The Student Travel Bureau

Although it is only the fourth year of its existence, the Student Travel Bureau Ltd, the travel company wholly owned by NZU SA, has come in for its share of trouble. The company has run up huge debts and there have been several attempts to wind it up. So far, however, these attempts have failed and STB continues to exist and, hopefully, trade its way out of its financial difficulties. However to fully understand the issues that are involved, it is necessary to examine the history of the company, how it got into difficulties and how it is intended that it will get out of them.

In the Beginning.

Prior to 1975, the Student Travel Bureau was a standing committee of NZUSA which operated various charter and exchange schemes throughout the country, but at a lower pitch than at present. However in the early 70s, STB successfully negotiated with Air New Zealand (then NAC) for a 50% standby scheme for holders of the International Student Identity Card (ISIC) for internal travel. This caused ISIC sales to rocket, now over 25,000 are issued or renewed annually. As the franchise holders this generated annual returns in excess of $40,000 for NZUSA/STB.

Because of the expanding scope of the operation it was decided, in 1975, to put the operation on a sound commercial looting, and the company Student Travel Bureau Ltd was incorporated in April 1 that year. Because, in those days, student politicians saw green pastures of commercial operations blossoming around every corner, STB was not owned by NZUSA directly. Rather NZUSA created a holding company, Student Services Holdings (SSH) Ltd, which NZUSA owned and which in turn owned STB, and a number of other business ventures some of which were successful (such as Exclusive Travel Ltd) and others which were less so (the publishing company instinctive Impulses Ltd.)

Exclusive Travel, which incidentally is the only company that NZUSA has yet owned which has made money, was bought by SSH as part of the general expansion of the "commercial wing". While STB Ltd could operate its various exchange programmes and other similar ventures, it lacked the franchise to operate as a conventional Travel Agency. To do this it required an IATA (International Air Transport Association) franchise. Exclusive Travel Ltd was a company that had such a franchise, and the various travel operations of NZUSA/SSH further expanded.

The AUSSTS Debt

Being our nearest neighbour, it is not surprising that STB should have had a significant amount of business with AUSSTS, (Australian Union of Students Student Travel Service) with joint bookings and the like. Last year however AUSSTS collapsed (a story in itself which will be discussed in a subsequent article). As the finances of that company were investigated when trading stopped for two months in I 978, it became apparent to the Australians that NZUSA/STB owed a pile of money to them.

The size of the debt was debated by the two organisations for some months, and agreement was finally reached as to how much NZUSA/STB would pay. As far as AUSSTS was concerned, the debt was the equivalent of $NZ96,000. For NZUSA and STB however, it was a little different. It was agreed that, of the $96,000, a debt of $40,000 had been incurred to AUSSTS before 1975. As, at that stage STB had not been a company, but rather a standing committee of NZUSA, this portion of the debt fell on NZUSA, the balance was owed by STB.

The Overdraft

To understand the other half of STB's debts, a little run down on its operations is necessary. When a student goes into STB to purchase a ticket to, say America, costing, to take a nice round figure, $500, s/he writes STB a cheque for $500. For STB this money is two parts, the cost of the fare, and the commission for selling it (easy arithmetic for this example, will be assumed to be 10% — which is higher than it actually is). When the money is paid to STB, STB writes out the appropriate tickets.

Now this 3500 goes into STB's account, where it remains until the student actually flies, perhaps a month after the original purchase. After the student flies, the airline bills STB $500 less the 10% commission, ie $450. This is all straightforward. The important point is that for one month STB had $450 of the airline's money sitting in its bank account. Therefore all the bank statements (or most of them, as there are lean periods in the business) showed STB's account with a healthy credit, but it was a credit of other people's money. It should be clear that by the time STB paid the $450, other students had similarly invested the airline's money with STB.

To see how this can work in practice, consider a mythical travel company selling $500 tickets to America. And to make the set up even more unrealistic, suppose that on the first of every month one student comes in and buys a ticket, and the travel company gets billed by the carrier on the first of the following month. Now suppose that in the course of the month, the travel company decided to buy a new typewritter for $500. It looks at its bank account and sees $500 lying there patiently, and writes out a cheque for the typewriter. The carrier of course does not know that the company has used $450 of its money to buy a typewriter, and duly presents his bill. Woops! no money in the bank. But there is because another rich student has just paid in $500 for his/her trip to America. So no problem, the $450 is paid and everyone's happy. In effect the travel company raised a loan from the carrier to buy its typewriter, and then raised another loan from the following carrier to repay the first carrier.

There are two important points to make here. The first is that, from the bank statements, the company does not show that it went into $500 debt to purchase the typewriter, because it is still in the black. The second is the question of what happens if one month no student buys a ticket? Clearly the debt cannot be rolled over onto the incoming student and the company has got no money to pay the bill from the previous carrier.

This arrangement is not of course eternal. Any profits the company makes likewise go back into the bank account, and over a period of time the $500 is repaid. In the artificial example used, the amount of the company's money in the bank increased by $50 each month, so in ten months the $500 used to buy the typewriter would have been repaid, providing of course that one student per month came in.

The relevance of this to STB is not the the company ran around buying up type-writers at a great rate, but that, in the same way as the cash flow can provide money [unclear: to] buy typewriters, it can also be used to [unclear: cove] losses in the operation of the company, [unclear: and] it seems that this is what happened. The company was losing money, but it could use its cash flow to roll over the loss. Furthermore STB was heavily subsidising certain of NZUSA's activities, again financing it through its own cash flow.

All these problems came to a head at [unclear: the] same time, when AUSSTS went down. [unclear: Wit] the halt in trading all these rolled over losses suddenly popped up. In the case of [unclear: STI] it faced a $56,000 debt to AUSSTS and [unclear: has] an operating debt of about twice that. [unclear: STI] Ltd was what is called an insolvent [unclear: compan] as it surely didn't have anywhere near [unclear: $150] 000 worth of assets.

What was Done

Early last year, NZUSA and STB put their collective heads together to attempt to chart a course out of these murky waters. There were a number of options available, but at the time there seemed to be only one course that could be sensibly followed, to maintain the company but scale down its level of operations. Had the company been wound up then and there, the shareholders (NZUSA) would have picked up the tab for the debt, which in turn would have been passed on to the constituent associations. What that would have done to students' association fees is a question best not thought about.

The rationale for curtailing the company's activities was based on a desire to ensure that the loss did not grow through further disasters. To this end Exclusive Travel (the IATA agency) was sold to the BNZ. At first this seems a strange thing to do, as the agency was making money, however the travel business is an uncertain one, and it was felt that the company should be put back on its feet before any gambles were taken. At the same time a structural change took place. SSH was holding company for all the companies that NZUSA owned. After the sale of Exclusive Travel, the holding company owned only one company, STB. Clearly it was pointless having one holding company which only owned one company, and so SSH was wound up, and NZUSA owned STB directly.

Well, you may ask, if NZUSA sold its only commercial enterprise that made any money how was it intended that all these debts would be repaid? The answer is ISIC, those travel cards that students buy to get the Air New Zealand Stand-by fare. Until October last year the ISICs sold for $3 each, the price being set by the International Student Travel Committee, (ISITC) which owns the scheme. Providing that the overseas travel ventures that STB runs make no losses, the entire income from ISICs, less some small expenses involved in producing them, can go to the bank to repay STB's debt. With a [unclear: groe] revenue of over $40,000 it is projected that [unclear: i] will take only three or four years to cover [unclear: the] $100,000 operating loss.

The debt to AUSSTS is also being repaid from ISIC. The franchise of the ISIC is such that its price is the same all around the world. There is an exception however. The ISTC will allow the price of the card to be temporarily priced higher, providing the extra revenue is to be used for repaying a debt to another student travel service (such as AUSSTS). Because it was clear that STB could not repay the AUSSTS debt without the surcharge, a $2 surcharge was added to the price of the ISIC from October 1 last year. The surcharge will be removed as soon as the debt to AUSSTS has been completely repaid, probably sometime in 1981.

Without wishing to stray too far into a consideration of NZUSA's sad financial position, some comment is needed on the portion of the debt to AUSSTS that was owned by NZUSA. Last year NZUSA paid, $22,000 of the debt, basically by writing out a cheque and running up an overdraft. The balance of page 7[unclear: $40,000] has been taken over by STB, to [unclear: paid] from the surcharge. This means that [unclear: USA] will be in debt to STB to the tune [unclear: some] $18,000 when the surcharge is [unclear: re-oved].

[unclear: w] to Stop it Happening Again

One very major concern when this whole [unclear: estion] blew up was that it might happen [unclear: in]. Related to this was the problem that, [unclear: he] company did go under, the bank would [unclear: allow] STB to go into overdraft by drawing [unclear: ques]. Therefore the company would be [unclear: able] to pay the carriers. Knowing this of [unclear: rse] the carriers would not accept tickets [unclear: oked] by STB. and students would be stran[unclear: i] wherever in the world they happened to

These problems were solved in one fell [unclear: oop]. STB stopped operating one account [unclear: 1] started working from two. There was [unclear: trust]" account and a working account. [unclear: en] a student buys a ticket, their money [unclear: w] goes into the "trust" account. When [unclear: carrier] sends in their bill a cheque is [unclear: wn] on the trust account, and at that [unclear: ie] the commission on the fare is trans[unclear: red] into the working account. In this [unclear: y] the cash flow cannot be used to co[unclear: any] operating losses as moneys in the [unclear: ust]" account cannot be used for any [unclear: rpose] other than to pay the carrier. Al[unclear: no] commission is transferred to the wor[unclear: ig] account until the bill to the carrier is [unclear: J.] In this way the fares of student tra[unclear: iers] are guaranteed to the carrier.

But there is a slight bug, of course. While [unclear: e] "trust" account is always in healthy sur[unclear: s], the working account is in severe over[unclear: ft] Currently the overdraft is fluctua[unclear: g] around the $100,000 mark, which can [unclear: taken] as a rough guide to the extent of [unclear: e] accumulated operating losses since '75. [unclear: der] normal circumstances STB could se[unclear: re] this overdraft against some asset, for [unclear: ample] a building. If the company then [unclear: nt] under, the bank would take the buil[unclear: ng], sell it and recover its money. STB has [unclear: such] asset.

The other option that leaps to mind, is [unclear: f-setting] the two accounts. This means [unclear: t] the overdraft in one account could be [unclear: set] against the credit in the other. Then [unclear: he] company went under, the bank would [unclear: e] the money in the credit account to co[unclear: r] the debit in the other. But this is not [unclear: ssible] if the trust account is to guarantee [unclear: vellers'] money. So a third method is [unclear: re-ired].

[unclear: ie] Guarantees

August Coucil last year the Board of [unclear: rectors] of STB, in order to provide the [unclear: nk] with some security for the overdraft [unclear: the] working account, approached all the [unclear: nstituent] associations and asked them to [unclear: ovide] a guarantee for a share of the over[unclear: ft]. STB's accountants predicted that the [unclear: erdraft] would reach a maximum level in [unclear: e]1979 of $125,000 and decline [unclear: thereof]. The Board therefore sought guarantees [unclear: ich] would total this figure. It should be [unclear: essed] that the guarantees are not loans [unclear: STB]. As yet no money has changed hands, [unclear: d] everyone hopes that no money ever will. [unclear: e] constituent associations agreed to offer [unclear: e] bank written guarantees that, should the [unclear: mpany] collapse, or should the bank just [unclear: nt] to recover its money, they would pay [unclear: to] cover the overdraft that existed at [unclear: e] time of winding up.

[unclear: This] all seemed quite logical and straight [unclear: rward] at August last year. However when [unclear: e]- Canterbury Executive considered this [unclear: prosal], they rejected the idea of giving a guaran[unclear: e] for STB, and earlier this year Massey took [unclear: e] same position. The reasons for not giving [unclear: e] guarantee have never been clearly articu[unclear: e] ed by either campus. Canterbury have ta[unclear: n] the position that they have no faith in [unclear: e] 'ability of STB to trade its way out of its [unclear: e] rent difficulties. In other words that the [unclear: mpany] will never be able to repay the [unclear: isting] overdraft and is in fact destined [unclear: go] further into debt. This would be [unclear: ite] a sensible position if they had in fact any evidence for this belief. They have, to date, produced none.

Massey appear to have taken a similar position for similar reasons, although, again, I have yet to hear what evidence they have based their opinion on. The only campus that has yet to sign the guarantees and clearly stated sensible reasons, is Auckland. They have taken, for a long time, the positon that students' associations should not be involved in commercial enterprises. They argue (and there are facts to support this view) that students' associations lack the time and expertise to operate them profitably. Following this principle they took the position that the company should be wound up, the constituents accepting the losses.

The difference between the Auckland position and that of the two others is firstly that they have always maintained that the debts of the company must be paid dollar for dollar if it is wound up. The other two campuses have taken a variety of positions on what should happen to the debts if the company were to be wound up. The other difference is in their attitude. Auckland moved at May Council that STB be wound up. That motion was defeated, and Auckland responded by saying that, seeing that the company was to continue, they would try once more to have the constitutional amendment passed that would enable AUSA to sign the guarantee (as at present their constitution prevents them from doing this), and then sign the guarantee.

Massey's position at Council was surprising in that they did not support the motion for the winding up of the company. However, neither are they prepared to sign the guarantee, which could be put nastily by saying that they do not want the company to be wound up, but are not prepared to give it what it needs to continue to exist. Canterbury have maintained that the company should be wound up, and if that direct move fails, they will try an indirect tactic by refusing to sign the guarantee. It is not clear whether UCSA anticipate receiving any of the dividends should STB become profitable, in the future, either directly or indirectly through reduced levies to NZUSA.

The New Guarantees

When it was clear that all campuses were not going to sign the guarantees, STB was placed in the embarrassing position of having an overdraft in the region of $120,000 but guarantees which only totalled some $80,000.' In an attempt to solve this problem, the Board altered the terms of the guarantees. Rather than dividing up the $125,000 on the basis of the size of each campus, they invited constituents to make guarantees of any size they saw fit. As recompense for for this, the Board agreed to pay a "guarantee fee" of 4% per annum. This is to say that if VUWSA were to guarantee STB for $40,000, we would get 4% of that sum each year, payable when the company has become solvent (ie when the overdraft and other debts have been paid off).

The important thing to note about the fee is that it is paid on money which has not changed hands. VUWSA has not paid anyone $40,000 is still sitting happily in the bank, but nevertheless it is receiving 4% of that sum per year as though it had invested it.

Canterbury's position on the guarantee fee is interesting to say the least. When there was no fee they proclaimed loudly to all and sundry they had no faith in the ability of the company to survive. When the guarantee fee was offered they suddenly changed their tune. "Yes, well it is possible that Canterbury will sign the guarantee after all — you did say a 4% guarantee fee didn't you?".

Now if you believe, as Victoria does, that STB is not going to go under, the guarantee fee is money in the bank. If however you believe, as Canterbury does, that the company is doomed, 4% is little more than chicken shit. Not only will you not receive the fee, buy you'll have to pay up the amount of the guarantee. It appears that Canterbury are not interested in helping their national association, (for if STB goes down it will drag NZUSA down with it) with a fraternal gesture, however they are more than happy if they think they can make some money out of it.

A New Board

A dramatic turn-around in the style of STB has taken place as a result of the new Board of Directors of the company, elected at August Council last year. John Judge (Chairman), Steve Underwood (ex-Victoria Treasurer) and Nigel Petrie (ex-Canterbury President) have adopted a "new professional outlook" on the business. Translated this means that they regard as their first priority setting STB on its feet and only secondarily, while the company is insolvent to use STB to strengthen NZUSA, financially and politically. To this end the Board have been trying to change the relationship between NZUSA and STB to strictly one of Board of shareholders

A clear example of this attitude is the position the Board took over tenancy of STB in Student Union House, the building that NZUSA owns in Courtney Place, where presently both organisations live. The Board felt that they were being charged an excessive rental, and after some negotiation, resolved to move from Student Union House, By doing this STB landed NZUSA fairly solidly in the financial shit. In fact at the time of writing the Board are reconsidering their position, but there is still a good chance that STB will move.

Superficially this would seem a sensible arrangement, but there is one problem that has to be overcome. The Board's position is that STB will not take financial responsibility for NZUSA, at least while it is insolvent, and nor will they brook interference from NZUSA in the running of the company. However the other side of the coin is that NZUSA still has to accept political responsibility for the actions of the Board. The whole guarantee issue, for example, was a major stimulus to the withdrawal issue at Canterbury. Again if STB moved from Student Union house, NZ USA might have to seek an increased levy to retain Student Union House (which it cannot afford to sell), and would then have to take the political flak.

While it is quite easy and quite satisfactory to have the Board make the vast majority of the decisions about the company, there are some issues in which it is not acceptable for the Board to be the final arbiters. Until the Board recognise this, I believe that NZU SA will inadvisedly meddle in STB's affairs, just to find out what the Board is committing NZUSA to.

Peter Beach.