Carlson Wins Lower Rebates with Military

WASHINGTON -- Carlson Wagonlit Travel renegotiated major reductions in rebates paid to five Army accounts doing $450 million in air, cutting its highest rebate on official domestic air from 4.1% to 1.9%.

Significantly, Carlson won a new contract clause that allows it to stop paying rebates and start charging transaction fees if airline commissions are slashed to the bone, or the agency could walk away from the business. This positions the company to retain the business and survive another commission cut or avoid bleeding red ink by giving it up.

"It's a solution to a problem that the Defense Department and Carlson did not create," said Erma Spell, vice president of the agency's government division.

Since last fall's commission cuts, most agents in the government market have been trying to get the government to break the rebate habit and move toward transaction fees. The Transportation Department set a precedent by unilaterally deciding to emulate the corporate world and pay transaction fees to its new travel manager, WorldTravel Partners of Atlanta, which took over early this year.

Carlson's new clause is believed to be the second time the "T" word (transaction) has appeared in an executed contract in the government market, and could be a model for other agents trying to protect themselves against future commission cuts.

In the meantime, the Army let Carlson reduce its rebates to the five accounts to amounts ranging from 0.9% to 1.9% on official domestic air, down from a range of 3.1% to 4.1%, depending on the account. On leisure domestic air, the Minneapolis-based firm pruned its rebates to 1.25% to 2.63%, down from 3.95% to 5.21%.

The lower rebates took effect on June 1 as part of new contract terms negotiated by Spell and Frank Giordano, chief of the Army's acquisition division at the Military Traffic Management Command, last May. At the time, neither side would reveal the terms. The government released them to Travel Weekly in response to a request under the Freedom of Information Act.

Under an "equitable adjustment" clause, Carlson's rebates will be reduced to reflect any future air commission cuts. Such clauses are beginning to creep into government contracts, but Carlson's is unusual because it guarantees that its rebates will be eliminated completely if commission cuts exceed the rebates.

At that point, the Army would have the option of immediately paying Carlson transaction fees. The fees would be equal to the difference between the amount of the rebate eliminated and the amount of the commission cut. Alternatively, the Army could make some other mutually agreeable "consideration" to compensate for Carlson's lost commission revenue. If the Army declined, Carlson could walk away from the business on 60 days' notice.

The terms were negotiated after Carlson tried unsuccessfully to convince the Army to provide the rebate relief that the agency felt was necessary after last fall's commission cuts.

Last Nov. 1, Carlson jolted the government by unilaterally cutting its rebates by 22%, a high-stakes gamble that put the agency in violation of its contracts. In retaliation, the Military Traffic Management Command threatened to evict Carlson, and Carlson threatened legal action if it did so. The two parties eventually went back to the table and resolved the impasse.

Under other terms, Carlson is required to: