Throttling back rebaters

By Charlie Funk
Charlie FunkFew topics generate as much spirited discussion in the travel industry as rebating, the practice of an agent giving the customer a portion of commissions earned on a booking.

Dating to the '70s, perhaps earlier, airline ticket rebates of 5% of the base fare, paid periodically in cash, were easy to find, usually requiring nothing more than membership in a loosely organized travel club. Some agencies rebated all or part of air commissions to woo large corporations away from other agencies or from booking directly with the airlines.

In addition, airlines offered discounts of up to 10% to corporations that committed to buying a specified percentage of all air tickets on their airline.

In the '90s, airlines began to wonder why they were paying commissions and offering discounts when agencies clearly were being paid too much or could make a profit by charging their clients fees. On Feb. 10, 1995, Delta announced a $50 cap on commissions paid to agents regardless of ticket price. It was a marketing and business stroke of genius.

Many leisure travel tickets were priced under $500, so the cap meant nothing to agents selling lower-cost leisure tickets. While many travel agents bemoaned the cap, Delta's business did not suffer, and the other airlines soon followed suit. Emboldened, the airlines eventually reduced commissions to zero.

Cruise rebating has been around almost as long as air rebating and is generally viewed with disdain by both retailers and suppliers. Interviews with senior cruise line executives and agency owners large and small produced several recurrent thoughts on the practice:

• It tells the prospect the cruise is not worth the advertised price, which is a rip-off that should never be paid.

• It undercuts work done by professional retailers.

• It compromises the integrity of the product.

• Rebaters do not create new business because the prospect contacting the rebater, in addition to having decided to take a cruise, has already chosen the line, ship and date.

• Rebaters are little more than a toll booth, acting only as a transactional tool and a collection point. They contribute nothing to the cruise experience.

• Rebaters create or sustain the image of the travel retailer as a seedy, pencil-thin-mustache hustler.

I've apparently led a sheltered life, as it would never have occurred to me to do things I discovered in my research, such as:

• Putting business cards in mail receptacles or under the door of all balcony-and-above cabins on a ship with the exhortation to "call me for your next cruise for a discount."

• Buying a suite on a ship and inviting guests over to entertain them and ask them to begin booking with my agency or transfer existing future bookings to my agency to receive a rebate check after the future cruise is over.

• Carrying a laminated refund check around on a cruise to show passengers how they can get a refund on their next cruise if they book with or transfer an existing booking to my agency.

• Camping outside the future booking office on the cruise ship and snagging passengers as they come out to solicit transfer of the booking they just made.

• Instructing a prospect to call another agency to get information on the cruise they wanted and then call back and book with me for a discount.

And just to dispel the thought that this is somehow emotional and not totally about business on the supplier or retailer level, cruise line executives tell me:

• Those passengers booking with rebaters or booking the cheapest category have the lowest satisfaction rate of all passengers.

• Large brick-and-mortar agencies have shown the largest sales growth year over year and, regardless of size, consistently produce higher average transaction value than online travel agencies (OTAs) or rebaters.

• Passengers of OTAs and rebating agencies consistently spend less onboard than those who booked through other channels.

• Passengers who book further in advance spend more onboard, regardless of ticket price, than those who book close in.

• Traditional brick-and-mortar agencies book passengers further in advance.

Cruise ships are beasts that must be fed. The ticket price is important, but putting bodies in berths at some price for onboard purchases is crucial to the lines' profitability. The 2010 annual report for a major cruise line corporation clearly shows that had "onboard and other" spending been cut in half, its profit would have been reduced by more than half.

Other thoughts that popped up several times:

• "Our agency doesn't rebate, but we sometimes have to in order to meet competitive pressure."

• Sometimes "buyers are liars"; there is business from which we need to walk away.

• Call the rebater and confirm the rebate is real before trying to match it.

• Wish the prospect well but put the fear of God in them about dealing with someone they can't go see, eyeball to eyeball.

• If nonrebating agencies did their job, they would close the sale and keep the prospect from picking their brain, then shopping the competition on price alone.

By August 2004, rebating had become a sufficiently distracting issue that Carnival Cruise Lines prohibited advertising unauthorized prices. Shortly thereafter, Royal Caribbean Cruises Ltd. banned rebating outright. Their intent was to reduce customer confusion, provide a more level playing field for retailers and return to a focus on the value and experience of a cruise.

Refinements to that original policy ultimately permitted agencies to rebate up to 10% of the cruise price in the form of onboard credit. One cruise executive confided, "If the agent wants to give up commission in the form of onboard credit, so be it." Given the profit margin for onboard spending, it's easy to see why cruise lines would accept onboard credit as an acceptable option.

Recently, Prestige Cruise Holdings introduced an anti-rebating policy that differs significantly in several respects from those of other lines. The policy announcement scarcely conceals the company's frustration with retailers selling their cruises like commodities, stealing bookings from other agents or diverting onboard bookings.

One provision allows the client to transfer a booking from the original agency to a receiving agency after 30 days have elapsed but does not pay commission to the receiving agency. Another provision limits "value-add" in the form of shipboard credit to 5% of the booking value.

The Great American Steamboat Co., meanwhile, stopped accepting bookings from a big-box chain after the companies were unable to agree on special pricing and offers not available to other retailers.

Perhaps these two examples could serve as benchmarks for other cruise lines that want to revisit their rebate policies.

Cruise lines executives' comments to me indicate they would be happier if rebating were not a primary business model. Replacing the flea-market-haggling discussion with one focused on the value of the product and the experience would be the ideal.

All executives with whom I spoke expressed a conviction that a strong retail channel is key to their company's success. It is not in their best interest for the distribution channel to consist of a handful of sellers, because such a small network represents a threat to their business. Perhaps the cruise lines cannot prohibit rebating outright, but reducing the maximum percentage they will allow is a first step.

Charlie and Sherrie Funk own Just Cruisin' Plus in Brentwood, Tenn., and have provided agent and agency-owner training throughout North America on every facet of travel agency operations. They are the authors of several books, including "A Recipe for Travel Agency Success," "Creating a Blueprint for Growing Your Agency" and "You're Invited," a complete guide to hosting consumer travel events. 
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