David Collins, CTC, President, Airlines Reporting Corporation
to the Association of Corporate Travel Executives
ACTE IX Chicago Conference
Chicago, April 28, 1997

I would like to start by telling you about ARC and its functions and its role in the marketplace. Some of you here today may be very familiar with ARC and I hope you will bear with me. Others, I believe are not so familiar with us. ARC is an airline owned corporation. We have 14 shareholder airlines. To be a shareholder of ARC an airline must be a U.S. passenger carrying airline. However, other non shareholder airlines - including foreign airlines - may also participate in ARC and at present we service 145 airlines and 3 railroad companies. On behalf of those carriers we provide travel agency accreditation services. We also provide ticket distribution to travel agencies; and the centralized mechanism for the reporting and settlement of sales of those tickets with our participating carriers. We also carry out a number of other functions that are key to ensuring the integrity of our primary services and maintaining the confidence of all the participants in the system.

The system that ARC administers has been in existence for 33 years. It has successfully stood the test of time because it has been able to adapt to major changes in our industry such as the initial advent of automation in our industry in the late '70's and the deregulation of the industry in the '80's. The system has been able to evolve to meet the changing needs of the marketplace and we believe that it will continue to do so in the future. I will talk in a moment about some of the things we have been doing recently to adapt to the technological change going on in our industry.

The other major reason that the ARC system has stood the test of time is that we bring huge economies of scale to our areas of responsibility. One of the reasons for our existence is the very size of this marketplace. Any airline operating in this market needs to be able to get its product to the market but it is economically prohibitive for an individual airline to set up its own outlets across the country to get its tickets to all its potential passengers. Hence the historic role and value of the travel agent or travel management companies as they are now becoming known. But it would still be prohibitively costly for a single airline to set up its own relationships with travel agents across the country, provide its own ticket stock to each travel agent and maintain the administrative and accounting staffs to make sure every ticket issued and sold was accounted for and paid for to the airline.

These are the key reasons why the ARC system was established many years ago. It was set up to provide the means for the airlines to be able to distribute their product to the marketplace other than through their own airport counters or city ticket offices. Conventional wisdom is that on an industry basis approximately 80 % of airline sales are now ticketed by travel agents on ARC ticket stock -- a number that has grown from 50% in the 1970's.

This need to find an efficient way to distribute the airline product led to the establishment of the key services we perform today. We provide a central accreditation system for travel agents wishing to represent the ARC participating carriers as well as to become accredited to the ARC system itself. Today our list of accredited travel agency locations around the country totals over 47,000 locations. This centralized accreditation system puts in place over 7 million business relationships between the 47,000 travel agency locations on the one hand and the 148 ARC participating carriers on the other hand, only a fraction of which would come into existence if each airline and each travel agency location had to set up each relationship individually.

The second key element of ARC's service to the industry is the distribution of the ARC standard ticket to travel agencies. Again, it would not make economic sense for each carrier to distribute its own ticket stock to each travel agency. The standard ARC ticket that we distribute to each travel agent can be issued on and will be accepted by each of ARC's 148 participating carriers. Most of you I am sure are familiar with the Automated Ticket and Boarding Pass or ATB ticket -- the card type ticket that is now almost universal in the industry. We are now shipping over 1 billion of those coupons annually to the market.

Finally we provide the means of settlement and act as a central clearing house for the credit billing or cash settlement of all tickets issued on ARC stock. Again it is far more economic to do this through a central point than individually with each carrier. Last year 180 million transactions representing over $ 63 billion in airline ticket sales were settled through ARC's central mechanisms -- over $1.2 billion each week.

In summary, the services we provide contain the infrastructure that enables the travel agent or travel management company to provide you the corporate travel manager with airline ticketing services on 148 different airlines. At the same time we maintain the infrastructure to ensure that settlement takes place for all tickets issued. That infrastructure maintains linkage between the interested parties to the transaction-airlines, travel agents, CRS and credit card companies and provides the data flow required by each of them on the transactions flowing through the system.

These huge numbers that we process mean that we operate with large economies of scale and thus we operate at very low cost to the industry to the benefit of all those who participate in our system. You have no doubt seen articles in the press relating to industry cost issues but you did not see ARC costs to the industry cited as a problem. We have been able to keep our costs down and our challenge as management for the future is make sure that the industry continues to receive the benefits of low-cost centralized ticket distribution and settlement as the industry evolves.

Our role in the industry gives us a unique perspective on the trends in the marketplace. We publish industry data on a monthly and annual basis and the trends we have seen confirm what you have been seeing in the press. The airlines have been returning to better health in the last two years after a disastrous start to the '90's. Last year we saw the total domestic airline fares we processed go up by 9 % to over $44 billion and the international fares go up by 8 % to over $ 17 billion. The actual transactions we processed went up by 5 % and thus we have been seeing an improvement in airline yields necessary to make up for the large losses they suffered at the beginning of this decade.

We have also seen a very strong start to 1997. Last week we released figures from the first quarter. Compared to the same period in 1996, total domestic fares processed through our system increased by 7 % to $ 12.3 billion while total international fares went up by 13% to $4.7 billion, for a total of fares processed of $ 17 billion -- 8 % greater than for the same period last year. We attribute this to a continuing strong economy although a part of the record growth we saw in February may be attributable to advance buying prior to the reimposition of the transportation taxes.

On the travel agency side we have been monitoring the impact of the domestic commission caps that were imposed by certain major US carriers in February 1995. As many of you probably know the carriers changed from compensation levels of 10 % on all fares to a scheme whereby the 10 % commission was payable on one way fares up to $250 and round trip fares up to $500. Above those fare levels commissions were capped at $25 and $50 respectively.

At the time the commission caps were imposed it was predicted in some quarters that 5,000 travel agents would go out of business. That has not happened. Our statistics show that the travel agency population has remained relatively stable. At the end of 1996, the total number of travel agency locations on our list amounted to 47,286, a one per cent growth over the prior year. While the predicted 5,000 did not go out of business, this one per cent growth rate has slowed from historic growth rates of 2 to 3 per cent that we used to see.

These overall statistics also hide some new trends that are taking place in the industry. Over the years what we call the independent travel agency locations continued to grow each year. These are the single office location travel agents. For the first time in 1995 and again in 1996 the numbers of these locations has started to decline by approximately 2 to 3 % on an annual basis. In the aftermath of the commission caps we believe we are seeing two things happening. First a number of these smaller travel agents are deciding that they don't want to be in the business any more and are closing their doors. Secondly, a number of them, who up until now have been fiercely independent business people, have finally decided that the time has come to merge with other agents to obtain operating efficiencies in order to survive.

As I mentioned before, ARC provides the central industry mechanism that facilitates the issuance and delivery of the airline ticket to the passenger and provides the necessary reporting and settlement systems to support that mechanism. As management of ARC we believe that those mechanisms have served the industry well for many years. However, we have also believed that it is critical to evolve those systems to continue to meet the changing needs of the market place and I want to briefly talk about some areas where we have been addressing the need to modernize our systems.

Many of you in this room represent corporate travel departments and in such capacity interface with many of the larger ARC approved travel agents. Over the years in our accreditation area we have tried to meet your needs for better service from your travel agents. In the mid 1980's, the Satellite Ticket Printer location was launched to create the ability for travel agents to be able to electronically deliver tickets onto the premises of a corporate client. Over the years we have refined this concept and there are now over 13,000 Satellite Ticket Printer locations around the country delivering tickets directly onto the premises of corporate clients.

More recently we responded to the market need for ARC approved travel agents to provide services over and above pure ticket delivery on the premises of their corporate clients and created a new accreditation category - the on-site branch location. This new concept enables an ARC travel agent to operate a full service location on the premises of a commercial client. Since creating this new category 2 years ago we have accredited just under 2,000 on-site locations around the country. This new concept also recognized the trend towards more cooperative purchasing between corporations and travel agents and staffing at this location can be either employees of the client or the travel agency.

Another area of concern that was brought to us in the past by the large travel agents who specialize in corporate travel, was the processing time involved in ARC's accreditation process. This made it difficult for them to respond to your expectations to establish new locations in a timely manner. We have addressed this problem in two ways. The first step was to establish an electronic application process which is now being used by the travel agents who file significant numbers of accreditation applications with us.

Electronic filing has considerably expedited the application process. The second step was to cut out the previously required on site inspection process for travel agents who had established a good track record with us. New conditional approval procedures that we have put in place have again helped to significantly simplify the accreditation process and position travel agents to respond to your needs in a more timely fashion.

In other areas of ARC we set out a number of years ago to modernize our systems and our major long term goal was to move what was largely a paper based system into the electronic age. To convert ARC from a paper based system to an electronic system involved looking at four major areas of our activity -- credit card billing, settlement, ticketing and reporting.

The first step we took was to move to electronic credit card billing of ARC ticketing transactions. We first moved in this direction in 1989 and now in common with most other industries bill credit card sales daily. The second step involved the settlement process. The weekly settlement process between ourselves and the travel agents and between ourselves and the airlines is now a totally electronic process.

The next area to address involved ticketing. In the summer of 1994, certain carriers began to talk publicly about launching electronic ticketing schemes. In the fall of that year, ARC started work with the CRS systems and with its own travel agent advisory groups to create the framework for ARC travel agents to be able to issue electronic tickets through the ARC mechanisms. This framework was in place by April of 1995 and ARC travel agents have been processing electronic ticket transactions through ARC since that time. A major difference is that the standard ARC paper ticket that you are used to now becomes a standard ARC electronic ticket issued against an electronic ticket number assigned by ARC. This electronic ticket is transmitted to the airline while the passenger is given a confirmation number or the record locator. Nothing that we have done in this area obligates the travel agent to do electronic ticketing. Our work provides the frame work for the agent to provide electronic ticketing where the corporate client requires the service.

The last step for ARC in moving to an electronic system was to look at the way the sales reporting process works. Travel agents today report to us on a weekly basis for all transactions issued by them in the previous week. A paper record is created for every transaction -- normally what is known as the auditors coupon - and travel agents ship all these documents to us each week. We receive approximately 6 million pieces of paper each week to process. Several years ago we set out to find a way to reduce and eliminate this paper flow to reduce the costs of everyone associated with this process. The result was a project to create a system whereby sales could be reported to us electronically and the paper flow eliminated.

We completed the first phase of development of this new electronic reporting system last year, and tested it with selected agents at the end of the year. In a nutshell, this new electronic reporting system is based upon the receipt by ARC every night of a transmission from the CRS systems of all ticketing transactions issued that day. ARC then loads those transactions into its computer systems by the following morning and during the course of the week this builds the travel agents electronic sales report to ARC. The travel agent can access this data at any time through its CRS terminal and has the ability to add, delete or modify the transactions. At the end of the sales period, the travel agent merely indicates through its CRS terminal to ARC that all the sales data for that week is there and correct and there is no longer any requirement to ship any paper to ARC.

In the time available to me today, I have attempted to cover for you how we have managed a system of centralized and standardized accreditation, ticketing, reporting and settlement over the years that through its standardization and economies of scale have kept costs down within the industry. Our management goal has been and will continue to be to evolve this system so that the industry and its customers continue to benefit from our processes as the needs of the market change.

I would be pleased to take any questions you may have.