London - British Airways is preparing to go further than any airline in stripping out costs to achieve the ultimate corporate net fare. Beginning in June, BA will cease absorbing the merchant fees imposed by card companies. BA also has signaled its resolution to reform, and perhaps remove, mounting global distribution system charges, and is contemplating removing frequent flyer mileage from corporate net agreements for the first time.
Clients have indicated their unhappiness at BA's action over merchant fees. Since travel management companies generally will pass all costs on to their clients, it effectively is a fare increase. The move has greater potential to increase travel costs for larger U.K.-based companies than the cut to agency booking payments revealed simultaneously by BA last month. However, corporations may well welcome the greater transparency that netting out merchant fees ultimately will bring to their negotiations with BA.
The latest developments come as U.K. companies are suffering sharp price rises, especially when flying across the Atlantic, if they have net fares based on a percentage discount on published fares.
Figures from the latest American Express European index show that full business class fares between the United Kingdom and North America rose 5 percent in Q4 of 2001 over Q3, in spite of the weakening of demand caused by Sept. 11. Discounted business class fares went up 8 percent over the three months. "We are encouraging clients to move on to fixed net fares because of the upward movement of published fares," said Matthew Davis, American Express head of European consulting services. "The trend is shifting from percentage discounts to fixed, but the majority of net deals are still based on discounts."
Net fares have become the dominant means of buying air travel for larger U.K. corporations since the start of the decade. "There has been exponential growth," said Stephen Humphreys, BA general manager for corporate sales in the United Kingdom and Ireland. "A couple of years ago, we could count the number of corporate net deals we had on one hand. Now we have several hundred."
Jim Tweedie, newly promoted to executive vice president of North Europe for Carlson Wagonlit Travel, told BTN that net fares now account for 60 percent of his clients' business in the United Kingdom.
BA has stripped out card merchant fees for two reasons: the expense of the fee, which is thought to be in the region of 2 percent. Humphreys said that it also will enable BA to move to a new system of filing fares, called Net Remit, which lowers processing costs but leaves it unable to handle merchant fees. Net deals have increased processing costs for BA because it has to load so many individually negotiated fares each time it changes standard published fares.
No matter the validity of the reasoning, the decision is likely to hit the bottom lines of corporate clients. "This potentially is a direct increase in my costs," said Tony Archer, manager of global procurement travel services at ICI. "It will have to be taken into account when we decide which airlines we deal with."
"I am sure corporate clients will try to negotiate it back and they may well succeed, but I don't think BA will take enough off of its fares to maintain the status quo," Tweedie said.
Humphreys indicated that he was open to negotiation and that the move should make it easier to hammer out deals in the future. "We will not lower fares as a result of this, but we believe a corporate net fare should be stripped of associated costs and that customers would welcome the improved transparency," he said. "The good news is that the real cost is exposed for what it is and will be factored into negotiations."
The news also could have interesting consequences for charge card providers American Express and Diners Club, which charge higher merchant fees than their credit card rivals, such as Visa and Mastercard. With corporations set to pick up the tab, they no doubt will want to see a reduction in their fees or a convincing explanation of what benefits the higher payments to Amex and Diners bring them.
In a written response on this point, American Express said: "These proposals would not come into effect until June and we are actively talking with BA and others in the industry to reach an agreement on a new economic model that will maintain value for corporate customers and benefit all of those concerned."
Another cost factored into net fare agreements is GDS charges and BA has resolved to tackle these as part of its urgent quest to stem losses running into hundreds of millions of dollars. There has been little evidence of GDS companies reducing their fees in recent years, in spite of the advent of cheaper Internet technology. Now that airlines no longer own the GDSs (BA used to hold substantial equity in Galileo, now 100 percent owned by Cendant), they question whether the fees can be justified.
"Merchant fees no longer have a place in the distribution chain and one could say the same for the GDS fee model," Humphreys said. "We are engaging in active dialogue with the GDSs to make them realize that the costing of their business and the way it flows on to suppliers does not make sense any more." Humphreys did not rule out developing systems to bypass the GDSs, but said BA's preferred option would be to continue working with them in a restructured form.
Robin Ranken, Europe, Middle East and Africa director of airline sales and marketing for Galileo, which has 55 percent market share in the United Kingdom, expressed sympathy for BA's position. However, he said, European Union regulations were frustrating the efforts of GDSs to reinvent themselves. "Every January, we have been putting up our fees without adding any value in return," he said. "Galileo agrees that the current model cannot continue. We are looking for a model that is a win-win, hopefully this year. However, unlike travel agents, GDSs are heavily controlled by EU law and have to treat every airline in an identical way."
Global distribution systems also are obliged to charge the same fee per sector regardless of the fare, which makes it impossible, for instance, to negotiate a special price for handling corporate net fares. Ranken said the GDSs are lobbying Brussels to grant them more flexibility in their pricing.
Another intriguing element of net fares that could hit the negotiating table for the first time is frequent flyer mileage. Travel managers long have complained that this is an unnecessary benefit of the fare accruing to the traveler rather than the buyer and they would, therefore, rather throw it out in return for lower prices. It is a complaint that has long fallen on deaf ears, but BA is set to become perhaps the first airline to discuss it seriously.
"In the past, we said would not even entertain the idea, but in the spirit of making sure we get the right offering, we will now look at it," Humphreys said. "We are open to discussing it for companies that manage their travel well."
One of the misgivings BA has is that although frequent flyer schemes often are blamed for enticing travelers to act against policy, they conversely can encourage compliance when the scheme is offered by a preferred airline. Hypothetically, if BA cut a net fare deal with a client that withheld mileage for travelers, those travelers might be tempted to break policy and find an airline that did give them points. "The issue is not as easy as it first looks," Humphreys said. "We would have to make sure it drove policy and compliance. When you get into further conversations, you realize that only a limited number of companies would be candidates for it."
ICI's Archer was intrigued by the idea: "I will be interested in hearing what the proposals are," he said. "If it is an opportunity to drive savings, I would like that to be quantified."