After a few stints with Hogg Robinson, the first starting in the 1970s, John Harvey knows a thing or two about travel management companies. Observing current market forces and technological innovation, he senses the emergence of a new framework. In this guest column, Harvey discusses how three decades of TMC evolution will shape the industry’s next steps.
Travel management companies act in the middle of the market (in the channel) between corporate clients on one side and travel suppliers on the other. Disruption in the channel is growing to a degree we have not seen for 20 years and market forces are driving unprecedented levels of change. New travel distribution, competition and innovation puts the current TMC model under pressure and may bring about the transition to a third generation.
This article defines the previous two generations and summarizes their legacy over what is to come. It does not predict the structure of the third generation but sets out the dynamics of the channel today and the need for transparency going forward. It also highlights why honesty, integrity and trust will be essential for any new model to succeed.
Importantly, however, this next generation does not need to be an “open book.” Of course, clients, intermediaries and suppliers will want clarity on each other’s positioning, motivation and core intention, but the future could be a “closed book” as long as everyone understands how the model functions, and can identify the value that each stakeholder derives from it.
Born Out Of Two Generations
First Generation: Business Travel Agents (1978-1998)
Emerging from traditional travel agencies, business travel agents were sellers of travel. They made their money from standard commissions paid to them by travel suppliers for the travel they sold. The client knew a portion of the travel they purchased funded their agency, but most never understood the details (closed book).
During the 1980s, business travel agents increasingly offered incentive rebates to win and retain clients. The annual rebates normally were as a percentage of the client’s total air spend. Behind the scenes, agents negotiated additional override commissions from suppliers, based on their overall volumes.
By the end of the 1980s, rebates to some large clients accounted for over half of agents’ standard commissions. Agents introduced “open book” pricing to show clients how much commission their bookings earned, how much it cost to service their business and how much remained for a revenue share (profit to agent/rebate to client). Agents rarely disclosed their volume overrides as these were never attributed directly to individual clients. The situation continued through the 1990s until the combined effect of three things drew the first generation to a close.
Firstly, travel suppliers developed more client deals, offering discounts, rebates and net fares and rates that earned no commissions. Secondly, airlines reduced and ultimately removed standard commissions. Finally, business travel agents introduced fees to help cover the gap in revenue. By the end of the decade, the traditional model had changed.
Second Generation: TMC Hybrids (1999-2018)
By the turn of the new millennium, business travel agents had become travel management companies. Most had repositioned themselves to work for the client on a fee model. However, it is important to note that TMCs still had a dual power source; though much reduced, they still maintained a strategically vital revenue line to the supplier side.
Perhaps the dominant feature of the second generation was the influence and control of client procurement. With contracts awarded every three to five years, clients had the benefit of open-book tendering and a largely compliant market. To compete for any large client, the TMC had to provide a full breakdown of its actual direct costs. This made it easier for clients to isolate TMCs as a category and negotiate line by line through their costs to achieve the lowest price (fee).
Most clients also negotiated with TMCs to return commissions generated by their businesses. This meant the model came under pressure. It would fail if the fees clients paid fell below the level needed to sustain TMC profitability. One could argue that the second-generation model has been broken for some time.
Some parts of the TMC community have already turned against the second-generation model and reverted back to closed-book travel agents. They’re seeking out market sectors and other opportunities where they can make money from selling travel — such as serving small and midmarket clients, offering their own hotel rate programs and promoting their own preferred suppliers wherever possible.
TMCs may have adopted different strategies affecting the proportion of revenue they make from client fees versus supplier income but the fact remains that all TMCs are, to some extent, funded from both sides of the channel.
Here are the five ways a TMC can make money today:
1. Fees paid by clients for the services the TMC provides (management or transaction fees)
2. Commissions paid by travel suppliers for individual bookings made via the TMC
3. Incentives paid by travel suppliers for the volume of business generated by the TMC
4. Incentives paid by other intermediaries such as global distribution systems
5. Markups added by the TMC to a net price
Commissions and markup opportunities do not apply to all bookings. Incentives are specific to TMC/supplier arrangements with no set format.
Third Generation (2019 – )
The third generation will originate from requests by clients for new proposals and from TMCs testing new financial models. It will be influenced by TMCs’ need to redefine their value. Existing players will compete both against each other and with new entrants – which will attempt to disrupt the market with new, simple, easy, quick and low-cost offerings.
Most new competitors will view the corporate sector from a retail perspective – aiming to make money from the sale of travel. This will bring into focus the key philosophical issue that generation three must address: Do TMCs see their future selling travel (making money from the travel they book) or selling service (making money from management services)?
TMCs focusing on the small and midsized market will likely aim to become retailers, generating revenue from travel sales. They will add fees for extra management services or fund them from travel income as value-adds.
The strategic challenge will be in the large national, multinational and global sector. Will procurement departments let the open book close and allow TMCs to retail travel offers? Or will they require a next-generation fee model? Maybe clients will draw a harder line between “travel” and “management” and buy the two lines separately. Perhaps we will see a new NDC enablement model in support of client direct connections.
One thing feels certain: change is all around us and the third generation is coming.
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