Q: We have just started negotiating our GDS contract renewal. My biggest concern is that we might lose our largest corporate client to a global consolidation in the next year or so. If we do lose the client, I am afraid that we might have to pay very large shortfall penalties unless the GDS contract has some escape clause. I know that GDS contracts used to have a "substantial loss of business" clause that would enable the travel agency to renegotiate the terms of the clause in case of a major, provable loss. Do all the vendors still have such clauses? If not, what should we do to anticipate the possibility of the major loss?
A: Your worry is a common one, as almost all corporate-oriented agencies have lost business to national or global consolidations in the past few years. I have no doubt that the trend will continue.
Only the standard Sabre contract has a clause of the type you are referring to. It states that if the agency "experiences or is threatened with a substantial loss of existing business, Sabre will ... meet and confer ... to discuss the impact of the loss of business on this Agreement and to determine what changes to this Agreement, if any, can be made in good faith by the parties."
The other vendors may offer to add such a clause if you have sufficient negotiating clout, but in my view, such clauses are generally unnecessary in GDS contracts today. The standard contracts already take potential losses of business into account, and you probably have very little reason to worry.
Most GDS contracts no longer contain shortfall penalties other than a refund of part of any signing bonus if you do not achieve the annual quota of segments. If you receive no signing bonus, there are typically no shortfall penalties at all.
The GDS vendors' signing-bonus refund formulas work like this: You sign a five-year contract with a $120,000 signing bonus and an annual segment quota of 100,000. If you fall short of 100,000 in any year, you owe the percentage of one-fifth of the signing bonus ($24,000) that the shortfall bears to 100,000.
For example, if you have only 70,000 segments in the first year of the contract, which is a 30% shortfall, you will owe 30% of $24,000, or $7,200. Your vendor will deduct this amount from your segment incentives in the second year, and you will need to pay any balance due.
The pro-rata-refund concept is really fair when you think about it, as the signing bonus was predicated on your commitment to achieve the annual quota. It is a self-adjusting mechanism that accounts for any loss of business, no matter how large.
The refund formula is a far cry from the bad old days when a mere shortfall meant that you were in breach of contract and owed liquidated damages. Such clauses are legal today, but the vendors do not use them.
Travelport's formula is the least equitable of the three, as it includes about a 5% to 10% interest component in the refund formula. In addition, Travelport sometimes tries to add a separate shortfall penalty of $2.40 per segment for large agencies, especially those that refuse to agree to a minimum share of bookings on Apollo or Worldspan vs. the other systems.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].