Mark Pestronk
Mark Pestronk

Q: My ARC-appointed agency has a deal with another agency under which the latter uses our ARC number for reservations and ticketing. The other agency, which I will call Agency B (we being Agency A) has a home-based independent contractor (IC) that operates as a corporation (call it Agency C) under its own name. Agency C even has its own IC operating under its own name (Agency D). So, A is over B, which is over C, which is over D. We all use our ARC number in all reservations. What risks are we running with this vertical structure?

A: Every person or entity in your vertical arrangement has the power to create unlimited liability for your agency. You need to make sure your contracts protect you against this liability, and you need to screen all transactions to avoid fraud and default that could put your agency out of business.

The multilevel arrangement you describe is becoming more and more common these days, and several of my larger clients have similar arrangements. Some even provide Agency B with a branch ARC appointment that operates under Agency B's control on a day-to-day basis.

The reason for this vertical integration of the agency industry is that the playing field for commissions is not level. Generally speaking, the larger the agency, the higher its commission and override rates. So it pays for the Agency A's to bring in as much volume as possible, and it pays for the Agency B's, C's and D's of the industry to use the larger agency's industry appointments.

Another reason why this arrangement is attractive is that the player at each level gets a cut of the commissions and overrides generated by the players below. For example, if a cruise sale by Agency B generates a 15% commission using Agency A's ARC number, Agency A may keep 10% of the commission and remit 90% to Agency B. Agency B is thus much better off with 90% of 15% commission than with 100% of the standard cruise commission of 10%.

As far as suppliers are concerned, all transactions appear as Agency A's sales, making you legally responsible for them. For example, if Agency D -- at the bottom of the chain -- makes airline reservations using an unauthorized credit card, and the cardholder disputes the charges, Agency A will receive the debit memo.

To take another all-too-common example, if Agency D signs up for a corporate frequent flyer program such as Delta Sky Bonus in its own name and then adds the Sky Bonus program number to hundreds of reservation records over a period of several years, Delta will hold Agency A responsible for the value of all the free tickets used by Agency D or its clients. If Agency A does not pay, Delta may lift its plate; i.e., permanently terminate Agency A's right to sell Delta tickets.

You need a contract with Agency B allowing you to veto any arrangement between Agency B and another agency, and you should have the right to terminate all such arrangements on short notice in case of suspected fraud and the like. You need similar contracts with Agencies C and D, especially if, like Agency B, they can access your GDS and issue tickets without your prior review.

Everyone in the chain needs to agree to indemnify you against all liability related to their transactions. If any of the companies in the chain are corporations or limited liability companies, you need personal guaranties from the owners.

You also need to have a trusted employee review all transactions daily to look for suspicious ones.

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