Q: It's time to renew our GDS contract. The vendor's sales rep has presented us with two offers: One is for a three-year contract, and one is for a five-year contract. I am not sure which one to take because there are pros and cons to each. For example, the five-year deal provides somewhat higher incentives, but the three-year deal matches my time horizon for selling my agency. Also, what if the industry goes down the tubes next year and leaves me with four years of prospective shortfalls in my quota?
A: The offer that you should take depends on your expectations about the future of the GDS contract market, your tolerance for risk, the relative benefits of each offer, your plans to sell or retire and the contract's potential penalties. Some of my clients want contracts to be as short as possible, while others want just the opposite.
Although three and five years are the usual options presented by GDS vendors, there is no rule against shorter or longer contracts, and your vendor should be able to offer you the term that you want.
There are one-year GDS contracts as well as seven-year agreements, despite what your vendor rep might tell you to the contrary.
So how do you choose between one, two, three, four, five, six or seven years? Your first consideration ought to be your own prediction about where GDS deals will be at the end of the three- or five-year terms that you have been offered.
If you feel, as I do, that GDS incentives will not be as good in three or five years as they are now, then by all means consider as long a contract term as you can get.
The analogy that I use is the office rental market. If your office is in an area where the rents keep rising every year or so, then you are better off under a long-term lease than under a series of short leases, as the landlord will raise the rent up to market levels each time your short ones expire.
In other words, if it looks like the deal will get worse for you over the years, then consider locking in today's deal for as long as you can.
On the other hand, not all agency owners have the risk tolerance for very long contracts, as they worry about what might happen to the industry in general. However, many of my clients don't worry because if disaster happens, the vendors will probably forgive everyone's shortfalls, just as they did after 9/11.
You also need to evaluate the proportionate benefits of each.
Unless the total value of any signing bonus and segment incentives are at least two-thirds more under the five-year offer (assuming that you have the same number of bookings or segments each year), then the shorter contract may be proportionately better.
If you want to sell or retire in three years, then a shorter contract might make sense, because you will give the buyer the opportunity to convert your location to the buyer's GDS without worrying about penalties for early termination.
On the other hand, the actual penalties for early termination or nonuse by a buyer might be so small that a longer contract will not deter any potential buyer.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].