The Covid pandemic ruthlessly exposed how money flowed around the travel industry and also made everyone in the business travel supply chain acutely aware of the sources of their income, particularly as these began to dry up.
Jonathan Wall, co-founder of travel accountants Elman Wall, says the handling of refunds during the Covid was a gamechanger. “Who was holding what money, how and where it was being held, and how did it get back to the customer... to a large extent, the industry was caught with its pants down.”
TMCs largely rely on three streams of income: fees from clients; commissions, mainly on hotel, car and rail bookings; and mark-ups on net airfares.
All three streams dried up during Covid and many TMCs found themselves in the difficult position of having to keep staff on to manage repatriation and chase refunds rather than put them on furlough as in other sectors.
“For some TMCs, 90 per cent of their income comes from fees. It was a dangerous position to be in and income collapsed,” says David Bishop, chief operating officer of Gray Dawes.
This dire scenario saw the UK's Business Travel Association issue a white paper during Covid calling on the corporate sector to revisit alternative remuneration models, including subscription fees.
Clive Wratten, the BTA’s chief executive, admits adoption of alternative models has been limited. “It is a really challenging time,” he says. “You cannot go to a corporate and say you want to change the whole remuneration structure and [have] them saying they can’t get in touch with you on the phone even though that is the reason why you are having that conversation.”
TMCs need to be better at identifying their true value to corporates, he said. “Coming out of the pandemic, [corporates] realised there is value in the data TMCs have and people pay good money for data in other sectors,” says Wratten.
Bishop says the discussion on models such as subscription fees has “all gone quiet” and that hyperinflation in air fares – up to 25 per cent in a year – is one of the culprits.
“There seems to be more of a focus on the cost of the product rather than the service. Our costs as a TMC are relatively small compared to the total travel cost,” he says.
Drilling into the details
Clarity Travel is one of the few TMCs in the UK to break down the sources of its income in its accounts.
In 2019, the last full pre-Covid year, the TMC’s revenues of £28.1 million included £22.3 million in services fees (79.4 per cent) and commission, £2.1 million in overrides (7.5 per cent), £1.7 million of credit card income (6.0 per cent) and £2.0 million of GDS income (7.1 per cent). Profit margins at the TMC were around 10 to 15 per cent. The breakdown has changed little during Covid, although profitability vanished.
Yet Gray Dawes' Bishop says profit is not a bad thing. “You just have to look at quoted TMCs, like FCM, and you see their profits are not excessive in any way. We all have shareholders and I think increasingly our numbers are being scrutinised by all of the supply chain. If they give us money on credit, they don’t want to partner with someone where there is a risk of failure,” he says.
It is also worth comparing the margins made by different players in the sector, he believes. “Amadeus, in the 12 months to June 2022, made £64,000 per head of staff in profit. In that same period, CTM made just under £12,000 per head of staff, while Amex GBT reported £12,500 for Q2 22. TMCs are not making a ton of money,” says Bishop.
Elman Wall’s Jonathan Wall says, “Lots of travel businesses relied on the profitability that had been built up over decades and it was those reserves that kept them going which they need to find again.”
Profitability will become even more important for TMCs in 2023. During the pandemic, IATA has allowed agents to be unprofitable without financial bonding. This has now been extended to summer next year but agents will face difficulties once that relaxation ends.
“You will find availability of credit hard to come by and you will be required to get bonds and if you can they are expensive. That is going to put a huge burden on a TMC that is marginal or unprofitable,” says Bishop.
Changing the system
The Covid crisis in the industry has led some to say there needs to be change in the way money flows around it.
One idea is for airlines to change their operating model to “pay as you fly”. It is an idea has been doing the rounds for 25 years. The recent push, championed by German buyer’s association VDR, has been stimulated by the huge number of cancellations and airline failures, particularly Air Berlin in 2017.
It is not a huge leap for the travel industry – the hotel and rail sectors are well used to it and travellers are charged more if they want to pay at the point of use rather than in advance. TMCs are going to need to have frank discussions with suppliers and clients as a result.
“Ultimately, the Covid refund factor will mean commercial terms being renegotiated and suppliers being far more acutely aware of their exposure to agents holding on to their money,” says Wall.
Wratten wonders whether one of the main systems that regulates flow of money around the travel industry – IATA’s Billing and Settlement Plan (BSP) – will remain unchanged.
“BSP was invented in 1970 and the world has moved on. There are those who say that BSP is now redundant and there are much more efficient ways of managing the relationship between airline and TMC,” says Wratten.
Wall agrees. “IATA went down from 21 days to 14 and now they want the money the same week. Airlines are trying get as close as possible to the cash,” he says.
Wall adds, “The whole of business travel came on the back of giving credit to corporates. Everything else, like duty of care, has been built on you don’t need to pay for now but many TMCs don’t give extended credit in the way they used to. There is this inevitability that the timing between the customer making a booking and the ultimate supplier receiving the money is shrinking. The industry will adapt but business models will continually evolve.”