Corporate Travel Management last week said it would have to make “material” restatements of accounting in its U.K. and Europe operations and “reverse” revenue related to certain large customer contracts due to refunds. The company put its U.K. and Europe chief on leave, withdrew earnings guidance and said it was still reviewing activity for certain clients to “determine the amount of any refunds that are due.” CTM plans an update for Dec. 19. RBC Capital Markets analyst Wei-Weng Chen called the news “far worse than we expected and largely contrary to the company’s prior disclosures” because those updates did not suggest an impact on cash or “significant” risk to the balance sheet. Previously released info indicated the accounting issues were isolated to Europe, but CTM now expects the Australia/New Zealand region to be impacted. Chen estimated that the reversals in Europe represented about 35 percent of CTM’s revenue in the region.
Consultant Tony O’Connor of Butler Caroye participated on a CTM call with equities analysts last week. Here he offers additional thoughts on how CTM got into this mess, why it’s not alone and where travel management companies may learn a lesson.
Corporate Travel Management has grown from a small business travel agency in Brisbane to one of the largest international TMCs. Its growth has been turbo-charged by acquisitions. Over the past 20 years, the company bought 16 other TMCs including Montrose, Travizon, Chambers Group and, in 2020, Travel and Transport and Radius Travel. It seemed to have cracked the code for global expansion through buyouts supported by organic growth at zero debt. It was a model of in-housing and developing proprietary travel IT. It was a formula that worked. With a price-to-earnings ratio of 36, investors, occasionally skeptical, remained impressed. Until last Friday.
Recapping What Happened
CTM suspended its shares from trading on the Australian Securities Exchange on Aug. 25 due to an accounting error discovered by its auditors, which meant the company could not issue its annual report and financial statement on schedule. With the suspension extended to November, CTM on Sept. 17 said the issue was contained to the Europe region, that it was about the timing of revenue recognition, that the correction would shift revenue from the fiscal year ending June 30, 2025, 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 a further extended deadline of Dec. 31, the company announced that its U.K. business would “reverse up to 58.2 million British pounds ($77 million) of revenue,” plus “up to 19.4 million pounds ($26 million) of additional revenue.” Some are suggesting that the problem pertains to the U.K. government account.
Reaction And Interpretation
In an Australian Securities Exchange webcast last Friday, the company provided little further information. I asked about the cause and nature of the situation and I enquired whether the problem could spread to other accounts and other countries. The response was to refer to the ongoing work of the auditors.
Investors have interpreted the statement as meaning that CTM will have to reimburse U.K. clients 157 million Australian dollars ($102 million), with this amount perhaps reduced by tax. This is greater than its last declared cash reserve of AU$148 million ($97 million).
The media portrays a sense of shock in 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 whether the problem could spread and the liability grow. CTM would have difficulty borrowing or selling new stock to cover new debt.
The Likely Cause
The numbers, the dates and the words used in the announcement point me to a likely cause. This is just an opinion.
Covid caused a huge ballooning out of flight and hotel cancelations. A goodly proportion of canceled and unused flights and rooms were refundable. Refund payments can take months or even years. With personal travel, you and I chase our refunds energetically. But large corporate and government buyers tend to be less diligent and assume the best. Tracking refunds due is fiddly.
If the TMC is in the position of acting as the merchant and buying the travel on the client’s behalf, then refunds 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 could, in principle, grow beyond the current scale. And even if it does not, serious financial and reputational damage has been done.
Could It Spread?
Yes, because the cause might be systematic. In other words, the underlying issue might have occurred — I stress “might” — with other clients and in other countries.
Could refund retention be widespread among TMCs? Yes. Possibly. And I stress “possibly.” Consider the equation of temptation:
- Many TMCs act as the merchant for some of their client base.
- Many TMCs would receive clients’ refunds from the suppliers.
- Every TMC went through hard financial times just as the refund pools were beginning to flow over.
- Commissions, overrides and GDS fees are shrinking.
- Clients are historically averse to fee increases.
- Competitive costs via IT are high.
- Clients tend to undermanage travel, and many do not track their refunds.
- For the TMC, refund remittal to clients is an administrative cost and burden.
There may be good reason to check your own receipts.
Understanding TMCs’ 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 one-quarter or one-third of TMC revenue. The problem is that due to technology, NDC and various ongoing pressures on the old distribution system, commissions are falling. They have been in downtrend 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, TMCs fees have effectively been subsidized 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 unsavory things that a TMC can do to obtain 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.
The Way Forward
The old model is cracking. This is a big crack. Better future approaches might include more direct sourcing of major components of the systems stack, hybrid in-housing (such as employing key personnel), aggregated direct buyer-supplier transactions and new fee structures that pay well for good things received.
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