Salient. Official Newspaper of the Victoria University Students' Association. Vol 44 No. 9. May 4 1981

Student Travel Bureau

Student Travel Bureau

This special report has delayed the publication of Salient by 24 hours. The paper normally goes away to the printer every Friday. In this case we have covered Sunday's meeting because it is an important issue, and because this is the last issue of the first term.

Salient has been aware of the financial difficulties of Student Travel Bureau for the past three weeks. However, we have faced difficulties reporting the situation for two major reasons. The first is that all the facts of the situation were not available until recently, and secondly that many of these facts were (and still are) part of some incomplete, delicate financial arrangements amongst some of the involved parties.

By the time of the next issue of Salient (in term two), negotiations are likely to have been completed, and we will be in a position to bring you detailed reports of the episode's solution.

Finally, Salient wishes to thank President Virginia Adams and STB Managing Director David Cuthbert for the access they have been willing to give Salient to reports and information on the current situation.

Ed.

The History

Why did VUWSA sign a $40,000 overdraft guarantee for STB? Why did only four out of the seven constituent associations of NZUSA (Otago, Lincoln, Victoria and Waikato students' associations) sign guarantees? Why are those guarantees now in danger of being called up? In the recent panic over what should be done with the "STB Problem" these questions have not been fully explored. In this article Salient investigates the history behind the present crisis.

In essence there were two reasons for the "STB Crash" of 1978 and for the company's substantial accumulated losses that were discovered then. On the one hand substantial losses arose from the cessation of trading of a major partner, the Australian equivalent of STB, and also the termination of a concessionary arrangement between STB and an international airline. Had the company a sound base at that stage, these blows could probably have been weathered, albeit with some strain. The position of the company however was not sound. From 1975 to 1978 it now appears that the actual profits of the company, while considerable, were not as large as was believed at the time. In consequence monies had been paid to NZUSA that were in reality beyond the resources of the company. While both factors, combined, brought the company down, it is difficult to assess one as the primary cause, ahead of the other.

When the realisation of the magnitude of these losses was appreciated, a number of measures were taken to restore the company to a stable footing. The debt to the Australian Union of Students Travel Service was to be repaid with a special purpose $2.00 levy on the International Student Identity Card (ISIC). The general accumulated losses were to be recovered from the trading profit of the company.

Constituent Guarantees

The general tosses of STB were, and still are, manifested in its bank overdraft. It was recognised that if the company were to be able to continue to trade there would need to be some guarantee given the bank in respect of the overdraft, as STB had no asset against which it could be secured. On this basis it was agreed in August 1978 that overdraft guarantees totalling $100,000 would be provided by the seven NZUSA constituents on a pro rata basis.

At the time it was agreed amongst all constituents that all would participate in giving the guarantees. At that time, had the guarantees not been given, STB would probably have been wound up, NZUSA would probably have covered the losses of the company, and then the losses would have been divided on a pro rata basis. The rationale for providing the guarantees was clear: either the losses were covered immediately, or a guarantee for a similar amount would be required (actually a smaller amount owing to the arrangements relating to the Australian debt) in anticipation that the trading profits of the company would reduce the debts, and eventually clear them completely. At that point the guarantees could be released without any cash having been required from the constituents.

Obviously the scheme proposed could only work if STB actually made a profit, but in view of the massive revenue from the ISIC scheme this seemed a valid assumption. Providing the travel operation was able to cover its costs, substantial profits from ISIC sales would generate the required revenue to recover the losses.

On the basis that other constituents were doing likewise, VUWSA signed its guarantee for the pro rata share of the overdraft, some $17,000. Three other constituents did likewise. After much delay and confusion, promise and counter-promise it became clear that three of the constituents (Canterbury, Massey and Auckland students' associations) were not going to honour their earlier commitments and sign their share of the guarantees.

Consequently by 1979 there were insufficient guarantees to cover the overdraft and the bank was beginning to ask leading questions. The STB Board attempted to resolve the impasse by offering those constituents who had already taken up guarantees the opportunity to increase them. They endeavoured to sweeten this otherwise tasteless pill with the offer of a guarantee fee of 4%p.a. on the value of the guarantee. Victoria and Otago increased their guarantees to $40,000 each on this basis.

Why so high

The decision to increase the guarantees seems clearly unfortunate when viewed in today's light. The justifications at the time were:
(i) if the guarantees were not increased by those who had already given guarantees, the guarantees already given would be liable to be called up by the bank, as they would realise there was no hope of ever getting even a significant part of the overdraft guarantees;
(ii) the company had just recorded a profit of some $22,000 for the previous year and there was every indication that the losses would be recovered according to the previous timetable (this would have involved the guarantees being released by the early 1980's).

The fly in the ointment is that STB did not continue to trade according to anticipated patterns (which included projections by Wilkinson Wilberfoss). The profit in the following year was a scant $6,000. It now seems highly unlikely that the company will be able to return to its former profitable levels without a substantial increase in the ISIC price.

What's Cause the Losses?

There are two obvious causes for the company's reduced profitability:
(i) students are travelling less as a result of the harsh economic conditions. This reflects both on sales of ISIC's purchases for the domestic air concessions and on ticket sales for overseas travel;
(ii) skyrocketing interest rates have substantially increased the cost of STB's overdraft. In addition the plummeting value of the New Zealand dollar has dragged out the time for repayment of the Australian debt, which is set in Australian dollars.

In addition to these factors, inflation has eroded the value of STB's income. While travel commissions increase in line with continual and frequent increases in air fares, the price of the ISIC has not been increased since 1977 (the entire $2.00 per card special levy struck in 1978 went to the Australians, STB's general operations received no benefit from this increase). Thus in real terms the value of the ISIC has dropped to about 60% of its 1977 value. At the same time, sales have also dropped by a similar amount.

It would appear therefore that a significant increase in the price of the card would solve the problem of its declining real value, although possibly at the cost of some further sales.

The profitability of STB could be expected to improve, providing such an increase did not substantially affect sales of the cards, with the additional proviso that the travel operation were able to at least maintain a breakeven position.

Peter Beach

The Debts of Student Travel Bureau

  • A bank overdraft of approximately $130,000.
  • A debt to the Australian Union of Students Travel Service of approximately $70,000.

Proposed Possible Solutions

  • Cease trading and wind up the company.
  • STB has three real assets: the ISIC agency and its other business; furniture and fittings; and the debt owed to it by NZUSA. In the case of winding up, STB would lose all these assets except the debt from NZUSA.
  • Estimated cost of winding up: between $200,000 and $250,000. (The Board of Directors of STB estimated a cost of $261,000 for this option).
  • This money would be paid over by NZUSA, without any real hope of seeing any of it again.
  • Injection of funds through increase in share capital.
  • This was the recommendation of the STB Board of Directors. They were looking for an injection of at least $150,000; $66,000 from NZUSA's debt repayment, and $100,000 in new share capital. Bank overdraft eliminated, AUSTS debt lowered to $26,000, in turn reducing debt servicing costs. (Cost estimated by VUWSA's law firm of this option: at least $160,000).
  • Objections: 1981 students paying the full amount of losses over past several years.
  • The money injected will simply pay off debts, not create value. STB's next step would have to be to approach the bank for a further overdraft.
  • STB would be over capitalised; perhaps having some $250,000 share capital with a relatively tiny value of assets.
  • No change in the present administrative structure. Difficulties between NZUSA and STB would continue unchanged.
  • The Rennie/Victoria Proposal
  • Explained in detail in the article on page 5. However, total cost of $116,000; share capital roughly equivalent to assets; and providing a base of operating capital.
  • Allows one company to get on with debt repayment, and the other to get on with providing travel services.

Note: the above figures and conclusions are, in general, drawn from a memorandum supplied by the law firm of MacAlister Mazengarb Parkin & Rose to VUWSA on 29-4-81; and a report furnished from the Board of Directors of Student Travel Bureau Ltd to NZUSA on 24-4-81.

Student Travel Bureau

The Prospect for a Solution

As expected, the Special General Meeting of the New Zealand University Students Association held last Sunday 3 May did not produce any final solution to the financial problems faced by its company, Student Travel Bureau Ltd.

However, a parcel of motions passed at the seven hour meeting in VUWSA's Union Hall looks likely to produce a brand new company by the 25th of this month — Student Travel Bureau (1981) Ltd — owned by at least two students associations (Victoria and Otago). Failing this, NZUSA will immediately discuss the future of the current STB; a move which will possibly see STB cease to trade.

Attended by delegates from the seven constituent student associations, NZUSA national officers, the directors of Student Travel Bureau, and no less than three association lawyers — the first half of the SGM was taken up with discussion of the proposal created by Victoria's lawyer, Heughan Rennie.

Rennie introduced the proposal as "a device" which provides constituents with a chance to pay as little as possible; and a formula acceptable to all seven, including those taking a non-financial role in the new venture. His system allows the services currently provided by STB to students to continue, and the repayment of all debts at the end of a five year period.

Although the lawyer took almost an hour to explain what has now affectionately been dubbed "The Rennie Proposal", it can be outlined as follows.

The Rennie Proposal

A new company would be formed ("Student Travel Bureau (1981) Ltd") with a paid up capital of $50,000. Rennie purposely made no mention of who would be the new company's shareholders. The new company would purchase all the assets — except the International Student Identity Card (ISIC) — from the old STB for $20,000. NZUSA would immediately pay its debt to the current STB — quoted by Rennie as $66,000; more on this later.

Currently STB has a long standing debt to the Australian Union of Students Travel Service (AUSTS) quoted as about $70,000. Under the Rennie Proposal, the new STI would immediately negotiate with AUSTS to eliminate this debt.

The new company would also be in a position to reduce its $130,000 overdraft with the Bank of New Zealand to apprximately $95,000 — which happens to also be the level of the overdraft guarantees held by the BNZ from four students associations ($40,000 in Victoria's case). Even more negotiations would be held with the BNZ regarding eventual repayment of this $95,000.

Lastly, the new company would arrange to hold the agency to sell the 1SIC, and pay the old company a royalty on each card sold. Being the backbone of STB's operation, this royalty would provide the capital year by year to repay debts. However, this aspect is dependent on successful negotiation for a price increase in the ISIC of an amount equivalent to the royalty.

Comparison with other Proposals

While this may all seem somewhat confusing, we can summarise by saying the Rennie Proposal represented a total cost of approximately $116,000 — $66,000 from NZUSA (again, more of this later), and $50,000 from whoever the shareholders may be (worth noting this is not necessarily all student money).

Compared with the estimated costs of $160,000 for injecting new share capital, and at least $200,000 to wind up STB (both discussed in the article above) — the Rennie Proposal is clearly the cheapest. This fact prompted STB chairman Steve Underwood to dub it "The Woolworth's Proposal".

Photo of the meeting of the Student Travel Bureau

The scene at Sunday's meeting.

Photo of Phil Chronican, Stephen Underwood, David Cuthbert

The STB Board of Directors, from left: Phil Chronican, Stephen Underwood, David Cuthbert.

But not only is it the cheapest, Victoria's proposal would mean that any student shareholders in the new STB would have their money in a company with real value. In addition, the venture would hopefully mean the elimination of all debts after a five year period.

While all this sounds rather sweet, Rennie was very careful to point out the assumptions upon which this proposal was based. The primary one is that the new STB will trade at least at a breakeven point. We must first be convinced that students will continue to suppport STB; otherwise the proposal becomes, said Rennie, "a recipe for further loss." If, for example, Victoria buys shares in the new STB and it trades un-profitably, we will be worse off under this approach than any other.

Future Profits?

The question of STB's future profitability is somewhat difficult. Rennie's firm pointed out that, without interest repayments, STB had traded profitably from 1978 to 1981. When STB managing director David Cuthbert was asked at last Wednesday's VUWSA Exec for his opinion on the question, he was cautious. He claimed there would be great problems if NZUSA's constituents did anything to work against the company — particularly non-shareholding constituents.

In the "medium term future" Cuthbert sees the primary factor to be a price increase on the ISIC, without a substantial fall in numbers sold. He also pointed to the need to at least sustain trading levels in exchange travel schemes such as those to North America, and the possibility of negotiating additional benefits (discounts on various products) to ISIC holders.

Quite clearly, this question requires substantial investigation by any of the potential shareholders of the new STB.

Campus Reaction

SGM reaction to Victoria's proposal was that it was worth serious consideration. However, this contrasted sharply with the number of campuses willing to become involved financially. Auckland, Canterbury, Lincoln and Massey all have strong policy which would, at present, keep them out of such a venture.

Simon Mortlock, Canterbury's lawyer, claimed the proposal was "far superior to the proposal of STB's board" to inject new share capital (see above article). It would be fair to say STB's board agreed with this appraisal.

However, the suggestion also came from Canterbury that the cost of winding up STB was, in a strictly legal sense, far less than Victoria's proposal — a total of $130,000, contrasted with at least $200,000. This suggestion was rejected out of hand by other delegates, however. It would have meant regarding STB staff holiday pay and redundancy payments, for example, as any other debt — likely to be settled at 10 or 20 cents in the dollar. The suggestion was also unacceptable in the light of the re-affirmation by NZUSA, at an SGM earlier this month, that it would "meet the debts of Student Travel Bureau as at 30 May 1981."

Another pleasing aspect of the discussion was the sensible approach taken towards the proposal by campuses which were not interested in being financially involved themselves. Auckland's Bob Lack expressed his association's opposition to itself or NZUSA owning shares in the new company, but added that AUSA would not get in the way of other campuses which might.

In fact, the key motion of the meeting resulted from such an attitude. Moved by Canterbury and Waikato, and passed unanimously, was the motion: "That NZUSA authorise those constituents interested in the Rennie Proposal to enter into negotiations with the Bank and other creditors of STB, on their own behalf, with a view to the formation of a new student travel bureau."

Basically, this motion represented an endorsement of Victoria's proposal and, in effect, an undertaking on the part of all constituents not to unduly hinder the establishment of such a venture.

Three successful motions followed; the first giving the board of STB the power to unanimously decide to accept any such proposal; the second resolving to immediately decide the future of STB if a proposal was not forthcoming by 25 May (putting a time limit on the potential shareholders); and, in the event of it being needed, the President is to prepare a report to May Council on the costs and related effects of the cessation of trading of STB.

Settling the Debt

The next part of the SGM was taken up with discussion of the debt owed to STB by NZUSA. This is the debt quoted as $66,000 throughout the Rennie Proposal. However, a substantial part of the debt was still in dispute (a result of the misty financial relationships between NZUSA and STB From 1973 to 1975). Because settlement of the debt is a very necessary part of the proposal to form a new company, its exact level had to be fixed at this meeting.

An often heated discussion followed, with Victoria's delegates strongly urging the acceptance of a debt of $59,554 and recognition of an approximately $8,000 payment to NZUSA by STB late last year. However, this figure was not accepted by a narrow margin and a figure of $52,732 owed to STB by NZUSA was agreed upon (plus recognition of the $8,000 payment). The difference between the two figures is the payment of interest on an old debt of NZUSA to STB — NZUSA has always refused to recognise this interest debt.

While having the level of debt settled is an advance, the difference between the Victoria proposal's "$66,000" and the real $52,700 may well provide some hindrance to the new company's prospective settlement.

Finding the Money

The last part of the SGM was taken up with the proposals for NZUSA to find $52,700 with which to pay STB. It was resolved that this figure will be paid to STB from constituent levies income — after STB has negotiated with possible assets purchasers and the BNZ — for the interim.

However, NZUSA will investigate the possibility of financing this debt using its own asset of Student Union House (although it will not sell the building). In the event of such financing not being available, notice has been given for a special levy to be struck in 1981 of $1.35 per student. In Victoria's case, such a levy would cost close to $8,000.

At first sight Victoria students may consider our Association will be taking on a risky venture if it considers providing share capital for a new STB. However, even if this new company trades profitably for only a couple of years, the debt repayments which will occur during that time mean that to wind the company up after that would be a cheaper process than any other proposal before NZUSA at Sunday's SGM.

Once other campuses fully realise this, there is the possibility we will see them come to the party and take out shareholdings.

Stephen A'Court