Read Jeff’s quote on the closing of airport lounges featured on the front page of the International Herald Tribune, July 28 - Download PDF

Elite airport lounges are falling victim to airline industry downturn
By Jane L. Levere | Published by International Herald Tribune: July 28, 2008

NEW YORK: Membership lounges at airports are the latest casualty of the current crisis in the airline industry.

United Airlines announced earlier this month that it was shutting four of its Red Carpet clubs at U.S. airports, after closing three others in the United States and overseas in the past few years.

Delta recently closed nine of its 47 Crown Rooms in the United States and at Gatwick Airport near London, while both American Airlines and US Airways are closing one club each.

With one exception, the U.S. carriers are continuing to serve airports where they are shutting lounges. American closed its lounge at Stansted Airport near London when it stopped flying there earlier this month.

The lounges are just one of the many targets of cost cutting by U.S. airlines as they reel from the double whammy of soaring fuel costs - which have skyrocketed more than 80 percent since last year - and a weakening economy. Carriers are also cutting capacity and staff, increasing fares and imposing new fees for everything from checking in luggage to redeeming frequent flier program mileage for free travel.

"Airlines are looking to take fixed costs out wherever they can," said William Swelbar, a research engineer at the International Center for Air Transportation at the Massachusetts Institute of Technology. "If a lounge is being used three, four or five times a day for only a small number of passengers, it just makes prudent sense to stop paying for it. In this high-cost environment, can I continue to offer all amenities to all people when I'm not being compensated?"

For many frequent fliers and business travelers, airport lounges have become an important place to wait out the longer times before, and between, flights, waits that have become typical in an era of increased security. Most provide free snacks and drinks, along with comfortable chairs, television, desk space and Internet connections.

Gary Chase, airline analyst for Lehman Brothers, said he believed that the "majority" of savings in the industry would come from retiring inefficient aircraft and cutting capacity. But "it is easy to underestimate the power that exists in lots of little actions," he said.

Carriers generally rent space from airports for lounges, on either a short-term or long-term basis. In addition, they must pay the salaries of lounge staff, and buy food and beverages and other services, like WiFi.

They derive some income from travelers who purchase memberships in lounge programs or passes for one-time entry to clubs. Some lounges also charge guests for alcoholic beverages and WiFi access.

United, Delta and US Airways declined to comment on their lounge closings or operation, while American declined to provide specifics on the cost structure for its Admirals Clubs, although it said that they were profitable.

In addition to the American closure at Stansted, US Airways is closing its lounge at Baltimore-Washington International Thurgood Marshall Airport. In the past two years, United has closed lounges at airports in Cleveland and overseas in Sydney and at London Heathrow Airport.

By Oct. 10, it will also shut lounges at Hartsfield-Jackson Atlanta International Airport, the Baltimore airport, Dallas/Fort Worth International Airport and Minneapolis-St. Paul International Airport.

In May and June, Delta reduced the number of its clubs from two to one in Boston, and from three to two in Cincinnati, one of its hubs. It has also eliminated lounges at airports in Kansas City, Missouri; Seattle; San Juan, Puerto Rico; Phoenix, Arizona; Denver; Honolulu and at Gatwick.

At airports where they are shutting down their own lounges. United and Delta say that members can use lounges run by their alliances - Star and Sky Team, respectively - and by alliance partner airlines. Star Alliance, for example, operates a lounge at Heathrow, while Northwest, a member of the Sky Team like Delta, operates a lounge in Honolulu.

But Tim Winship, publisher of FrequentFlier.com, a Web site devoted to travel loyalty programs, says he believes that such reciprocal agreements do not always favor business travelers.

"The lounge needs to be in the same terminal as the traveler," Winship said. "Business travelers can't fritter away time schlepping from one terminal to another."

The consolidation in the airline industry might be another factor in the lounge closings. Delta and Northwest recently announced a merger, while United and Continental created a marketing and operational alliance.

"Delta's closing lounges in Seattle and Kansas City means they are saying it's not worth it to offer our own lounges, but with our merger with Northwest, maybe there are other lounges we can offer," said Henry Harteveldt, travel analyst for Forrester Research.

In addition, he interprets the decision by United and US Airways to shut down their Baltimore lounges as an admission that "Southwest is the big airline there."

The lounge closings could affect more than the travelers who belong to the clubs, who pay fees that can go as high as $450 annually for a new member. The lounges are also open to passengers who buy day passes, those who purchase certain first-class or business class air fares, to holders of elite-level credit cards, like the American Express platinum card; and to travelers who belong to the Priority Pass program, which provides access to about 500 lounges worldwide.

Many industry analysts expect the latest round of lounge closings to be permanent, as was the case with most lounges shut by airlines after Sept. 11.

Winship, for one, predicts that more closings will be announced.

The question for some business travelers is whether the airlines will lose more in good will than they will gain in savings.

The airlines will save "peanuts" in closing the lounges, said Jeff Miller, a lawyer in Columbia, Maryland, who represents travel companies. But the lost confidence, he said, "is significant."

Paul Metselaar, chairman and chief executive of Ovation Travel Group, a travel management company based in New York, agreed. "The more barriers suppliers put in front of having a comfortable travel experience, the less likely it is that business travelers will travel," he said. "To the extent that you remove these oases of calm, it's just another nail in the coffin of business travel service."

The shutdowns may provide an opportunity, however, to a few companies like Escape Airports USA, which operates a lounge at Kennedy International Airport in New York which offers food, beverages, showers and WiFi service. The lounge is open to select passengers on airlines like Asiana, and to passengers on other airlines who pay a $40 fee for one-time access.

New Fees to Drive Cost of Air Travel Sky High
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The recent introduction of new fees by many of the large U.S.-based airlines will substantially increase the price of air travel for all passengers and can add significant costs to one’s family vacation. For example, new fees from rising fuel costs can increase the cost of an airline ticket by more than $150. There are also new or steeper fees to check the first piece of luggage, the second, and all additional bags, not to mention buying water or soda on a flight and redeeming frequent flyer miles.

In addition to the cost, imagine the extra time these transactions will take. In the future, travelers should expect to arrive well in advance of standard one hour for domestic flights and two hours for international flights due to the time involved in handling and paying for the luggage as well as the inevitable disputes that will arise when passengers indicate they were not advised of the charges.

The flight attendants on US Airways will probably have the most stressful and demanding job following the implementation of fees for sodas and water. They will have to determine if a passenger is entitled to “free” water because they are dehydrated as opposed to charging them $2 for a bottle. The flight attendants will also have the obligation of collecting the fee, which adds to their already stressful duties and slows down the beverage service for everyone on the flight.

It’s no surprise that Southwest has begun a national advertising campaign to promote the fact that it is essentially fee-less, including no charge if a passenger changes a ticket on Southwest, other than to pay the then-current fare. On some of the legacy carriers, the charge is as high $150 just to change a ticket before paying any additional fees due to a change in pricing. Southwest will also check two pieces of luggage per passenger without charging a fee. Most sodas and other in-flight beverages continue to be free. We have to wonder why any passenger would fly a carrier other than Southwest or some of the low-fare airlines if they operate in one’s market.

The cruise lines have already reacted to the increased cost of flying by moving some of their fleet to convenient “drive-to” markets. Examples include Norwegian Cruise Line’s many departures out of New York City and Carnival’s repositioning of a ship to Baltimore beginning in the fall of 2009 for year-round service.

We recommend to our travel agency clients that they advise their clients, in writing, of the additional fees if they are traveling on airlines that have implemented or increased these types of charges, even if some of the fees will be paid at the time of departure or on the flight such as beverages. For a family traveling with children, the additional fees can add a significant cost to their round-trip vacation.

There is little doubt that some of the legacy carriers will be in bankruptcy by the end of the year. That, of course, will raise other liability issues for our travel agency clients. The most important issue for the travel agency community is to remain up-to-date on all developments in order to provide the best advice and guidance to clients regarding new or increased fees.

Credit Cards, Travel Insurance Essential in Wake of Airline Bankruptcies
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The recent bankruptcy filings by four airlines have raised a number of questions for our travel agency clients with regard to protecting passengers who may be holding tickets on an airline that has gone into bankruptcy and, in several instances, shut down operations.

The best protection under these circumstances is for the passenger to charge the airline tickets on a credit card so the charge can be reversed or, if it has not been paid yet, the traveler should not pay it. In most instances, the Federal Fair Credit Reporting Act provides protection for purchases for which the services are not delivered. Unfortunately, the passenger would still not receive the air transportation but at least they would be reimbursed for the cost of the airfare.

A second alternative is to sell travel insurance. However, many travel industry insurance carriers exclude either specific suppliers from default protection or do not provide default protection if a vendor goes into bankruptcy.

Further, neither cancellation/change fee waivers or cancellation/trip interruption insurance will protect the passenger in the event of a bankruptcy. In trip cancellation/change fee waivers, the vendor simply waives their cancellation/change penalty if the passenger needs to cancel/change before they depart. Under most waivers, the ability to do so only applies up until a few days before departure. At that point, if the passenger cancels, the normal penalty applies. The waiver must be purchased at the time the deposit is made and it cannot be added later. It is not insurance and it does not cover supplier default.

Trip cancellation/interruption policies can include trip cancellation/interruption, trip delay protection, baggage protection, medical coverage, emergency evacuation, and assistance. Some policies also include clauses for the traveler’s voluntary cancellation, which provides a partial credit toward future travel in lieu of non-refundable cancellation fees.

Insurance offered by the suppliers, even through a third-party vendor, does not include default protection because the vendor cannot sell insurance where they are insuring against their own actions.

Inevitably, some clients will lose deposits and/or payments and ultimately try to recoup their losses from the travel agency. We strongly recommend that our agency clients undertake an internal audit to evaluate and take steps to limit the agency’s risk as much as possible. This includes reviewing the agency’s organizational structure, including whether it is a sole proprietorship, partnership, corporation, LLP, or LLC. The agency needs to review its current corporate structure with its CPA and/or attorney to determine which form of ownership best suits its needs.

Agencies should also review their use of disclaimers in the sale of travel insurance. Enhanced training programs should be mandatory for employees and available to independent contractors and home-based agents to make certain that disclaimers are routinely used and travel insurance offered on every sale.

We also strongly recommend that the agency include in its disclaimer a recommendation that the client use a credit card for payment. However, under no circumstances should a travel agency guarantee their client’s funds are protected if they charge the payment to a credit card. We merely recommend that agencies suggest to their clients that a credit card might provide more protection than cash or writing a check when paying for travel arrangements.

It is also essential that the agency has written authorization, such as a signature, e-mail, or fax, authorizing the credit card charge. If the sale involves airline tickets that are processed through ARC, the agency must follow the procedures outlined in the Industry Agents’ Handbook, which specifies what is accepted by each credit card company and airline for a credit card charge. If the travel agency follows these steps, it will have no liability in the event of any chargebacks or disputes by the passenger. Alternatively, if it does not follow those procedures and the passenger stops payment, it is likely the agency will be issued a debit memo.

We strongly recommend that all agencies take precautions to avoid possible economic loss associated with the current financial conditions of many travel industry vendors.

You'll love the way we fly… Well, maybe not
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Let’s start by putting your mind at ease: The recent announcement of the planned merger between Delta and Northwest should not create any immediate concerns for air travelers. Keep in mind that there is less than an even chance the government will approve the merger. Under existing statutes, the U.S. Department of Transportation must give its approval before any merger can take place. The anti-trust division of the U.S. Department of Justice also must approve the merger from a competitive standpoint.

If you review these “golden” objectives that were set forth at the time of the merger announcement, most industry observers believe that there has never been a successful airline merger or acquisition since the Deregulation Act was passed in 1978. (Just as an FYI about the financial wherewithal of these two carriers: Northwest posted a fourth-quarter loss of $4.14 billion; Delta reported a $6.93 billion loss for its first quarter.)

Some aviation experts believe that the only acquisition that came close to being successful was Delta’s acquisition of Western Airlines in 1986, which solidified its operations in the west.

One of the many obstacles to trying to successfully merge Delta and Northwest is the fact that there is no agreement with either pilot’s union with regard to the seniority list, which will ultimately lead to chaotic operations. (Yes, we’re talking scores of delays and cancellations for passengers – daily.) Several years ago, Northwest successfully prevailed over work issues with its mechanic’s union by essentially “busting” the union. It was able to hire replacement mechanics and have some maintenance done offshore. However, no airline has figured out how to operate and substitute pilots, whom would need to undergo FAA-approved training before they could fly the company jets.

Despite assurances by both airlines to the contrary, if, for some reason, the merger is approved, Delta’s Cincinnati hub and Northwest’s Memphis hub would clearly shrink in size because the operations would be close to the existing Detroit and Atlanta hubs of the respective carriers. (That’s when the issue of who’s where on the seniority list kicks in.)

Northwest also brings to the table a reputation for horrendous customer service and terrible employee relations. Many years ago, Delta was considered the preeminent airline with regard to both customer service and employee relations. While that has deteriorated over the years, it has never reached the basement level of Northwest … at least not yet.

There have also been reports circulating that USAirways and United may try to merge in order to be in a position to compete with Delta and Northwest. As history has shown, it is exceedingly difficult to merge two different operations, including work rules, different airline types, corporate culture, and still be able to provide any type of basic customer service to its customers.

Another inevitable result of any merger or acquisition, despite assurances by both Delta and Northwest to the contrary, is an increase in fares, unless the market is served by a low fare carrier, such as Air Tran or Southwest. Consumers could also expect a reduction in service to smaller communities, including the elimination of full-sized jets or reasonable jets or the elimination of regional jets or smaller aircraft.

Again, we do not believe the merger will be approved by the government. But, if it is approved, consumers will be the big losers as customer service and employee relations may hit all-time lows – and airfares may hit all-time highs.

Strength in Numbers
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Although the number of ARC-appointed travel agencies has continued to rapidly decline, there has been stability and growth for most travel agency consortiums. (While this article refers to organizations that may be consortiums, co-ops, franchise organizations, or other agency marketing groups, we will collectively refer to them as “consortiums” regardless of the actual legal structure of the organization.)

We strongly recommend that all of our travel agency clients belong to a consortium because the benefits almost always are greater than the cost of membership. There has been some consolidation among consortiums and name changes among some of the largest and best known. In our experience, the size of the consortium does not automatically determine what benefits will be offered to its members.

We do not believe that any travel agency should blindly select a consortium, nor do we recommend that any agency automatically remain a consortium member indefinitely. Agency owners need to continually evaluate what benefits the consortium brings to the agency and then compare those benefits with the cost of membership. Although all consortiums promote education and training, marketing and sales, internet development, and preferred relationships, the benefits to agents will vary dramatically among the different groups, depending upon the specific demographics of the travel agency members. There clearly are consortiums that represent the corporate market and others that represent the leisure market. However, it is not unusual to find a large corporate travel agency that belongs to a leisure-oriented consortium, as long as neither group has any restrictions regarding multiple members. There are also large corporate travel agencies that have acquired smaller leisure-oriented agencies that might belong to a different group. The acquiring travel agency typically operates the leisure agency as a separate entity, including keeping its original name and consortium affiliation.

Each consortium is unique and ranges from being member-owned to geographically concentrated or privately held with members located throughout the country. Most of the more successful consortiums have specified thresholds with regard to the sales of preferred suppliers, while others do not impose any quotas, restrictions, or guidelines on their members. We believe it is fairly evident that consortiums will continue to increase their preferred supplier thresholds in order to make certain the members are selling the preferred suppliers and not other vendors that provide no benefit to the group.

Some of the most successful travel consortiums today are among the smallest in terms of members but have programs in place that allow those members to prosper, even in troubled times. We again recommend that all travel agencies review their consortium members on an annual basis as part of their internal review of the agency and its operations. The process is vital to make certain that the agency’s sales and objectives are still being met by the consortium to which the agency belongs.

The Cruise Brochure: More Than What Meets The Eye
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A common question we are asked by our travel clients is whether a cruise line has the right to change an itinerary at any time for any reason. While a change in itinerary is unusual, it does occur, particularly in ports with rough seas or other weather conditions which would make it unsafe for motoring to the island for shore excursions. The exception to this would be during hurricane season when cruise lines often change ports and even shorten or extend cruises, as necessary, for safety reasons.

The cruise brochures issued by every major cruise line include language that states the cruise line has the right to change the itinerary for any reason whatsoever without notice to passengers. Some cruise lines also have a “cruise contract” including the same language, which must be signed by the passenger prior to embarkation. This language is necessary for the cruise lines to make operational decisions related to the safety and security of the ship and its passengers and crew.

Both federal and state courts in the United States have consistently ruled that the cruise brochure constitutes a contract between the cruise line and the passenger. The courts have generally found that if the passenger either did not read or, in some instances, did not receive the brochures, the language of the agreement is still binding on the parties.

The cruise brochure also contains information with regard to filing claims against the cruise line and where any lawsuits must be filed. Again, these provisions have been upheld by U.S. courts, including a decision by the United States Supreme Court, that specifically addressed the proper jurisdiction of the law suit. In most instances, the cruise brochure’s notice provisions and the deadlines for filing lawsuits are more limited than those set forth in state statutes. Again, these more restrictive provisions have been consistently upheld by the courts.

Most lawsuits involving cruise lines are litigated in the state or federal courts in Dade County (Fla.), Los Angeles County (Calif.), or King County (Seattle, Wash.), depending upon the cruise line. (This is based on the large number of cruise departures out of these areas.) The cruise lines do not want to be defending lawsuits throughout the country but, rather, in specific jurisdictions where they can develop case law addressing liability issues involving passengers on cruises that, hopefully, are more favorable to them than the passenger.

While we are aware of some travel agencies that have been threatened with litigation by cruise passengers as a result of itinerary changes by the cruise line, we are not aware of any travel agency that has ever been ordered to pay damages as a result of these types of allegations. We recommend to our travel agency clients that they make certain passengers have a copy of the cruise brochure.

While on the topic of disclaimers, we do recommend that agencies use them with regard to the sale of cruises when the passengers are not taking an air/sea package. It is very common today for passengers to either book air independent of the cruise, even if they arrange it through the travel agency, or use frequent flyer miles for the air portion of the trip. Under these circumstances, the passenger needs to be aware that it is his or her responsibility to get to the port on time.

We recommend that travel agents use disclaimers when offering travel insurance as part of a cruise package. Most travel agencies today generate a substantial portion of their revenue from the sale of cruises. They need to take the steps that are necessary to protect the agency while increasing their sales and related revenue.

In the future, travel agencies will continue to derive more and more of their revenue from the sale of cruises. It is, therefore, extremely important that the agency be aware of these issues and take the proper steps to protect itself and its clients with regard to cruise sales. This includes advising clients, if asked, with regard to specific questions regarding the trip itinerary and informing them of the possibility it can be changed without notice to the passenger.

Selling Travel to Minors: A Revenue Boost or Liability?
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One of the more challenging issues for travel agents is selling travel to groups that include teenagers younger than 18 years old.  These programs typically range from high school senior trips to spring break cruises or all inclusive trips to Mexico, Jamaica, or other warm-weather destinations.  While these types of trips can produce a significant revenue source for the agency, they can also create enormous liability issues that need to be addressed early on during the planning process. 

It is best to be extremely cautious when dealing with travel arrangements for teenagers.  It is essential that the travel agency have signed and notarized consent forms from the parents or legal guardians for any traveler under the age of 18.  We recommend the travel agency obtain photocopies of the driver’s license of the individual over the age of 18 to include in the file and also keep a copy of the traveler’s passport if the trip is outside of the United States.

The group also needs to be made aware that if there is no consent form signed by a traveler’s parent or guardian, the individual will not be allowed to travel and any deposits or other payments will be forfeited if the consent form is unavailable before the trip departure.

If the group decides to offer travel insurance, we recommend that it be included as part of the package. The parent or traveler over 18 can opt out of the coverage by deducting the amount of the insurance from the payment. This process works better than a disclaimer because the action of either paying the full price or deducting the insurance premium serves as an iron-clad disclaimer as to the intent of the passenger. 

It is also essential that signatures be obtained for any payments by credit card rather than relying on a “phone order” or “signature on file.”  This is because problems can arise if the teenagers or their parents change their minds sometimes after the refund period has passed and try to stop payment on the basis they never signed a charge slip for a payment.

The agency also needs to address the issue of chaperones and make certain the number and experience of the chaperones is disclosed to the group well in advance of departure.  The agency and the group jointly need to determine the number of chaperones needed to travel with the group, particularly if there are minors younger than 18 traveling.  The chaperones should ideally be parents or legal guardians of the traveling teens. 

The agency needs to provide a list of the rules of behavior or conduct expected during the trip with the express understanding that anyone who violates the rules can be sent home with no refund.  On trips to some Caribbean islands and Mexico, there are unclear age limits for drinking or no limits at all.  Parents and guardians must be advised, in writing, that while no alcohol will be served at group functions, the chaperones have no control over what the teens will do in their free time.  It is essential the agency has a signed disclaimer from the parents or guardians as well as the travelers over the age of 18 regarding the code of conduct.

It is also essential that the travel agency obtain insurance coverage for each particular group, in addition to its regular coverage, so there will be adequate liability insurance protection available for the agency.  Some insurance carriers will not write this type of coverage but it is available in the marketplace, although it is not inexpensive.  The cost of this type of insurance should be determined by the agency and factored into the price of the trip.

In addition to liability insurance, the agency must make certain it has errors and omissions insurance in place.  If the agency does a significant amount of student travel, in addition to other travel agency services, it might be worthwhile setting up a separate legal entity to handle teenage travel in order to insulate the remainder of the business.

The Ins & Outs of Host Agencies
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While the concept of “host” agencies has grown rapidly over the last three or four years, a handful of national host agencies have been in business for a decade or more. Generally, in this type of arrangement, the affiliated agency gives up its ARC plates and makes all of its travel arrangements through the host agency. 

We do not believe that an affiliation with a host agency will work for every travel agency, but it should prove successful for a majority of agencies.  However, there are number of issues that need to be addressed as part of the process of determining whether the agency should give up its ARC plates and affiliate with a host agency.  Prime among these are any contracts or leases that do not expire in the near future, such as an office or equipment lease, GDS, or yellow page advertising.  Each of these items must be reviewed to determine whether the agency would have liability if it closed down.  It is also important to determine whether other liabilities, if any, need to be resolved prior to closing, including personnel issues such as health insurance, profit sharing, or pension plans that may be in effect. 

The financial arrangements vary.  In one method, the host agency gets a flat fee and the affiliating agency keeps all commissions and service fees.  Another common arrangement has the agencies splitting fees on predetermined percentages, and a third system has a flat fee paid to the host agency, with the host agency keeping all back-end commissions.

In some instances, the affiliating agency closes down a corporation and operates as an independent contractor.  We have been involved in situations where the affiliating agency keeps its corporation intact and the corporation affiliates with another agency as an independent contractor.  The advantage of this approach, which must be structured in consultation with the agency’s CPA, is that it allows the affiliating agency to determine how to take money out of the corporation.  All payments from the host agency will be made to the affiliating agency’s corporation. 

Another issue that needs to be reviewed is how many bookings are under deposit and how they will be handled after closing, both with regard to the clients and to the commission splitting with the host agency.

Travel Insurance No Longer a Vacation Staple, Says Industry Veteran
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For at least the last 15 years, I’ve encouraged our travel agency clients to actively sell travel insurance. I’ve also advised friends, family, and acquaintances that travel insurance should be purchased for all types of travel arrangements other than airline tickets. Sure, every so often, travel agency clients tell me that their customers have had difficulty collecting on their travel insurance policies even though it would appear that the circumstances were covered. Occasionally I’ve heard complaints of problems or delays in processing claims that were ultimately paid. Over the course of a decade and a half, though, the handful of issues was to be expected.

Why travel insurance?
I’ve recommended travel insurance because trip cancellation, baggage loss, and/or medical emergencies could be covered for a reasonable cost (averaging between four and eight percent of the cost of the trip being purchased). It not only protects the agency and travelers, but also provides a revenue stream from the commissions paid from the travel insurance company to the travel agency.

The trip cancellation and/or interruption coverage essentially protects travelers from losing their deposit due to a pre-trip occurrence or reimburses clients to return home in the event the trip was interrupted for a covered reason. Medical evacuation benefits provide transportation to an appropriate medical facility if someone is seriously injured or disabled and can not receive treatment at the location of the accident.

Another provision in a typical travel insurance policy, subject to specific restrictions, is third-party default coverage (i.e., if a tour operator or other vendor goes into bankruptcy or defaults, the insurance carrier would pay.) These provisions are only offered when policies are sold through retail travel agents. Similar policies offered by the insurance carriers through vendors directly to the consumer don’t include default coverage.

That was then – this is now
However, over the last nine to 12 months I’ve received numerous insurance-related inquiries from clients, friends, and acquaintances asking how to pursue a claim against a travel insurance carrier after being denied benefits for what appeared to be legitimate claims. In fact, the volume of complaints has resulted in me changing my position with regard to whether travel insurance is needed by most travelers. I no longer believe travel insurance to be a vacation staple.

The main problem lies in the many circumstances travelers believe the insurance coverage provides which, in fact, are not part of the policy at all. Adding to the frustration is the quagmire of how claims are processed. And, if that’s not enough, the travel insurance carriers and their claims departments (the two are sometimes independent of each other) are sorely lacking in customer service skills, not to mention the knowledge of what is and isn’t covered.

The following examples illustrate why I no longer always encourage my travel agency clients to actively sell travel insurance: A couple booked a very expensive nine-day trip to Italy. Due to flight delays, they missed a connection and lost their first day in Europe. Sadly, their luggage did not catch up with them until the next-to-last day of their trip in Italy, and when it did, some of it was wet and several bags were missing. The travel insurance company reimbursed the couple for out-of-pocket expenses that were incurred due to the missed flight and offered $100 per person for the delayed baggage, which was the maximum limit on the policy. The couple believed that the baggage delay portion of their policy would cover at least some part of the clothing they had to purchase for the week, and so it came as a surprise to find out that they each were only being reimbursed $100.

Another recent issue with regard to travel insurance involved an individual who booked a high-end niche trip to Europe – a trip that was ultimately cancelled by the tour operator. The good news? The money for the trip was refunded. The bad news? The travel insurance carrier refused to refund the premium because the policy indicated the premium was non-refundable under any circumstances, even when the trip was cancelled and there would be no risk to the carrier because there was nothing to insure. The carrier also refused to reimburse the traveler for other out-of-pocket expenses, including non-refundable airline tickets. When the traveler dealt with the third-party claims administrator, he could not get any answers to his questions and was unsatisfied. The net result was filing a lawsuit in small claims court, which resulted in the insurance carrier settling the case by paying the individual for all of his out-of-pocket expenses.

There is no greater risk to a travel agency than to be selling insurance for which their clients believe there is coverage, only to find out they have paid premiums on coverage that doesn’t exist. Indeed, the situation jeopardizes the agent’s credibility and results in undue expenses for the client. Unfortunately, this has become a fairly common occurrence. Again, travel agents are not insurance experts. It is the role of the insurance carriers and third-party administrators to make certain the policies are clearly explained and thoroughly understood by both the travel counselor and consumer.

I would respectfully suggest that if a travel insurance company issued a policy written in clear and concise English and one that covered the actual circumstances encountered on a regular basis, it could capture an enormous share of this lucrative market. This means, in the case of the delayed/damaged/lost luggage in Italy, a policy that would reimburse the couple for a reasonable amount of the clothing they had to purchase – not a paltry offering of $100 per person. Obviously, had the luggage been delivered on the second day of the trip, the $100 reimbursement would have been sufficient. However, when it arrives on the eighth day of a pricey European trip, it is not.

To buy or not to buy
Certainly if the travel clients are elderly, have small children, or have existing health conditions, travel insurance is most appropriate. On the other hand, I do not believe it is any longer a good value for many travelers – especially in some circumstances when insureds are covered under their homeowners’ insurance policies or through insurance offered by their credit card issuers. (That said, I still would urge agents to have their customers sign a disclaimer either accepting or rejecting travel insurance. A client could still pursue a claim against the travel agency if travel insurance would have paid for their claim but was never offered by the agency.)

Another alternative? It is also possible to purchase medical evacuation insurance from insurance carriers under a yearly policy, which would cover the insureds if they are more than a certain distance from home and require medical evacuation assistance in addition to medical care at the location where they are injured or become sick.

While I am certain many of my clients will disagree with my change in position (based upon our long-standing advice to them), I believe the travel insurance industry has not kept pace with the common problems travelers frequently encounter. This is particularly true when some portion of the trip involves air, which often disrupts at least some segment of the travel arrangements.

Consider legal action
My advice to consumers who believe they have an unpaid claim against an insurance carrier is very simple: File a complaint with the state insurance commissioner in your home state. In order to offer travel insurance through your travel agency, the insurance company must be licensed to do business in your state. Most insurance commissioners have a program in place to respond to consumer complaints with regard to insurance coverage. As a last resort, a claim can be filed against the group administrator and/or the insurance carrier in small claims court in your home state.

The ABCs of Working with Consolidators
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We have received numerous questions from our clients with regard to the use of consolidators for the purchase of airline tickets. We feel it is useful to provide some of the most frequently asked questions and our responses.

Why should I have a client sign a disclaimer when buying a consolidator ticket?
Your client needs to understand that while the fare will likely be lower than the fare offered directly by an airline, there may be significant restrictions on a consolidator ticket. We believe the use of a disclaimer is necessary to advise the client of the risks and rewards of purchasing an airline ticket through a consolidator.

What do I do if my client refuses to sign a disclaimer or if the client is not in my office, how do I get the disclaimer signed?
It is a business decision for the agency as to whether to issue a ticket without a disclaimer. A disclaimer can be signed in person, transmitted by fax, or e-mailed with an electronic signature.

What liability issues do I need to review?
We strongly recommend that all agencies process their client’s credit cards directly with the consolidator, even if this causes cash flow issues. Many agents prefer to process credit card charges through their own merchant agreement because of cash flow benefits, but we do not believe this is the most prudent procedure. If there is a dispute with the client and the agency has processed the charge through its own merchant agreement, the chargeback will be against the travel agency, not the consolidator. We also recommend that agents make certain that consolidators are processing the credit card charges and returning the “mark up” to the agency in a timely manner.

What happens if the consolidator shuts down before the tickets are issued?
There is very little protection for the travel agency and its clients unless payment was made by credit card through the consolidator’s merchant agreement. Unfortunately, under this scenario, while your clients may not have to pay for the ticket or the credit card can be credited, they still will not have the flights because the tickets would not have been issued.

Do I need more protection if I use a consolidator that is part of a bigger company?
Generally, the travel agency is much better off doing business with a consolidator that is a division of or owned by a larger company in the travel industry. If your agency is a member of a consortium, try to use the consortium’s preferred consolidators because they likely will provide a better financial return for your business.

The consolidator we use does not take credit cards. Is that a problem?
We strongly recommend not using any consolidator that refuses to accept credit cards. Even with a disclaimer, the liability risks are significant. The only protection the agency’s clients have is for a credit to be issued to their card. Also, air carriers have continued to reduce the number of consolidators they use and the number of seats available to consolidators, which will continue to cause financial problems for the marginal operators.

Making the Most out of the Agency/ Independent Contractor Relationship
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The following are some of the frequently asked questions from our clients regarding the use of independent contractors. For purposes of this discussion, an independent contractor is someone who receives a Form 1099 from the travel agency.

Why do I need a written agreement with an independent contractor?
A written agreement sets forth the rights and obligations of each party, such as commission provisions, and reconfirms that the independent contractor has no authority to bind the agency. We strongly recommend that our clients have a form agreement prepared and then fill in the blanks with regard to the independent contractor’s name, commissions earned, and any other specific issues. An independent contactor agreement can be terminated at any time, by either party, for any reason. We generally recommend that the agreement be for one year with termination upon 30 days written notice. The agreement can be renewed by mutual consent at the end of the one year period.

Can I require an independent contractor to sell preferred suppliers or charge service fees?
In an independent contractor/agency relationship, the agency cannot control what the independent contractor sells or require them to charge a service fee. However, the agency can structure the arrangement so the independent contractor earns a higher commission for selling preferred suppliers. As for fees, the practical solution is to require the independent contractor to pay a service fee to the agency for every airline ticket they sell. This process works because if the independent contractors have to pay a fee to the agency, they will collect one from their clients.

We have independent contractors who have incurred debit memos and other debts that the agency wants to collect by offsetting any commissions. Is this allowed?
Yes, however it is very possible that any offset will be less than the debt that has been incurred by the independent contractor, still leaving the agency with liability. Under this situation, the agency would then need to seek repayment directly from the independent contractor.

Our agency wants to reimburse several of our independent contractors for certain expenses. Will that cause a problem with the IRS?
Your agency can have one agreement with one independent contractor that allows reimbursement and another that does not. Further, the agency clearly can agree to reimburse the independent contractor for any reasonable expenses. However, we strongly recommend all of these items be set forth in the written agreement before work commences. Keep in mind that the more expenses that are incurred and paid by the agency, the less likely the agency will earn a profit from the independent contractor’s sales.

Why must the independent contractor be covered by our errors and omissions (E&O) policy?
The agency will generally be covered if the independent contractor is covered by the agency’s E&O policy. However, if the independent contractor is incorporated, they generally will need their own policy. Under this situation, all payments by the agency will be made to the independent contractor’s corporation, not the contractor personally. Some E&O policies automatically include all independent contractors and others require them to be named and a fee paid.

Understanding the Value of Cruise Brochures
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Numerous federal and state courts in the United States have consistently ruled that the cruise brochure constitutes a contract between the cruise line and the passenger. The courts have generally found that if the passenger either did not read or, in some instances, did not receive the brochure, the language of the agreement is still binding on the parties.

A cruise brochure contains information with regard to filing claims against the cruise line and where any lawsuits must be filed. Again, these provisions have been upheld by U.S. courts, including a decision by the United States Supreme Court that specifically addressed the proper jurisdiction of the lawsuit.

In most instances, the cruise brochure’s notice provisions and the deadlines for filing lawsuits are more limited than those in state statutes. Again, these limiting provisions have been upheld by the courts. Most lawsuits involving cruise lines will litigate in the state or federal courts in Dade County, Fla., Los Angeles, Calif., or King County (Seattle), Wash., depending on the cruise line. These jurisdictions are also found in charter contracts and generally are non-negotiable. The cruise lines do not want to defend lawsuits throughout the country, but rather in specific jurisdictions where they can develop case law addressing liability issues involving passengers on cruises which are, hopefully, more favorable to the cruise line than the passenger.

We recommend that our travel agency clients make certain that cruise passengers have a copy of the brochure. However, we have never recommended that our clients use a disclaimer to obtain an acknowledgement from the passenger that they have received the cruise brochure. We do not believe that step is necessary in order to protect the agency from liability under these types of circumstances.

We do recommend that agencies use disclaimers with regard to the sale of cruises when passengers are not taking an air/sea package. It is very common for passengers to either book air independent of the cruise, even if arranged through the travel agency, or to use frequent flyer miles for the air portion of the trip. Under these circumstances, the passenger needs to be aware that it is his or her responsibility to get to the port before the ship sails. We also recommend that travel agencies use disclaimers when they are offering travel insurance as part of a cruise package.

Most travel agencies today generate a substantial portion of their revenue from the sale of cruises. The steps mentioned above are just a few of the measures that will help protect the agency while increasing its sales of this profitable product.

Handling Emergency Travel Situations
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Our clients routinely ask us how to deal with emergency situations which can arise through no fault of the travel agency. These situations include cruise passenger clients who have become ill as a result of a Norovirus, blackouts or natural disasters that disrupt travel, or a myriad of other situations.

There is absolutely no way for a travel agency to predict or prevent these types of events, nor are they the fault of the travel agency. However, we strongly recommend that our travel agency clients establish policies and procedures to minimize any possible risks that they may have and, most importantly, to assist their agency in coping with the inconveniences that may arise out of these situations.

We believe that having these types of emergency policies and procedures in place will allow the “brick-and-mortar” and home-based agents to provide the outstanding, personal customer service that will distinguish them from their Internet-based competitors, especially during emergency situations.

We recommend that travel agencies review the policies and procedures of their current emergency plan and/or establish and implement a plan. As part of this process, agencies should provide their clients – on agency stationery – a checklist of items that need to be addressed prior to departure, which include making sure that family members have their itinerary, copies of passport information, traveler’s checks and credit card numbers, medical authorizations for minor children, and a copy of their health insurance card.

The emergency plan policy should outline the steps the agency will take when contacted by a client who needs assistance. It is important that clear and consistent guidelines exist for dealing with these types of situations. For example, the agency may want to contact the travel insurance provider to assist, if necessary, in coordinating medical assistance, arranging for alternative flights home, or, in extreme cases, making reservations for family members to be transported to a location where someone might be ill. Alternatively, there may be simply a hand-holding process involved, where the agent reassures the client that his or needs are being met as the situation dictates.

The key to responding to emergency situations such as blackouts or Norovirus is to have a plan in place that can be implemented on short notice. We believe that emergency preparedness plans not only assist the agency clients, but also benefit the agency by making the client aware that customer service is a top priority of the agency, clearly an important distinguishing factor.

Minimizing Your Risks
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What do supplier defaults, potentially dangerous travel destinations, high-risk travel, and protection of client lists have in common? They all pose costly risks for you as a travel agent or agency owner. Let’s review some ways to minimize your liability in these four areas of your travel agency business.

Supplier defaults
Unfortunately, a travel supplier’s reputation or longevity today might not provide the “comfort level” it did in the past for both you as the booking agent and for your clients. In fact, the industry has seen many major players close their doors because of bad economic conditions, world events, or poor business decisions. As agencies have shifted the bulk of their business away from air carriers, the risk of supplier default has increased dramatically.

The best possible protection against supplier default is to sell the client travel insurance. It is best that the client pay for the travel arrangements by credit card because, in most cases, the federal Fair Credit Reporting Act will protect travelers by crediting their account for the amount of the trip, if it is not provided by the supplier.

Common sense on the part of the travel agency is also essential, particularly with regard to observing the activities of the supplier to determine if there has been any recent change in its business operations. For example, are clients being “walked” to inferior properties? Is the supplier demanding cash in advance of the date for final payment? Have there been any service problems with the supplier?

Potentially Dangerous Destinations
In the past several years there have been horrible situations with regard to travelers being kidnapped and/or killed, particularly in some developing countries. The best protection for the agency is to have a disclaimer, written in plain English, advising clients of the risks in traveling to a particular destination. This disclaimer should be signed by the traveler and witnessed by the agent, if possible, with each party keeping a copy. If two or more passengers are traveling together, even members of the same family, each passenger should sign a disclaimer unless there are minors involved, in which case a parent can sign on behalf of the minor. It is not a good business practice to have only one spouse sign on behalf of both parties, because there can be an issue as to whether the disclaimer is legally enforceable against the non-signing party.

High-Risk Travel
White water rafting and hang gliding are two examples of high-risk travel. Again, a reasonable disclaimer is the best protection for the agency. We also recommend that a short, accurate description of the risk accompany the disclaimer, along with the suggestion that passengers check with their own medical providers to determine whether the individual has the physical ability to engage in the activity. Under no circumstances do we recommend the agency ask for, receive, or even transmit medical reports between the client and a third party. Handling medical reports raises significant liability issues for the travel agency as well as the possibility of inadvertently violating federal statutes with regard to health privacy issues.

Protection of Client Lists
The agency should have a non-disclosure/trade secret agreement with each of its employees and independent contractors, regardless of whether they have written employment agreements with them. A trade secret agreement is generally enforceable and protects the agency from an employee or independent contractor taking the client list and using it to compete after terminating the relationship with the agency. Although simple in nature and easy to prepare, it’s a document most travel agencies don’t have in place, at least based on our experience. The agreement should state that the agency has the right to make any new employer or travel agency affiliating with the independent contractor aware of the existing agreement. This language, when acknowledged by the individual signing the agreement, protects the initial agency from charges that it tortiously interfered with a contractual relationship between the individual and the originating agency. If there is an independent contractor agreement, which we strongly recommend, the clause can appear in that document.

By reviewing your risk management programs on an ongoing basis, you are minimizing your agency’s liability while concentrating your efforts on reducing expenses and enhancing your short- and long-term profitability.

Knowing the Legal Requirements for At-Home Employees
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Over the last several years, there has been an increase in independent contractors and home-based employees. We regularly receive questions from our travel agency clients with regard to how at-home employees should be treated. It is very important that the agency understands the legal requirements with respect to at-home employees in order to avoid liability, particularly with regard to wage and hour statutes.

Many travel agencies have determined they can reduce the agency’s overhead by having some employees work from their residences. The reduced overhead includes less office space, furniture and fixtures, and perhaps a reduction in telephone and utility bills.

Benefits
It is extremely important that agency owners and managers understand that at-home employees are eligible for any and all of the benefits available to employees based in the office, and subject to any pro rata share of those benefits if the employee works less than full-time. Under many health insurance policies and pension plans, employees need to work a minimum number of hours, 1,000 is typical, to be eligible for those benefits. However, the employee should receive a pro rata share of vacation, sick leave, and any other leave available to other employees.

Compensation
The at-home employee is also subject to the withholding of taxes as well as FICA and Medicare, is covered by the agency’s workers‘ compensation policy, and is eligible to file an unemployment claim in the event he or she is laid off by the agency. We strongly recommend the agency have an agreement with home-based employees as to how many hours per day and per week they can work. It is essential that employees be required to submit a time card at the end of each week or pay period to reflect the hours they worked during that time period. It is extremely important because it will avoid any claim for overtime that can accrue if the home-based employee works more than 40 hours per week or, in some states, more than 8 hours per day. If employees working in the office are required to have prior authorization for overtime, the same requirement should exist for at-home employees.

Homeowner’s Insurance
If employees are seeing agency clients in their residences, both the agency and the employee need insurance to protect them from liability. Further, any agency-owned equipment at the employee’s residence needs to be covered by insurance. Generally, the home-based employee can add occasional business use to his or her homeowner’s policy for a minimal sum. This would protect the employee in the event a client is injured on his or her premises.

Business License
The agency also needs to determine if a business license is required or if there are any zoning issues that should be addressed by the home-based agent. The trend over the last several decades has been for more home-based businesses, so the zoning issue should not be a major factor. Another issue the agency needs to address is what provision, if any, is going to be provided to the home-based employee on a regular or ad hoc basis. It is imperative to establish written procedures for handling funds collected from clients by the home-based agent and how they will be remitted to the agency. A major advantage of a home-based employee is that the agency can control the work activities of the employee by providing instruction and directions as to how their work should be performed.

We believe that allowing employees to work at home, in certain circumstances, can be very beneficial for both the agency and the employee. However, it is essential the agency have procedures in place to protect itself with regard to liability and wage and hour issues.

Understanding the Key Issues of Agency Acquisitions
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This is not an all inclusive list as there may be unique issues in every situation.

Following a ‘Holistic’ Approach to Agency Appraisals
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In my more than 25 years of valuing travel agencies I have been asked to appraise agencies for many reasons, including buying and selling, estate purposes, and disputes between partners and/or stockholders. I have also had clients request an appraisal for informational purposes to assist them in general business planning. In addition, I have testified as an expert witness in federal and state courts throughout the country with regard to the value of travel agencies.

My valuation process is based on a common-sense, “holistic” approach and reflects my experiences in representing travel agencies and other travel businesses, of all sizes, throughout the country. My goal is always for the value of the appraised agency to reflect today’s market conditions. (Fortunately, agency valuations have increased over the last several years.) My appraisal process evaluates the entire agency in order to provide a realistic appraisal in today’s business environment.

Unlike my holistic approach, there are some travel industry consultants who use a formula or multiples of earnings for appraisals. However, in my opinion, this type of analysis does not take into consideration the realities of the marketplace in which the potential for future loss of earnings can easily occur. The nature of the industry includes many factors beyond the control of the travel agency, which impact its value in the marketplace. It is unlikely that a buyer would pay a multiple of past earnings for an agency with 75 percent of its sales in corporate air. That type of business is not guaranteed into the future, as with many other elements of the travel agency operations. It is also for that reason that almost all travel agency sales today are based upon a percentage of revenue retained from an existing client list for some future time period.

Unfortunately, I have recently seen several negotiations break down and terminate due to completely different expectations concerning the valuation of the agency. In these instances, the disagreement generally centered on how the agency was valued, the seller’s anticipated purchase price, the buyer’s intended purchase price, and over what time frame. My approach insures that these sensitive issues are discussed openly and early on in the process, thus avoiding any misunderstandings or a possible failed acquisition.

It is important to understand the entire agency picture in order to provide a realistic appraisal of the agency in today’s marketplace. My “holistic” approach has resulted in fair and hassle-free acquisitions for my clients.