Q:I have read that ASTA's surveys show that most agencies' GDS contracts are for three years, but I have also read in your columns that most large agencies have five-year contracts or even longer ones. Why the difference? Do large agency owners know something that small agency owners don't? Would you recommend that every agency sign a five-year deal? If longer is better, why not go for six or even seven years? What about just a one- or two-year deal for agencies that might be selling? These are important questions, as our GDS contract is not only the longest one we sign but also the most lucrative over the long term.
A: In my experience, owners of large agencies are not necessarily smarter than their smaller counterparts. It is just that they are less worried about long terms because they believe that if they end up owing shortfall penalties and the like, they can probably use their clout to negotiate their way out of the penalties.
Such a belief in one's own clout is well founded. While small agencies generally have to make good on shortfall penalties, large agencies can often avoid them by adding more years to current contracts or renewing their contracts under formulas that forgive earlier shortfalls.
Nevertheless, I strongly recommend that every agency give serious consideration to contracts longer than three years for the following reasons:
First, if, like me, you believe that net GDS incentives will not be as good in three years as they are now, you might as well lock in today's incentives for another few years. Even if your vendor exercises its rights to cut incentives during the course of the contract, you will probably still be better off with a five-year contract than having to negotiate a new deal in three years.
The same rationale could be applied to six- or seven-year contracts, which some very large agencies have been signing. The trouble is that the vendors do not offer such contracts to any but the largest agencies, so five years is probably the longest term you can get.
Second, your signing bonus might well be proportionately larger, and your segment incentives may increase, too, resulting in more per segment throughout the term of the contract. Even if you are hesitant to commit to a contract longer than three years, at least get offers for both three-year and five-year terms, so that you can compare them side by side.
Conversely, although you probably can get your vendor to offer you a one- or two-year contract, you will undoubtedly find that the incentive offers are terrible. You will be better off trying to obtain a GDS hosting arrangement with a large agency that offers one for your preferred system.
Third, if you believe that the future is so uncertain that you might be forced out of business before the end of the term, keep in mind that the standard contracts of both Amadeus and Sabre allow you to effectively terminate your contract without liability if you go out of business. Although Travelport has no equivalent contract clause, its policy is similar.
These contract clauses and policy do not apply to sales of your agency, so if you are planning to sell soon, you might want to avoid a long-term contract.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].