BA Steadies Commissions But Cuts Overrides
<B> BA Steadies Commissions But Cuts Overrides</B>
By Amon Cohen
An anticipated cut in British Airways' base commission rate of 7 percent for the U.K. market now is unlikely to materialize, following two back-door reductions in agency payments. Travel managers had been bracing for a cut themselves following similar moves in the U.S. and Scandinavian markets.
However, the steadying at 7 percent is unlikely to restore BA's reputation with corporate buyers, many of whom believe the U.K. flag carrier remains high-handed in its client negotiations.
Travel agents are suggesting that a combined drive by corporate customers to switch purchasing away from BA was one of the main reasons for the airline's announcement last month of its first decline in profit in several years.
One of BA's new indirect commission reductions is the scrapping of the Performance Related Scheme, which was launched when BA originally cut commission to 7 percent in January 1998. The PRS was an incentive program that rewarded agents according to the amount of incremental business they delivered to BA.
The other reduction has been through the introduction of what the airline calls a Passenger Service Charge on all tickets. BA has isolated the airport service charge element from its fares and now shows it as a separate, noncommissionable item. The charge for international flights from London Heathrow is $10.50 (£6.50) but rises to $16.60 at Glasgow. Most other U.K. airlines now have followed suit.
Agents are crying foul, saying commissions will go down even while administrative duties go up. They also pointed out that the charge was announced the week before Christmas, when immediate protest was likely to be muted, and that it will begin on April 1, when fares traditionally rise. A senior figure at one of the big three business travel agencies alleged that the timing was designed to confuse the charge with hidden fare increases. "We have examples where fares have gone up by the PSC," he said.
However, this could be the last activity from BA on the distribution front for now. "I would be surprised if BA announced further cuts," the agent said. His view appeared to be confirmed by BA general manager for business sales John Morgan, who told a seminar at last month's Business Travel '99 exhibition in London that 7 percent was "as far as we plan to go at the moment."
What is not clear is how long BA will remain on its own at 7 percent.
Unlike the reaction to United Airline's international commission cap in the United States, no other carrier at first followed BA's lead in dropping from 9 percent. That changed last week when Lufthansa announced it too will drop commission to U.K. agents to 7 percent on April 1, though it will offer extra incentives to a select number of travel agents.
Virgin Atlantic, on the other hand, has increased commission in its Upper Class and Premium Economy cabins to 11 percent through April 30. It claims it already is winning market share from BA as a result, and is likely to maintain the extra 2 percent into May and beyond.
Elsewhere in Europe, 7 percent has become the norm, the main exception being Scandinavia, where SAS has reduced commissions to 4 percent plus a cap. Other recent moves on the continent include the whole Star Alliance reducing to 7 percent in Switzerland and BA following Iberia down to 7.5 percent in Spain.
BA's adjustments to commission came as it announced a loss of $121 million for third-quarter 1998, down from a profit of $129 million for the same period in 1997. The airline would have shown a surplus of $68 million had it not been for a $188 million non-cash accounting charge connected with hedging Japanese yen, but that still represents a fall in operating profits.
Bob Ayling, British Airways CEO, said "economic conditions and increased competition on our routes have resulted in excess capacity, which is forcing yields down."
Load factors in premium classes are falling while economy is rising, though largely with heavily discounted traffic. But corporate clients and agents have told Businesss Travel News that BA is hurting not only because of a global economic downturn, but because of its attitude toward the corporate market.
"Their arrogance goes beyond belief, as does their incapacity to cut a deal with corporates," said the travel buyer at one large European consulting firm. "We also are having issues with service, and our partners are beginning to drop flying with them."
"They are in denial at the moment. No one wants to move things upward or onward," said the procurement manager at a Financial Times Top 100 company.
Yet another travel buyer said, "British Airways is not an airline you could ever call a partner. It is hitting a bad time, but we know that if we go into a deal with them, it will be short-lived and when business gets better in two years' time they will be putting two fingers up at us again. I believe we will pull away from BA because the deals it comes up with are not as good as we get from others. We are getting better at moving market share to preferred carriers, and that will give us a good deal from someone else.