British Airways has launched an aggressive assault on its distribution costs by reducing U.K. travel agency payments to a flat commission rate of 1 percent. Sources at the airline confirmed there will be a major change in global distribution system strategy within 60 days. They said this likely will be followed by the imposition of fees for payment by credit card on all fares and the introduction of further penalties for use of paper tickets.
BA is in advanced negotiations with the GDS companies to hammer out an agreement that would reduce the fees the airline pays them. Unless it sees immediate movement on the issue, BA has made it clear it will unveil an alternative distribution strategy involving direct connectivity to agents and corporations coinciding with anticipated GDS deregulation on both sides of the Atlantic. Partner American Airlines just launched such an initiative
(see story). Meanwhile, Aer Lingus late last month pulled several of its cheapest fare types from the GDSs and made them available only through its Web site. However, both British Airways and GDS sources have confirmed that the airline's preferred option remains to continue distribution through the GDSs if a settlement can be reached.
Continental and Northwest airlines' deals with Galileo International
(see column) are the latest examples of U.S. carriers coming to terms with a GDS provider.
As in the United States, these airline-GDS deals put pressure on the substantial incentives GDS providers pay to travel agents. While the precise consequences for BA clients remain unclear, it is understood that one condition of the deal BA has proposed involves reducing or eliminating those payments. In turn, agents likely would seek compensation in the form of increased fees to clients.
BA also is expected to start charging passengers for bookings made using credit cards, a policy long employed by low-cost airlines in Europe to offset the merchant fees they pay to card companies. EasyJet for instance, charges £4 (US$6.30) for bookings using credit cards, but nothing for payments with debit cards. BA is currently in a legal dispute with American Express over a move made by BA last year to pass on card merchant fees to corporate clients for payment on net fares
(BTN, June 24, 2002).The first front of BA's drive to reduce distribution costs was unveiled last Monday, when it gave U.K. agents three-months notice that it will introduce a commission rate of 1 percent on Dec. 1. In 2001, BA became the second mainstream carrier in the world, after Singapore Airlines, to ditch commissions when it moved to a system of flat booking payments. Supposedly assessed on the true value of the work an agent performs for an airline, the so-called Fresh Approach scheme paid agents between $9.50 (later reduced to $4) and $32 per booked sector, according to whether the flight was in premium or economy class and whether it was domestic, short haul or long haul.
In the case of long-haul premium class flights, the switch to 1 percent commission could mean a slight increase in payments to agents, but the net effect will be a "fairly significant" reduction, according to Tiffany Hall, BA head of sales for the United Kingdom and Ireland. "When we brought in booking payments, we hoped they would be for the foreseeable future. But the simple reason we have switched is that, with all the changes in the industry, we can no longer afford to pay as much to agents," she said. "Low-cost carriers have transformed the market so significantly that we can no longer compete unless we make changes. Last year, we removed our Saturday night restrictions on short-haul bookings and our average fare has fallen a lot. We are under pressure to maintain those low fares."
Agents inevitably will have to raise their fees to clients to compensate for the reduced income, and those clients that receive all of their agents' airline remuneration also will see their income drop. Yet, in spite of this and the abrupt dumping of the Fresh Approach philosophy, the news generally has been received with equanimity. Tom Stone, chairman of the U.K. and Ireland's Institute of Travel Management and director of travel management for Universal Music International, said his members accepted the change for several reasons. "It is good news," he said. "Most of our members are glad to see commission getting closer to zero because it means the travel agent is now working for the customer and not for the airline, which caused a crisis of identity. In any case, it won't make any difference to any members on net fare programs. More than two-thirds of my own company's business with BA is on net fares."
Stone also agreed with Hall's assertion that commission cutting represented part of the quid pro quo for the major reductions in BA's short-haul fares. "What BA has done to make its short-haul fares more flexible more than mitigates this," he said. Stone said his only quibble was that BA had not simplified the situation further by eliminating agency payments altogether.
Jon Langley, U.K. managing director for TQ3 Travel Solutions, agreed. "It is more of a problem to administer 1 percent than zero," he said. "This change is more an inconvenience than anything else. Earning 70 pence commission on a £70 fare is a bit of a joke. However, most of our clients will be indifferent. Fresh Approach [which replaced a previous commission level of 7 percent] gave them two years to re-educate themselves that agents do not provide a free service."
Hall said BA had considered moving to zero but feared this could breach its International Air Transport Association resolutions. Scandinavian agents are suing SAS, which has moved to zero in its home markets, on this basis.
Mike Platt, managing director of BTI UK, expected the new commission level to accelerate some clients' movement to lower-cost distribution options, such as online booking and call centers. "This will lead them toward new products that have been on the market for some time but for which there has not been much uptake," he said. BTI UK is working on launching a rival product to the lightly managed business travel offerings of Expedia and Travelocity. "It will do a lot of things better than either going to the airline direct or using the online travel agencies," he said. "For instance, our clients often want to fly out in economy and return in business class. You can't do that on most self-service reservation systems, but you will be able to with us."
BA is not the first airline to move to zero or token commission in Europe. As well as SAS, Aer Lingus dropped to 1 percent in the United Kingdom and Ireland on Sept. 1. Iberia has followed BA in announcing a cut to 1 percent in the United Kingdom. Platt expects some airlines to follow instantly but others to hold at the standard 4 percent or possibly even raise commission in a bid to win marketshare.