Cuts And Fees Sweep Europe

<B> Cuts And Fees Sweep Europe</B>

By Amon Cohen

After inundating the north, the relentless tide of airline commission cuts has swept into southern Europe.

The Netherlands, Germany, Scandinavia and the United Kingdom all have succumbed in the last year. Now it is the turn of France, Italy and Spain, where travel agents are hastily restructuring their remuneration deals with corporate clients in light of changes announced by the respective flag carriers.

Air France will reduce its international commission to French agents from 9 percent to 7. However, in a drive towards harmonization, domestic commissions actually will rise from 6.5 percent to 7. Air France was going to introduce the new commission structure in June, but has now put it back to Sept. 1, following a legal challenge by French agents. A judge ruled that the airline was within its rights to set any commission level it liked, but that the notice period was too short.

Alitalia is not altering its international commission rate of 9 percent, but will drop domestic commission from 8 to 6 percent on Aug. 1. Meanwhile, Iberia has just told Spanish agents that international commission will fall from 9 to 7.5 percent, and domestic from 8.5 to 6.5, on June 1.

Air France and Iberia simultaneously are introducing performance incentive schemes that potentially allow agents to win back and even exceed their lost commission if they deliver substantial volume increases. The Air France scheme is almost identical to that introduced by British Airways in the United Kingdom.

If agents can increase their business with Air France by 15 percent, their commission will return to 9 percent. If they increase business by 25 percent, commission will rise to 10 percent.

Many U.K. agents condemned the BA version, called the Performance Reward Scheme, as unworkable, pointing out that BA does not even have the capacity on many routes for agents to increase their business by 15 percent.

PRS is in any case in danger of being declared illegal by the European Commission, following a complaint from Virgin Atlantic that it is an abuse of BA's dominant position in the market.

European competition commissioner Karel Van Miert--who still is sitting on approval of the BA/American Airlines alliance--has issued a statement of objection to BA and is awaiting a reply from the airline. BA has countered by claiming that if PRS is ruled illegal, agency incentive schemes offered by the likes of Air France and Lufthansa also must be outlawed.

As airlines and agents settle in for a Eurocratic argument, southern European travel managers are coming to terms with the new economics of the commission-cutting environment. They expect similar consequences to those in the United States and northern Europe, the most obvious being a shift from commissions and rebates toward management fees.

However, it is anticipated that change will be much slower here than in the north. Spain, Italy and France have a relatively small number of large corporations. Instead, their economies are dominated by small and medium enterprises, often family-run affairs. They therefore are less sophisticated practitioners of travel management, which is one reason why the large travel management companies have less of a grip on Latin Europe than on Northern Europe or North America. Strong community links, particularly in Italy, also mean that the local travel agent often is retained in preference to multinational rivals.

''There are so many small mom-and-pop travel shops in Italy, it's unbelievable,'' said Sharla Ault, an American based near Venice. Ault was travel manager for international clothing group Benetton until the beginning of 1998 and is now sales manager for its private airline, Benair.

''We are starting to see a little bit of consolidation, but only a little,'' she said. ''Many companies are still using small agencies. Larger Italian agencies have started to get their clients used to the idea of a management fee, but so far only the multinationals with businesses elsewhere have gone for them. Management fees have not caught on with all-Italian companies because they don't really understand them.''

Airbus travel manager Bernard Pain, based in Toulouse, paints a similar picture of the French scene. ''Most large companies are already on fees or are thinking of switching to them,'' he said. ''Many smaller agencies are on commission splitting, but somewhere there will have to be a fee for using a travel agent.''

Failing that, Pain added, clients will find their rebates reduced. ''If travel agents were giving 2 percent through commission sharing, they are now going to give nothing, because the 2 percent has disappeared,'' he said.

Pain is unhappy with the Air France incentive scheme. ''Air France is not being completely clear in its strategy. It is trying to hide the truth, which is that it is cutting commission, as it should. Will it ask agents to jump again by 15 percent next year?''

He also agreed that the incentive scheme could pressure agents into pushing Air France tickets even when they are not in the client's interest in order to claw back commission lost by the cuts. ''This is clearly a risk for mid-size and smaller accounts using medium-sized travel agents, but it will be easier for larger agents that can change their payment structure altogether,'' Pain said.

However alien the fee concept may be for southern European travel buyers, they will have no choice but to make the transition, said American Express European director of business development Andrew Risby.

''There are two scenarios: If a client already has a commission and rebate arrangement in place, the agent will have to go back and negotiate. If there is no deal in place, agents will have to introduce transaction fees,'' he said.

Risby claimed that the three-tier system introduced in Scandinavia following commission cutting has been successful in delivering an appropriate fee structure to companies of different sizes. Large corporations are being converted to some type of management fee involving remuneration for consultative work. Medium clients are paying an annual subscription fee for Amex's travel management services. And the smallest customers simply are paying a fee for each ticket booked or other individual transaction.

Benetton's Ault said she believes that the move to management fees will eventually be forced by the internationalization of Italian businesses as national boundaries disintegrate in the coming single European market. ''Italian companies are becoming part of global associations of businesses, and their corporate travel arrangements will be pulled along as part of that process,'' she said.