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Analyzing Legal Action Against YTB, Impact on Agents

August 12, 2008 By: George Dooley

YTB International, based in Wood River, IL, has the dubious distinction of being one of the most controversial companies in the industry and the target of sharp, often vitriolic, criticism from many agents. The recent legal action by the California Attorney General and a new class- action lawsuit filed in Illinois underscores this.

The accusations against YTB range from being a multilevel marketing (MLM) plan focused on network building rather than the sale of travel to being a card mill that encourages YTB agents to scoop up free or reduced travel. Charges that YTB is also an illegal pyramid scheme are commonplace. Its critics see YTB as a scam for the unwary seeking free travel benefits.

Suppliers are routinely criticized for supporting YTB, and praised when they punish YTB. The YTB business model is held out by many agents as an example of what a travel company should not be. YTB agents, it’s charged, pass themselves off as professional agents, earning the anger and frustration of veteran agents with vast expertise and professional credentials.

Despite this criticism, YTB has survived—at least until the California action. And YTB can be expected to defend itself against the charges. The reality is that YTB has been moving aggressively to carve out a strong, arguably profitable, market position in the travel industry— critics be damned. Often, YTB has gained the support of industry suppliers who want YTB’s business.

In an interview with Travel Agent prior to the California Attorney General's lawsuit, J. Kim Sorensen, YTB’s founder and president, admitted that YTB’s business model was controversial but frequently misunderstood. Multilevel marketing isn’t illegal (pyramid schemes are), he noted, urging agents to understand the difference.

Sorensen sees YTB’s model as being radically different from “traditional” brick-and-mortar agencies or host agencies. YTB sells travel via a 140,000-member network of Referring Travel Agents (RTAs) primarily via websites. RTAs direct consumers to the websites. Sorensen sees YTB’s power in attracting new entrants to the industry.

YTB International has three distinct components, Sorensen notes, including REZConnect Technologies, YTB Travel Network and YTB’s referral arm Combined, YTBI has reported year-over-year growth and ended 2007 with a $3.2 million net profit on revenues of $141 million. Also significant, to Sorensen, is YTB’s tracking of the aggregate retail value of all travel services sold by its RTA’s websites. YTBI reported a 2007 gain of 84 percent to $414.5 million from $225.7 million in 2006.

While reporting a loss of $3.5 million for the first quarter of 2008, total revenues increased to $42.7 million for the quarter. Sorensen also noted that YTB paid its reps and RTAs more than $65 million in combined marketing and travel commissions through the third quarter of 2007.

Combined, YTB’s performance is strong enough to allow YTB’s stock to be traded Over-The-Counter (OTBBB) with all the transparency that a public company is required to deliver.

In the interview, Sorensen expressed frustration with the criticism that agents leveled at YTB. YTB agents are getting the recognition from where it counts: industry suppliers who are benefiting from YTB’s marketing and sales clout, he argues.

“There has been some progress in turning YTB’s image around," Sorensen said. "We are working all the time to get better. We have guaranteed issue health insurance for RTAs, including company-paid major medical and life insurance for RTAs with commission income of $25,000.  We are developing our own Travel Agent Certification program. Our training is expanding all the time. As long as we recruit large numbers of part-timers, a certain group out there will not like YTB.”

YTB’s expansion is critically important to Sorensen and CEO Scott Tomer. One example is a recently signed agreement with the Kansas City Chiefs to market travel services to Chiefs fans.  Sorensen credits YTB’s RTAs for the "touchdown": “We have been working on this for more than a year," he said. "And there are other teams and high-profile organizations in the pipeline.”

Another example of expansion is YTB’s entry into Canada. In March, YTB acquired Sunrise Travel Services in Ontario, and Sorensen sees real growth opportunities. YTB had also expanded in the Bahamas and Bermuda.

YTB is also breaking new ground in online education and training of its agents, and in developing group travel capabilities. It has also developed a strong approach to niche markets—honeymoon, golf, fishing and hunting among them.

Sorensen believes groups are a vital part of YTB’s planning. New agreements have been signed with tour operators to give RTAs access to the European market and China. “Groups would be our true specialty," he said. "We are uniquely positioned because of our people. Every RTA that joins YTB is a group waiting to happen with some training. I think our group department is what we will ultimately be known for."

While declining to discuss the appointment of Bob Dickinson, Carnival’s respected former CEO, to YTB’s board and Dickinson’s subsequent decision not to accept the post (allegedly due to agent animosity to YTB), Sorensen believes that the industry is learning slowly to accept the YTB business model.

“We are not a card mill," Sorensen said. "But we are a perfectly legitimate multilevel travel-marketing firm that is moving supplier products and putting money into the pockets of our agents. We are competitive, to be sure. But we are also productive and increasingly professional, we are also investing in the future of our agents.” This includes a new booking tool to be introduced later this year.

Sorensen is bullish on 2008, in part because YTB can expand into non-travel areas—a move that infuriates professional agents. “The future looks very bright to us," he said. "And there are other areas where we can expand. YTB doesn’t only sell travel. We are becoming a major retailer of flowers, gifts and other widely consumed products. We have just introduced YTB Cars, for example.”

Sorensen does not mind when RTAs are called  “hobbyists,” as a recent research study did. “I would agree that many of our RTAs are hobbyists," he said. "I don’t see anything wrong with that. We have people at all levels of proficiency from spare-time to part-time to full-time pros. We don’t have quotas and we don’t fire people for lack of production. We have people that start as hobbyist and later become producers.

“The YTB business model is proving itself in a very competitive marketplace," he added.  He also notes that YTB is considering a move to becoming a franchise operation, a decision that could mitigate some of the criticisms of YTB.

Where do travel agents stand? The industry remains divided. Many will wait to see how the court cases against YTB go. But it will be the individual professional agents exerting pressure on suppliers and associations that may prove decisive.

The court actions against YTB may spark a fire to end abuses of card mills and barely legal marketing schemes. It will also force agents, suppliers, associations and consortia to ask what kind of an industry they want to see emerge.

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