United Airlines' move last month to pull its preferred partnership with Carlson Wagonlit Travel is part of a wider effort to trim $80 million in annual agency incentive programs. Though CWT is the largest travel management company to be hit by pullbacks, United said it is managing such relationships more aggressively, scaling back its portfolio of corporate clients, travel management companies, leisure travel agencies, fare consolidators and agency affiliate programs.
United senior vice president of worldwide sales Jeff Foland said the carrier has "reworked" all contracts with leisure and corporate agencies, noting that one mega, which sources confirmed as CWT, fell to the wayside.
Though Foland said managed corporate travel remains an "important segment," the carrier is refining its portfolio to tilt toward highly compliant and business-generating customers—be they corporate buyers or TMCs. Foland said the agency and the corporate client portfolio is "shrinking by design," as the carrier focuses on getting a return on investment from upfront discounts to commissions and override agreements.
COO John Tague during United's second-quarter earnings call last month spelled out the strategy: "Distribution and cost of sales continue to be a key focus area in our cost-reduction areas. Actions we've set in place even over the past several weeks will reduce agency commissions by more than $80 million on an annual basis, helping us achieve our overall cost savings target this year and working toward a significant improvement in costs for 2009."
According to United's 2007 annual report, the company last year spent $779 million in "distribution" expenses, which includes "commissions, GDS fees and credit card transaction fees."
The $80 million it expects to shed through restructuring agency programs represents more than 10 percent of total 2007 distribution expenses.
In addition to referencing the termination of a "large multinational agency" contract, Tague said United also has "walked away from many agency incentive programs altogether" and "also stopped participating in agency affiliate programs, eliminated consolidator commissions in the Pacific and reduced numerous base commissions internationally."
Though airlines are taking a closer look at every line item on their expense sheets, including agency distribution deals, they also are attempting to drive more business traffic to their networks—favoring the higher yields the business segment provides. CWT would not disclose any efforts to shift business away from United in light of the agreement's termination or detail booking figures for the carrier.
According to several sources, United pulled the contracts of all mega agencies in favor of new terms, but eventually reinstated them. BCD Travel CEO Joop Drechsel said his agency's relationship with United "has returned to normal."
HRG North America president Tom Gleason said attempts among domestic carriers to overhaul agency incentive programs have been limited to United, noting, "We haven't heard back from any other airline saying they are unhappy with us. My opinion is that it's business as usual until they tell us differently."
BCD's Drechsel, however, said, "It wasn't only with [United]. We've had a number of discussions with some European carriers and my only comment is that, as far as I'm concerned, things are back to normal."
Though TMCs would not shine any light into the opaque world of airline override agreements—which generally translate to back-end payments for shifting business to preferred carriers—president of TRW Travel Consulting Tom Wilkinson said, "My sense is that the override agreements had been growing and growing rapidly. The largest TMCs have been able to extract a pretty definite revenue stream from this."
Several TMC executives stressed the importance of proving the value of such programs to their airline partners. BCD's Drechsel said, "One of the strongest arguments back to the airlines is that we are not taking a lot of money away from airlines. We as TMCs are very efficient distribution channels for them. There is no way they can replicate themselves in a cheaper way. It's just about all paid for by customers and not by airlines. If you think about the statistics and see what we as an industry get from airlines and what they could save on it, there are so many other things from paint to water that they could save first before they should start looking at cutting their backbone of distribution."
Gleason underlined the importance of compliance. "Everyone is going to be looked at, whether corporation or TMC," he said. "You better bring value to that airline or I think it's going to be under scrutiny and possibly changed or canceled. I know of some carriers that have canceled deals over the last couple of years because they are not getting value out of them. The most visible is the United/CWT one. CWT is a great company and United is doing what they think is best for their company. When we do the reviews, we need to make sure they see all the value we bring to them. We have to be constantly in their face to show the relationship and the value. You can't take anything for granted right now. The market is very tenuous."
Jean-Pierre Remy, president of Egencia, formerly Expedia Corporate Travel, said the agency is "on a very different path of discussions" with United and other carriers. "They went to the megas and said, 'We want to check our overrides,' but the way it works with us is totally different," Remy said. "A few weeks before they did that, we went to them and said, hey guys, we want to structure a partnership with you where we have a very strong commitment to corporate travel. We are going to invest in this business. We are going to sign more large accounts, so let's sit down to make sure we have the right programs in place that will let us offer the best deals to clients."
TRW's Wilkinson said, "I understand how much pressure carriers are under, but I can't imagine United pulling out of these arrangements completely, because TMCs have shown they can and will move business in response to agency incentives. It's hard to see any airline unilaterally refusing to play that game."
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