segment booked). Increased incentives are earned for higher productivity averages usually measured as monthly booking per system access. These commitments dissuade agencies from making non-GDS bookings such as Internet direct airline or hotel bookings.

Airline consolidators: Agencies use wholesale sources such as airline consolidators that buy travel inventory at substantial discounts. These reservations are then marked up several hundred dollars or more to the client. Most agencies also charge a ticketing fee in addition to the markup.

Supplier incentives: Most air, hotel and car rental suppliers provide marketing incentives including soft dollar accounts, complimentary reservations, upgrades, and club room passes, etc. Most of these incentives are managed through the client's agency, which substantially limits the amount filtered through to each client. Many are used by the agency.

Agencies offer limited resources: As with most businesses, limited capital restrictions force agencies to restrict their investments into one or two suppliers per service category, such as GDSs and online booking automation. Clients are encouraged to use the agency's bundled systems, when other alternatives might work better. Agencies benefit from their clients' eventual reliance on these systems as a means of "locking in the client".

Agency employed staffing: Travel agency personnel have a dual loyalty to the host client and to their agency employer. They are in the compromising position of comparing company-preferred versus agency-preferred suppliers. Several agencies measure and compensate their agents according to their results in booking the agency-preferred suppliers. Dedicate agents' job security with any particular client is limited to the term of the agency's contract with that client. Therefore, these agents are motivated to retain the client by keeping its travelers happy, which often puts them in a compromised position with regard to enforcing travel policy.

The CTD Solution

A CTD is a "cost avoidance center" dedicated exclusively to the host company. The firm procures and pays for exactly what it needs to manage its particular business travel program. CTDs retain the three most valuable components that travel agencies offer; expert agent staff, reservations automation, and the ability to earn supplier commissions. By eliminating the agency intermediary, CTDs save significant operating expense and most also achieve substantial supplier savings. Listed below are many of the benefits CTDs give to their company owners.

CTDs eliminate the agency fee process. Companies are freed from agency fees, fee allocators, expensing of fees, and reconciliation of fees. However, should the company want to use fees to allocate the cost of their CTD or to bill back travel costs to their clients, a fee allocation system is available through ARC.

CTDs are mostly fixed cost models. (The more transactions a CTD produce, the lower the cost per transaction.) Savings opportunities, such as those provided by online booking systems, have a much greater impact on CTDs.

CTDs achieve lower supplier rates. With the agency "middleman" eliminated, contracted supplier discounts often improved. CTD agents are not in the compromised position of choosing between company-preferred versus agency-preferred suppliers. They are also better able to achieve negotiated preferred-supplier volume targets, which help to retain and improve agreements with these suppliers. Finally, CTD agents often search more diligently for lower price options and are more likely to use alternative reservations sources including direct Internet bookings.

Supplier relationships will improve. Supplier sales management prefers to deal directly with the ultimate decision maker, the business client. Companies have the greatest control over their own buying behavior and thus have superior negotiating leverage with suppliers. Increased use of net fare contracts drives the discounts directly to the travelers' cost centers.

Supplier incentives will increase. Supplier perks are received directly by the company instead of being filtered through a contracted agency. This typically results in more supplier incentives for the company's traveler and ultimate control over their use.

CTDs attract and retain superior industry talent. Travel agents would much rather work directly for a company-hosted CTD than for a travel agency. In a contracted-agency relationship, the agent's job security is limited to the term of the contract. In addition, CTDs rarely convert back to being agency hosted.

CTDs operate at higher productivity levels. This is mostly due to the elimination of agency serving processes and agendas. As cited above, CTDs have superior staff retention levels, which give them an advantage in accumulating CTD agent experience with the host company and its unique business travel operation.

CTDs improve policy compliance. CTD agents are more easily directed to enforce policy and are part of the company effort to maximize profits. They are not in the compromised position of circumventing travel policy to satisfy personal traveler preferences. Travel costs can often be best controlled through the simple policy of requiring "manager's approval" for any deviation from the CTD agent's policy compliant travel options.

CTDs improve service quality. The mixed loyalty for travel agents is replaced by a singular loyalty to the host company for CTD agents. As full colleagues, CTD agents receive greater respect and trust from travelers.

Online booking works better in a CTD. Companies with CTDs contract directly with online reservations suppliers and pay only the supplier's direct pricing. Live support for the online system does not incur additional fees from the CTD. The primary savings advantage of an online booking system is in the reduction of agent labor expense. The staffing expense in a CTD is approximately 90% of its total cost, while the staffing cost of an agency averages 50%. Therefore, the savings impact of an online booking system is much greater in a CTD.

Companies have complete control over their travel operation. A CTD is free to obtain the best travel services and automation for its particular needs. It is also free to hire (or service contract for) the exact personnel it requires. All of these staffing, service and automaton items can be internalized or outsourced to reliable third parties.

State-of-the-art automation: In a CTD environment, companies have unencumbered access to all available technology and can obtain the "best of class" systems directly. Also, by controlling their own automation, companies can have immediate access to their travel data.

Improved cash flow: In addition to eliminating agency fees, companies with CTDs earn offsetting commissions from hotels and other sources. Such commissions are much more likely to be collected and payment is substantially faster due to direct accounting identifiers and elimination of the travel agency as an intermediary. It is also easier to track and collect unpaid commissions. CTDs can also earn income for GDS booking incentives. Finally, companies now have full control over reuse of their unused airline tickets.

Minimal investment: All of the benefits of a CTD are available for a relatively small investment. Typically, a total investment of only a few thousand dollars is required to establish a CTD. Few travel consultants specialize in CTDs since they typically provide only a one-time payout versus the repetitive income of an agency RFP every few years. Travel Consultants Group specializes only in CTDs and further distinguishes itself by offering the option of receiving our compensation as a percentage of the savings obtained by the CTD over its previous agency relationship.

Evaluating and establishing a CTD: In considering conversion to a CTD, companies should first evaluate its cost benefits. Travel Consultants Group can provide a detailed cost analysis of a CTD versus the company's agency arrangement. If the analysis provides sufficient cost savings projections to proceed, Travel Consultants Group will facilitate the development of the CTD including selection of all required travel services and staff.