American Airlines' attempt to shift some of its distribution costs to clients through traditional travel agencies has drawn skepticism and consternation from many corporate travel managers and travel management companies. While most understand American's plight amid the worst financial crisis in airline history, many said its voluntary EveryFare program, which passes on new fees to clients in exchange for Web fare access, is not the right solution. No mega travel agency aside from TQ3 Maritz Travel Solutions has committed to the program and no other airline has announced a similar scheme.
Even St. Louis-based TQ3 Maritz, which at press time had signed only a letter of intent to participate, acknowledged the program could collapse if clients do not agree to defray the agency's new costs or if no other agencies sign up. TQ3 identified direct connections as the back-up plan.
Corporate Travel Management Group of Lombard, Ill., which last year posted $145 million in U.S. air sales, is the other EveryFare launch travel agency.
From the corporate travel manager perspective, access to generally restrictive Web fares—which by most accounts rarely beat negotiated corporate fares—is not enough of an enticement.
"It is a risk shift away from the carrier and does not sound like a win-win proposition," said Mark Vilcsek, senior purchasing manager for travel services at National Semiconductor Corp. in Sunnyvale, Calif. "If my agency were to accept the costs of the GDSs and translate them to me, I would not see the cost-value for it."
The new AA model, which officially launched last week and runs through 2007, essentially trades to traditional U.S. and Canadian agencies' access to all Web-only fares via the GDS under a separate fare basis code in exchange for a transfer of GDS fees away from the airline. In return for reimbursing AA for total GDS costs associated with their bookings on the carrier, participating agencies will be given AA-issued allowance credits for every booking, initially set at $4.13 per flight coupon and gradually diminishing over the next five years.
The concept calls on agencies to realize technology-enabled distribution efficiencies and to negotiate lower GDS fees, something the airlines admit they have been unable to accomplish. The lower the fees secured by agencies, the more AA's allowance credit will offset the cost.
"We will calculate the GDS costs and pass on the net bill to the agency if the allowance did not cover the bill that would be incurred or rebate if it did," said Craig Kreeger, AA vice president of passenger sales.
"Our expectation is that EveryFare will inject some much-needed price competition among the handful of large GDS suppliers who have a stranglehold on the market right now," AA CEO and chairman Don Carty told analysts late last month. AA's reservations system is hosted by Sabre and parent company AMR owns 26 percent of Worldspan. "Previously, travel agencies had no incentive to shop around, as airlines bore the full brunt of the ever-escalating GDS fees. Now, participating agencies will have every reason to seek out the GDS that provides them the best value."
Furthermore, registered travel agencies in the months ahead will use their Airlines Reporting Corp. numbers to book directly through aa.com, eliminating all GDS fees from those bookings.
AA said agencies would be charged a lesser fee for such reservations, but had not specified the amount. If that fee falls below the AA-issued coupon allowance at that time, agencies, in fact, would earn revenue by booking on aa.com.
The travel agency community has not been supportive.
"We applaud American for taking steps to change the business and economic model," said Danny Hood, president of World Travel BTI, "but our biggest issue is deciphering that economic model. From our initial calculations, it does not seem to be the right one for us or our clients."
In a letter to corporate clients, American Express last week shared its view that the incentive offered by American does not warrant participation.
"The value and desirability of Web fares seems to have diminished over time as the airlines have made them less available and more restrictive," the letter stated. "Should global distribution system costs increase as they have in the past, Web fare access in the EveryFare model may end up costing much more than savings they actually deliver."
"Since the airlines themselves have been unable to reduce GDS costs, it's unlikely that any travel management company can do the trick," added an American Express spokesperson. "There's no guarantee that GDS costs will not rise."
The Amex representative also said that travel management companies "must commit to a non-negotiable, five-year contract with no escape clause" and that "AA is not obligated to continue offering Web fares: They can discontinue and reduce the volume anytime."
Senior executives at other corporate travel agencies contacted by Business Travel News had yet to find value in the program. "We're still puzzling over it and trying to figure out why they're doing this," said one. A common sentiment was that the AA-TQ3 relationship involves other unique aspects making it compelling for the agency to participate, but according to Mike Koetting, TQ3 Maritz senior vice president, other revenues paid to TQ3 by AA would not be affected by this new arrangement.
TQ3 Maritz acknowledged the program represents a cost risk. To protect itself, the agency first will attempt to negotiate with GDSs for lower fees. If that fails, TQ3 will work to flow bookings through aa.com.
A more significant and apparent method of covering its costs is TQ3's new $1 fee levied on all reservations, regardless of carrier, for those clients choosing to work in the new model and get GDS access to AA's Web fares. Contractually, AA requires EveryFare participants to levy equally on all carriers any fee they charge to clients.
TQ3 Maritz vice president of information technology Richard Spradling said there was a "generally favorable response" during a recent conference call with 50 of the agency's clients. "We have equipped our account managers to talk client by client," he said. "It took over a month of talks with American to get comfortable with it ourselves."
TQ3 Maritz also acknowledged it preliminarily agreed to the five-year program without knowing the exact fee AA will charge for bookings through aa.com and that both parties still are working to finalize the contract. Because of the confidential nature of its negotiations with AA, TQ3 also did not have the opportunity to discuss the program with the GDSs.
"I can't tell if it is all marketing hype or if it will have a real effect on our program," said a travel manager, speaking anonymously, whose company is a TQ3 Maritz client. "It means an additional fee, and I don't like additional fees, even if they are just $1. And we have a business relationship with our GDS. I don't want those bookings going though another channel."
Nevertheless, TQ3 Maritz president Jack O'Neill told BTN that the agency hopes to have clients engaged in beta tests within a week.
"We are assuming cost and it's over a time frame, and we're asking our clients to help out with that," he said. "If it doesn't work, we have the technology for plan B: direct connects."
Corporate Travel Management Group, unlike TQ3 Maritz, has not announced a plan to collect additional fees from clients.
TQ3's Spradling acknowledged the initiative could sputter if it is not more widely embraced. "From the airline's perspective, it's probably predicated on at least some other megas signing up," he said. "We alone cannot make the kind of impact they want."
Travel managers, like most of the largest agencies, remained unconvinced. "This is troubling if it results in a cost shift," one buyer said. "Paying for access to Web fares, which airline people say are going away for corporate travel, just does not feel right."
Another buyer said the shift threatens his company's agency relationships. "We have a transaction fee arrangement that is all-inclusive, but it is difficult for travel management companies, unsure what the airlines are going to do, to price their product," the travel manager said. "We don't want this channel thing. We want our own direct connect so we can avoid these costs."
The National Business Travel Association voiced its support for "a step in the right direction," but was troubled by cost implications. "While this process will benefit corporations' processing and data tracking of Web fares, it will undoubtedly add to corporate customers' already burgeoning costs," the association said.
An executive at a rival carrier called EveryFare "convoluted," while executives at other airlines—despite acknowledging the potential benefits to airlines of shifting the distribution cost burden to buyers—wondered how travel agencies would derive value.
Agencies can book Web fares directly on a number of airline Web sites, but integration with agency systems and extranet connectivity, as well as reporting capabilities, still are developing. Northwest Airlines, for example, is preparing a new agency site enabling both direct Web fare bookings and "robust" reporting
(see story)."Some people will want it all on the GDS platform, but putting it all there does not help us save costs at this time," according to Fay Beauchine, Northwest vice president of sales and customer relations. "We will watch and see if there is demand for the AA strategy. If so, we'll respond."
Meanwhile, Continental Airlines is evaluating AA's new program and said that "the perceived value of Web fares is a discussion item."
"We are intrigued by the EveryFare program. This issue starts with and ends with GDS fees and the burden they represent for us," said Frank Kent, United Airlines vice president of sales. "We are considering any and all options."
Both Delta Air Lines and US Airways declined to comment on EveryFare specifically or broader strategies to cut distribution costs.