Cut Spurs New Fees

<B> Cut Spurs New Fees</B>
<I>Agencies Scramble Yet Again To Pass Commission Tab To Clients</I>

By Sarah Welt

American Express next month will implement an across-the-board $20 transaction fee for all non-contract clients on domestic tickets, falling in line with countless other travel management companies instituting higher processing fees as a result of this month's commission cuts.

While United led the way for the third time (<I>BTN</I>, Oct. 11), its counterparts quickly followed suit during the past two weeks, matching the 3 percentage point travel agency commission cut for both domestic and international flights. As of press time, Air Canada, Air France, Alaska, American, American Trans Air, America West, Continental, Delta, Midwest Express, Northwest-KLM, TWA and US Airways all had adjusted their commission structures from 8 percent to 5 percent.

American Society of Travel Agents COO Bill Maloney said this cut is a hit of roughly "$20,000 for the average agency." To come up with this number, he said, look at the ARC sales figures. "If you take a $9 million agency, that is $180,000 drop in pure revenue because costs are not going away and it is very difficult for that kind of agency to make it up in fees."

The timing couldn't be better for American Express also to unveil its definition of a core transaction and the ability through a new "Shared Services" process to offer clients a $20 reduction on a per-transaction basis (see sidebar, page 16) beginning early next year.

While the news of another reduction hardly came as a surprise, several industry insiders believe this is invariably the final straw for many small travel agencies. To stay afloat, they will have to further diversify their business, switch clients to some type of fee arrangement if they had not already done so and increase existing fees.

Business Travel Coalition chairman Kevin Mitchell is expecting a decline in the number of travel agencies by 60 percent through closings, mergers and reduced openings, which will drive consumers to the Internet. He compared the result to today's fortress hubs, where "the Internet air service spaces can be quickly divided, dominated and controlled by a small group of firms."

There is evidence that this scenario already is playing out. Delta invested in Priceline.com, American parent AMR merged its Sabre Travelocity with Preview Travel and the Star Alliance established an Internet portal in cooperation with GetThere.com.

Travel managers, meanwhile, will be looking to adopt online booking systems and get usage up on existing products with greater intensity now that the bottom line will be even more carefully scrutinized. And those who have filed their budgets for next year likely will have to revise those documents to include a fee line for agency expenses, if they have not already done so. Fewer travel managers will have the option of not charging back transaction costs to individual travelers now that the commission cuts for many clients means negative earnings for the travel department. Few would argue that the profit center mentality can continue to exist in the new environment.

American Express Corporate Services president Ed Gilligan said this latest cut is a "watershed event. This is really where the rubber meets the road. Most clients are going to owe their travel agencies money versus on average six months ago when most clients were still getting money back. This is when they have to write checks, and the readiness for Corporate America to have to do that is still relatively low. And it is not because travel management didn't know it was coming. It is because CFOs and CEOs are still somewhat removed from the economics of this and it is probably only now being sprung on people that for budgets for the year 2000 there is an expense line here where before it was a break-even or positive." He added, "None of our clients seem to be shocked that commissions were capped. I think they are going to be shocked three, six, nine months from now when they start to see the bills pile up. I think sticker shock has yet to hit."

The only way that corporations would have been able to protect themselves from the latest cut is to have had net fare deals in place with their preferred carriers. Even so, Gilligan noted that two years ago net-nets "looked more like a sham than the real thing. Many times clients were worse off. Two years ago the old net-net deals were worse, so the first clients that moved to net-nets were shortchanged on average." However, he noted that "net-nets cut this year have been better."

Still, the number of accounts actually on net fares still remains low across the board. Gilligan noted that there has been a dramatic increase from 5 percent last year, but it is still only 20 percent. "If you think of net-nets as a hedge from future drops in commissions and overrides, a lot of clients missed the opportunity to hedge." Going forward, however, "I think it will go well north of a third of our business."

While 82 percent of its accounts have contracts, a great deal of accounts under $10 million--which equates to more than $3 billion worth of business--are not run on a contract basis. To recoup some of the losses, American Express next month is going to implement an across-the-board $20 transaction fee for non-contracted clients. "We are not just going to slash and burn service levels," Gilligan said. The company didn't go out and test the waters before deciding to institute a fee on that segment of the business. "We felt we didn't have time to research. We are going to have to see what happens. We feel it is worth more than $20, but that kind of covers our processing costs for that segment."

American Express may be going to processing fees on the corporate side for the first time (it already charges a leisure ticketing fee), but a large number of agencies started to charge per-ticket transaction fees for non-contract clients after the last cut. This time around, however, it is time to up those fees.

The $52 million Piedmont Travel Inc. of Greenville, S.C., for example, expects to have to increase fees by 75 percent because the "financial hit to the agency is well over half a million dollars, said president John Townes. The actual fee, while not across the board, "is going from less than $10 to less than $18." For management and transaction fee clients, meanwhile, which account for between 30 and 40 percent of the business, "We will sit down with them individually and take a look at the hit. Most larger accounts were on net deals anyway," Townes said.

The Atlanta-based Georgia International Travel beginning today also will institute higher processing fees. "We have been charging $10 for domestic and $20 for international, but we are going to $20 domestic and $30 international," said vice president of client services Patti Huddleston. Asked if the $17 million agency plans to "eat" some of the cuts instead of passing the money back to clients, Huddleston said, "not if we are going to stay in business and pay experienced agencies a competitive salary. We are losing an average of $12 a ticket because our average ticket price is $400. So we are not even raising fees to cover what the average loss will be on domestic. International will be more than that--more like $30 average loss per ticket."

The $75 million Caravelle Travel Management of Schaumburg, Ill., calculates that the cut is "in excess of half a million dollars," said executive vice president Tony Vanella. The agency knows it has to increase fees but "we are still struggling with that. We want to understand the financial consequences first." Whatever it does, it is unlikely it will be an across-the-board action for the three-quarters of its accounts on a per-transaction service fee. "For some clients, there was no loss because they purchase tickets generally in excess of $1,000, so it would be hard to go out to them and say, 'we didn't lose money but now we have to charge you more.' " Like Georgia International, Caravelle also figured it was a $12 reduction per ticket.

Vanella noted that this commission cut is "in many respects the most unique and most devastating rolled into one. This touches every ticket to every destination on the planet from $1 to $1,000. There is nowhere to hide any longer." He added, "What I don't understand is why my competitors continue to work in an ostrich-type environment where they don't put competitive bids in the marketplace. I still come up against proposals where revenue sharing and no transaction fees are contemplated."

Northwestern Travel Management's COO Art Dahl figured that the cut is a $4 million hit to its $270 million business. Ninety percent of clients are on some sort of fee arrangement and while it likely will have to pass on some of the cut to customers, "we will be absorbing some of the hit," said Dahl.

One way that some insiders believe the answer of absorbing the hit to commission revenue is for buyers to ask their preferred carriers for an increased discount and the agency to hit up its airline partners for higher overrides.

Management Alternatives consultant John Heilner suggested that those corporations already on a management or transaction fee go to their airline partners and "remind them that while you sympathize with their efforts to reduce distribution costs, in your case there is no distribution cost. The so-called commission is part of your discount, and that's part of the reason you chose X airline as preferred."

Asked if Piedmont Travel expects a higher override to take the sting out of the cuts, Townes answered, "Can I expect it? Maybe. Would I like it? Absolutely." He added, "I still maintain with every cut there are some savings back to the airlines. Perhaps they could at that point pass back to key partners. Whether or not that will happen, who knows, but I think there is a recognition on the part of the airlines that there is a certain number that do create value for them and should be compensated for it."

Gilligan, for one, doesn't believe agencies will see higher overrides. "The airline industry is in a cyclical lull. What is happening now is we are in a downward spike. We haven't bottomed out but if you look at demand for high yield passenger business travel, it's slowing down, especially international." He added that "all airlines are chasing passengers," and the increased usage of low-cost carriers that don't pay overrides is "growing faster than airline business. The airlines are growing 3 percent and low-cost carriers are growing at 10 percent. Airlines are chipping at the override and the earn rate is coming down."

While the industry has spent the past couple of weeks figuring out the cut's impact, the American Society of Travel Agents, as part of its "Fight Back" program, announced last week its board voted unanimously to expel United from the group. It also voted unanimously to resume efforts to abolish the statutory authority to grant antitrust immunity to airlines as well as to form a coalition embracing dealers (and others, such as physicians) who face coping with large, economically powerful entities but cannot act collectively under antitrust laws. Part of the first phase of the program includes filing a complaint with the Secretary of Transportation to rescind commission cuts.