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Thursday, September 16, 2021

Despite Demand Dearth, TMC Hess Grows by Buying

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Hess Corporate Travel CEO Alan Hess talks:

  • The challenges of valuation in a pandemic
  • The state of corporate travel demand
  • The viability of the transaction-fee model

Bountiful, Utah-based midsize corporate travel agency Hess Corporate Travel in February announced it had acquired Salt Lake City-based Wycoff Travel, a smaller, predominately corporate agency, for an undisclosed sum. Hess, which in 2019 had $119.5 million in sales, 95 percent of which was generated by business travel, according to Travel Weekly, thus joins the roster of travel management companies that have plowed ahead with M&A during the pandemic. Hess CEO Alan Hess, who said the deal actually was finalized last summer, last week spoke with BTN managing editor Chris Davis about the company’s strategy for recovery. An edited transcript follows.

BTN: Why did you take the step of acquiring at this point, and why Wycoff?

Alan Hess: Over the years we’ve bought a few companies—not many, a couple. The biggest one was [the business travel division of] Morris Murdock Travel a dozen years ago. In this case, it was just a friend of a friend who said, “Why don’t you talk to us?” They kind of came to us and it was a very friendly, “What can we do for you?” That kind of thing. And we brought them in with a minimum of fanfare. It’s just a good fit to bring them in.

BTN: How does doing this in the middle of a pandemic change the equation, not only in terms of valuation but also in terms of demand being what it is?

Hess: Yeah, you have to try to evaluate a business based on revenue that’s not there. What we did with these folks is, we just said, “Look, we’ll create a scenario where we can pay you out over time, based on actual revenue over time.” And so we didn’t focus so much on coming up with a price as we did with a formula. To their credit, they’re really good guys. Their big concern was for their employees. And so we made it a priority to make sure that their staff is well taken care of and would have a home. 

BTN: What kind of working assumptions are you working under as to how the pandemic goes from here, and what does that mean in terms of business travel coming back, if it does?

Hess: Consider the fact that every prediction I’ve made in the last year has been wrong, along with everybody else. As we entered into this train wreck a year ago, in terms of the triage, [our goal] was to stabilize financially and operationally, which we did. It was hard to part ways with good people, but we needed to have some of that happen. Then we focused really hard on communicating and strengthening relationships with customers. They’re not gone, they’re just sort of dormant.

Our relationships with key suppliers have been strong and are building. I think we’re prepared. At first, everybody was kind of like walking a plank—how long can we go before we run out of money? We’re way past that. We’ve stabilized, so we’re not walking the plank anymore.

I think that by mid-summer we’re going to start to see quite a bit of additional activity in the business travel side. And in certain areas like Western Europe, international destinations opening up, I think that will happen by mid-summer. Even if it’s not all the way, it’ll be more than now. And with the team we have in place, we can handle it.

We handle our share of RFPs. That’s not our preferred way to get a client. RFPs, we think, are a commoditization of what we do.”

BTN: Is that what you’re hearing from corporate clients, or is that more based on what you’re seeing out in the market?

Hess: It’s more what I’m seeing. Again, I have a bad record for predicting, but I think it’s going to happen. As you know, there are two parts to that equation for business travel. A traveler’s got to be willing to go, but he’s got to have a customer willing to receive him or her. And I think that will start to slide back in. I think that overall business will regain some form of normalcy by summer with community immunity rising, and vaccinations approaching 30 or 40, maybe 50 percent of everybody by summer. At least in the U.S., I think we’ll see strength coming back. So we’re happy to see that. And we think it’s coming.

BTN: Did you have any initiatives you were working on outside of Covid, and did Covid have any sort of impact on that development?

Hess: That’s interesting, that question, because we undertook in 2019 to rebuild our digital infrastructure to allow totally cloud-based—we got rid of all the physical servers, telephone, digital, everything. And so when everything hit in 2020, we were well down the road on that. So it was real easy to have a seamless transition to people working remote. During February, March and April of last year, we’d already done our projects. We were not expecting a train wreck, but we didn’t have any big projects that were disrupted.

BTN: Upside cited Hess as a TMC with which they’re working for their booking tool. How is that going?

Hess: It’s in the very early stages. I would say at this point, we brought it on board, but it’s sort of still exploratory. We have engaged also with Deem. But mostly we’re still on Concur in terms of the booking tool for our clients. We just wanted to have more options.

BTN: You mentioned before you did had cutbacks with the pandemic. What about the other side of that? Were you able to tap into any government programs like the Paycheck Protection Program?

Hess: Yes, we did. Yeah. The PPP distribution is very helpful in terms of stability and covering cash flow. It was crucial to have that so that you could bridge all that’s going on. … We’ve used our PPP funds really 100 percent for payroll, for paying people.

BTN: Is corporate client acquisition still going on with nobody traveling? Are you still seeing requests for proposals? 

Hess: It’s very interesting. We handle our share of RFPs. That’s not our preferred way to get a client. RFPs, we think, are a commoditization of what we do. A lot of our [business] is referral. And during this time, even though things are really different, we have added nine substantial good accounts. Those are also sort of dormant. I mean, we’re not seeing the results yet, but we’ve added during the last year.

BTN: What do you think about some of the discussion of the viability of the transaction-fee model, and some efforts to charge clients based on different models?

Hess: I think that a fee for a transaction has its weaknesses, but almost everything else is worse. If you’re trying to figure out an annual management fee to charge somebody, you’re either going to be overcharging or undercharging. There are a lot of ways to try to charge the customer. You can unbundle or bundle. We’re having all these conversations as well, but seems to me that most customers benefit from having travel be a variable expense. And the way you make it a variable expense is you charge them for what you do, which is generally best in some fashion related to the transaction. So I personally think that a transaction-based fee structure is still probably better than others. I don’t think a fee per transaction is likely to go away.

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