Tony O’Connor, Managing Director of Butler Caroye, shares a fresh update on the Corporate Travel Management (CTM) situation and reveals his theory on what might have caused it.
What happened?
If you book your business travel through CTM, you may need to reassess the travel category soon. If not, the issues raised by their current situation are worth taking note of.
Six weeks ago, I provided a checklist for clients of CTM to help you monitor and prepare for possible worst-case scenarios. Events are now moving quickly in that direction.
To recap: CTM suspended its shares from trading on the ASX on 25 August due to an accounting error discovered by its auditors, which meant that it could not issue its annual report and financial statement on schedule.
With the suspension extended until November on 17 September, CTM said that the issue was contained to the European region, that it was about the timing of revenue recognition, that the correction would shift revenue from FY25 into previous years, and that it would take some time to rectify. CTM also said the adjustment would not have a cash impact.
On Friday, saying that it could not meet an extended deadline of 31 December, the company announced that its UK business will “reverse up to £58.2 million of revenue” plus “up to £19.4 million of additional revenue.”
No further information is expected until 2026, but some are suggesting that the problem pertains to the UK Government account.
Reaction and interpretation
In an ASX webcast last Friday, the company provided little in the way of further information. I enquired about the cause and nature of the situation (see below), and asked whether the problem could spread to other accounts and other countries. Their response was to refer me to the ongoing work of the auditors.
Investors have interpreted the statement as meaning that CTM will have to reimburse UK clients up to $157 million, with this amount perhaps reduced by tax. This is greater than its last declared cash reserve of $148 million.
The media portrays a sense of shock amongst the investment community, with numerous funds locked into the situation because they cannot sell their shares. Retail investors, who hold a third of the stock, are of course similarly stuck in the headlights.
Before Friday, shareholders’ fear was that the stock price would suffer a large fall when trading resumed. Based on the length of the suspension alone, some funds would need to exit the company. Also, CTM is included in market indices. If it was removed from these indices, index funds would need to sell.
The grim expectation was that the share price would nosedive, many would take a loss and life would continue. Now, investors appear to have existential concerns.
You have to wonder at this point whether the problem, whatever it is, could spread and liability could grow. CTM would have difficulty borrowing or selling new stock to cover the debt.
The likely cause
The numbers, dates and words used in the announcement point me to a likely cause. However, this is just my opinion.
COVID caused a huge surge in flight and hotel cancellations. A considerable proportion of cancelled/unused flights and rooms were refundable. Refund payments can take months, or even years, to happen. With personal travel, you and I chase up our refunds energetically, but large corporate and government buyers tend to be less diligent in the matter, and tend to assume the best. Tracking refunds due is fiddly.
If the travel management company (TMC) is in the position of acting as the merchant, meaning the TMC is allowed to buy the travel on the client’s behalf, then the refunds that are paid go to the TMC.
The TMC then has to make the effort, and devote the time and money, to sending the refunds out to its many clients. You can see how a temptation might arise, especially during the COVID slump and its aftermath.
So, IF I am right, this IS something that in principle could grow beyond the current scale. Even if it doesn’t, serious financial and reputational damage has already been done.
What to do now
I really hope the situation can be rescued, that CTM can navigate its way through these choppy waters, and that clients experience little operational and service impact.
I don’t want to worsen things by suggesting otherwise, so I won’t go down that path here, but please have a look at the preparation checklist in my previous PASA article.
Understanding a TMC’s tough position
Like any travel agent, most of a TMC’s income comes from travel suppliers – let’s call it “commissions”.
Fees account for only a quarter or a third of TMC revenue. The problem is that due to technology, due to New Distribution Capability (NDC) and due to various ongoing pressures on the old distribution system, commissions are falling. They have been in a decline for years and NDC is now causing a ratchet down.
Corporate travel buyers, used to paying under $10 for an online booking are understandably averse to paying closer to $20. Since they began, TMC fees have effectively been subsidised by commissions. That is drawing to a close. Cost reductions can’t cover the breach. Like every business, TMCs need to make reasonable and sustainable profits, but they are stuck in a vice.
There are a few unsavoury things that a TMC can do to find relief, including applying hidden mark-ups and chasing commissions at the client’s expense. If we want to avoid these, if we want transparency and trust, we may need to pay more for their services.
Tony O’Connor is the Managing Director of Butler Caroye, Australia’s leading independent corporate travel procurement consultancy. Since 1997, he has helped hundreds of travel buyers in the public and private sectors with tenders, auditing, benchmarking, travel management and advice. He can be reached on 0409 944 911 or toc@butlercaroye.com.au
