<B>Zero Looms In U.K.</B>
<I>Agencies Prep For BA's Move Next Week To Eliminate Commissions</I>
By Amon Cohen
Year zero dawns for British travel managers on April 1, when British Airways axes commissions to U.K. travel agents and hastens the inexorable transformation of corporate travel programs from profit centers to cost centers.
After more than a year of planning and speculation, it is only in recent weeks that a picture has developed of how the market is adapting to the new pricing model--and some major surprises are emerging.
Agency handling of clients is being split according to whether they spend above or below a certain level. That level is varying significantly from agency to agency: BTI UK publicly has put the split point at $2 million to $3 million. Carlson Wagonlit Travel, on the other hand, initially has pitched it much lower, at $350,000.
Companies that spend above these lines--and typically manage their programs with a dedicated travel person--are offered negotiated management or transaction fees.
Companies with unmanaged budgets and below that level are being offered non-negotiable transaction fees--service fees. It widely was anticipated that the transition to cost center economics would push large clients toward transaction fees and reallocating costs internally. In fact, many are sticking with management fees and opting to take the hit centrally, with finance directors willing to fund this new cost.
Among smaller clients, the major point of difference between agencies is over how to structure service fees. American Express is offering what is being dubbed, the 'Swedish model.' It charges the client a service fee, but reimburses any income it receives from the supplier. For most airlines, that remains a commission of 7 percent to 10 percent, since no other carrier yet has followed BA's move to zero. BA, on the other hand, is switching to a booking payment of $8.50 to $28.50 as part of the new scheme it calls Fresh Approach.
Nearly all other agencies have opted for a 'Norwegian model,' charging a flat fee and not reimbursing commission. Clients likely will find midsize business travel agencies offering uncannily similar fees to one another. In most cases, a fee only will be charged on tickets from airlines that drop below 7 percent commission.
In practice, that means just BA and low-cost carriers for now, but travel agents predicted that others also will go to zero. "We have had indications from a number of large airlines that they will follow suit," said American Express Europe head of strategic partnerships Kaveh Atrak. However, it is the continuation of commission payments for now that appears to be inhibiting the move toward internal cost reallocation, because a) it temporarily provides sufficient income for the agency relationship to stay in profit and b) many companies feel they cannot switch while the commission picture is so uncertain.
"Some of us are taking the view of absorbing costs centrally for year one, while the situation settles down," said Kevin Watts, chairman of the Business Travel Liaison Group, an informal grouping of about 25 of the United Kingdom's largest travel spenders. Watts said the British Council, the organization for which he is travel manager, "will see what the picture looks like in 12 months and then have a debate about how to recoup costs."
Watts had little difficulty persuading senior management to accept the decision, which he attributed to having long split his budget into two lines: showing agency costs and his income from suppliers. "I was able to go to managers and show this is not a travel agency issue because that line is not changing. What is changing is the income," said Watts. However, he also has had to inform management that for the first year of Fresh Approach his budget forecast could be wildly off target. "Normally, there is a 10 percent to 15 percent difference, but for this one I am having to give all sorts of health warnings," he said.
Nestlé, HSBC and agricultural machinery company CNH (formerly Case New Holland) all are heading for central budgeting as well. "I armed myself with information from BTI UK and BA and put the case to our finance director," said Ian Nurdin, business travel coordinator for Nestlé UK. "It wasn't a problem since we had never publicly made travel a profit center, but had used it to subsidize accommodation." Nurdin added that Nestlé is a centralized organization in the United Kingdom and that travel falls under the facilities department, which is accustomed to handling costs centrally.
It seems that the travel departments that most readily embrace transaction fees and reallocation are those organizations, most notably consulting firms, that pass travel costs on to clients.
Yet, for HSBC senior group travel manager Tony Pilcher, transaction fees are too fussy and too imprecise a science. "Introducing transaction fee charges is, for HSBC, not cost-effective," Pilcher said. "The continued debate would revolve around what constitutes a transaction and the work and time involved with that transaction regardless of the cost of the ticket."
CNH travel manager for Europe Dennis Bailey also is staying on his existing management fee with Carlson Wagonlit Travel and is finding his centralized budget through some adroit refinancing. "We have told our travel agent to keep its commission for 2000 and use that to offset its charges for this year. That effectively turns 2000 into a break-even year, with the profit funding 2001--although I can't be sure yet." While many companies have given themselves greater certainty by moving the majority of their air spend onto a net-net basis, Bailey has a mixture of net-net and back-end.
Carlson Wagonlit UK managing director Jim Tweedie reported mixed reaction among clients when choosing between management and transaction fee options. He said travel managers' apparent cooling toward transaction fees reflects earlier confusion about their purpose. "More and more companies are realizing that transaction fees are only a means of dispersing costs internally. They do not change the cost itself," Tweedie said.
American Express is being more bullish than its rivals about promoting transaction fees, claiming they offer transparency and efficiency. "Some clients are saying they will leave the process as it is for this budget cycle," said vice president of corporate travel operations in Europe Pearse Reynolds. "I would urge them to look carefully at reallocating costs, whether this year or next." If not, he warned, the inevitable negative cash flow when other airlines do cut commission will wreak havoc with budgets.
Another option being presented by American Express and its rivals is a management fee divided by transactions, whereby the corporation pays the agent centrally, then divides that cost by the number of transactions for internal reallocation.
"This has flexibility since it balances simplicity with the attempt--albeit a crude one--to divide travel costs internally," said Chris Fry, director of sales and marketing for BTI UK parent company Hogg Robinson. "It has one other great virtue, which is certainty. Although individual departments will not know at the start of the year how large their travel bill will be, the company as a whole will."
One other issue being thrown up by transaction and service fees is the economic inefficiency of agents booking low-cost tickets, such as for domestic rail journeys. "Travelers won't like seeing a £30 (US$43) fee on a £50 (US$72) transaction," said the Business Travel Liaison Group's Watts.
American Express Europe corporate travel product manager George Hayes said, "companies may well tell their travelers to buy tickets at the station," although his colleague Matt Andrews, U.K. and Ireland vice president of corporate sales, added: "We have been surprised by the large number of customers who are still routing rail travel to us because they want the convenience of one point of contact for travel arrangements.