In a move that could mean fare increases of 5 percent to 17 percent for some business travel buyers, Continental Airlines drastically cut the point-of-sale bonus commissions it pays to many New York-area agencies.
While Continental declined to comment and no corporate buyers could confirm news of the cuts, several midsize New York-area agencies have just learned about them.
According to two sources, Continental also cut agencies' corporate discounts by 2 percent to 7 percent, but many more confirmed that bonus commissions were cut to 6 percent. Carriers pay the bonus commissions in the form of discounts at the point of sale in return for business on certain city pairs, often involving international or premium class travel.
The move is the latest in a series of efforts by Continental and the other airlines to cut distribution costs. At press time, it was unclear whether Continental would extend the cuts to smaller or larger agencies or if other airlines would follow suit.
Terry McCabe, president of Stratton Travel, an Oakland, N.J.-based agency with $90 million in annual air sales, said, "This is a big one. Continental dropped our point-of-sale commissions by five to 10 points. This will have a big effect on us. It certainly makes you reevaluate the carrier you're using. For clients who are on management fees and have the commissions passed back to them, this is an increase in fares. Continental told us the cuts would be effective immediately for our new contract, which was to start on Jan. 1." In response to the cuts, "We will shift our commission-based business to carriers that compensate us, and I expect our management fee clients will move their business as well."
One New York agency president also said Continental was threatening its competitive position with the cuts: "Continental was in line with the rest of the carriers in their use of point-of-sale commissions. Now they're away from the pack because they cut their commissions."
Bill Chiles, chairman and CEO of Saddle Brook, N.J.-based Hickory Travel Systems—an international network of 150 agencies with annual sales of more than $14 billion—said, "The commission and corporate discount cut will affect New York-area agencies in our network that handle from $25 million to over $500 million in annual ticket sales."
Indeed, it appeared that New York agencies were the only ones affected by the cuts. Ken Bennett, executive director of the Oakland, N.J.-based Travel Management Alliance, which has nine member agencies with a total of $2.5 billion in annual sales, said several New York members reported that Continental cut its point-of-sale commission Jan. 1. Member agencies in Washington, D.C., and Boston, were not hit with cuts.
According to an executive at a corporate travel agency near Continental's Cleveland hub, the airline has not adjusted any compensation levels there and, in fact, extended the current contract for another quarter. "It would not surprise me if this move by Continental is strictly a New York-area development," said the executive. "They have done a tremendous job marketing themselves as the New York metropolitan area airline and their feeling may be that they own New York. Whether they still will own New York after this remains to be seen."
As agents are just learning about these cuts, their customers are uniformly unaware of them, so far.
One buyer said, "Point-of-sale bonus commissions are out there, but it is very quiet. Airlines are always looking for market share in the other guy's backyard. That is where these point-of-sale commissions really come into play, trying to get more business in their competitors' stronghold."
Stratton Travel's McCabe said Continental also had "cut our corporate discounts by about two to three points." Meanwhile, Hickory's Chiles said member agencies in his network also reported cuts to corporate discounts of up to seven points, indicating that Continental hit some agencies with a double-cut.
Travel buyers who have not yet heard about the cuts could expect to hear from their agencies soon, Bennett said. "Given the timing on this, corporations and agencies are tied up with beginning-of-the-year projects. But at the end of January, I expect more travel buyers will be hearing about this."
Still the cutbacks didn't appear to impact mega agencies. Top execs from Rosenbluth International, American Express, TQ3 Maritz, Carlson Wagonlit Travel and Navigant International all pled ignorance of the cuts or refused to comment.
Danny Hood, president of Atlanta-based WorldTravel BTI, said that the tightening of bonus commissions by Continental was symptomatic of the airlines' attempts to cut costs. "Airlines are cleaning up some of their override payments if they don't believe that agencies are really moving share. But I do think they'll keep some incentive payments to keep agencies whole." Hood believed more cuts were coming soon. "Moving to 0 percent base commissions is an easy cost-cutting move the airlines could make," he said, and guessed that such a move by the airlines might come by April.
Harold Stevens, president of New York-based Stevens Travel Management, said point-of-sale commissions (also called bonus commissions or cluster commissions) are privately arranged incentives that most often are paid on international tickets for specific city pairs.
The commissions are paid in the form of a discount on a ticket at the point of sale. "It's a discount on the ticket that is usually not passed on to the client," said Stevens. "If a client pays the agency $1,400 for the fair market price of a ticket, then an airline paying a point-of-sale commission would cut the price of the ticket to $1,200. The agency pockets the difference of $200 as the commission." Stevens said these bonuses were paid on top of the $100 per roundtrip base commission the airlines pay on each international trip.
Point-of-sale commissions could run from 15 percent to 40 percent of the ticket price, according to Stevens. Clients who have net arrangements with their agencies generally have the point-of-sale commission passed to them, as well as base commissions and override commissions. In these cases, Continental's cut of point-of-sale commissions would translate into a fare increase.
Joe Broesler, vice president of international rates for Hickory Travel, said, "Most companies are management fee accounts, so it's the client who is going to be affected."
Despite the cuts, Continental is betting that no one will change their market share, Broesler said. "They're playing hardball with the expectation that the agency and traveler won't move to other carriers," he said.
However, Broesler said Continental may lose that bet. "The people I talk to at agencies are looking to shift market share away from Continental, because the other carriers have not changed their commission structures."
Broesler supported this move. "If companies do not shift market share in response to the cut," he said, "this is not the last commission reduction we'll see. If this cut holds, next year they'll drop it again.
"The airlines are trying to reign in commission spending," he added. "What happens next is up to travel buyers: Are they going to be tough and shift market share? Or is it going to be business as usual?"
An unnamed faring expert, who advises midmarket and super regional agencies in the New York area, said the cuts could mean a fare increase of 15 percent for buyers.
"Buyers were getting a 14 to 16 point-of-sale discount, and now they get six. They were also getting a 7 percent corporate discount. According to agencies with which I consult, that discount was just eliminated. The total discount drops from as high as 23 percent, to just 6 percent."
"A typical roundtrip Newark-to-London business class fare is $7,460 on Continental," he said. Under the old deals, net buyers could see a discount of $1,815.80 off that fare. After the commission cut, the discount would come to just $547.60.
Andy Menkes, president of Partnership Travel Consulting, a Princeton, N.J.-based consulting firm, said corporate discounts and point-of-sale commissions have been part of airline-agency dealings "for many years."
By way of explaining Continental's reasons for the cut, Menkes said that "The airlines are looking at commissions as a line item and looking to reduce costs. It's tough to explain how you can go to Congress and ask for grants and then continue to pay commissions like this."