United Caps Int'l Commissions

<B> United Caps Int'l Commissions</B>

By Jay Campbell

Corporate buyers reacted swiftly on Thursday to United Airlines' $50 one-way commission cap on international tickets, driving as many as possible of the affected $625 or higher reservations before United's deadline of 10 p.m. central time.

Travel managers then moved to report to their senior management the financial impact of the cap, which varies greatly depending on mix of international business, average ticket prices and the extent to which the companies have moved to net fares.

Other airlines were expected to match, with the domestic carriers moving more quickly than foreign ones and European carriers beating out those based in Asia. However, none had made announcements as of Friday morning.

United's justification for the change and its analysis of the impact were sharply criticized by travel professionals. Of particular concern was United's claim that "this commission action will have no direct impact on the cost of tickets for consumers."

"This is a serious rate increase for us," said Rob Callahan, travel services manager for SBC, the parent company of Pacific Bell, in San Ramon, Calif. "With a management fee where all commissions are coming back to us, now there's less coming back."

Assuming the other carriers match the cap, commissions for international tickets at SBC, which average $1,268 per segment, would be halved from about $100 to the capped $50. Still, because international travel makes up about 8 percent of the company's tickets, Callahan estimated that his department would remain in the black, though his commission income will drop about $10,000.

Other companies are not so lucky. Toyota Motor Sales USA travel manager Zack Hicks in Torrance, Calif., said the cap will cost $250,000 in lost revenue.

Jeanne Mehalek, manager of corporate travel for Andrew Corp., Orland Park, Ill, said, "This will significantly impact the way we operate. As an onsite, the commissions fund our operation." International travel comprises more than 65 percent of Andrew's $11 million annual air spend.

Consultant Mark Walton of the Travel Solutions Group, Rolling Meadows, Ill., is developing a strategy for one client with 50 percent international travel on volume of $70 million. He said the company is facing a 21 percent revenue drop.

<B>Average Cut Of 34%</B>

The new rates will cut commission payments on the average one-way international business-class fare--$1,900 in the second quarter of 1998, according to American Express--by 34 percent. But costlier buys, such as a non-stop roundtrip in business class between San Francisco and London on United (priced at $7,378 on the airline's Website), will generate 83 percent fewer dollars, down from $590 to $100--an effective fare increase of 6.6 percent.

United maintained that the cap will allow it to "continue to invest in products and services," and is "part of the ongoing effort to reduce costs and prepare for a possible economic recession." The carrier expects the cap to save $100 million annually.

The American Society of Travel Agents argued United is using its "monopoly power" to keep travel agents from providing lower fares to the consumer.

"United said it is 'focusing on what travelers want' and is bracing for a possible recession," said ASTA president and CEO Joe Galloway. "What they are really doing is demanding consumers pay more when business is good, and then more still on the pretext that business may slump. When asked why United is doing this now, the answer is simple: because it can."

Bob Moss, president of Travel Intelligence in Belmont, Mass., said that given the concerns about airline competition, "I'm surprised United would do it now. I always thought it was American's turn."

Indeed, it is the second straight initiation of a major commission change by United (<I>BTN,</I> Oct. 6, 1997), preceded by Delta's first (<I>BTN,</I> Feb. 20, 1995). Quipped the corporate travel manager at one of United's top accounts, "Why can't United be the industry leader in something else?"

But the bigger question is, who's next? While many observers are assuming most of the major world carriers will match, perhaps with some twists, WorldTravel Partners-BTI Americas executive vice president Tom Lacny said he isn't convinced of that because of "the competitive nature of the international airline business."

Moss speculated that lower load factors to Asia and a less sophisticated data set with which to measure the reaction may give the Asian carriers pause. But a handful of European airlines, which buy the GDS marketing information data tapes that record detailed airline booking information, are more likely to take action.

Moss predicted more tickets could be driven by consolidators. As before, he added, override opportunities for selected, high-performing agencies should increase.

Michael Whitesage, president of The Prism Group in Albuquerque, N.M., said the concept of awarding for performance appears to be taking on two forms: public and private. "There are two approaches when it comes to international commissions," he said. "One is British Airways' model, where full base payments go to those who are, in fact, selling BA. United and anyone who matches them could certainly plan to give extra overrides--we don't know yet. But wouldn't it be better for corporate clients to know what's going on out in the open?"

Understanding the impact of overrides on their true costs is an ongoing issue for buyers who are considering the switch to net-net fares. But travel managers who have adopted nets were glad they had done so in light of the cap.

"Thank God I've already constructed my net-net deals," said Mark Vilcsek, travel services manager for National Semiconductor Corp. in Sunnyvale, Calif., who in April moved to net fares with American Airlines for domestic travel, BA for transatlantic travel and Northwest and JAL for transpacific travel. While the change "was more by the airlines' choice than mine," Vilscsek acknowledged, it has eased his concern about commission issues.

Carol Salctio, president of Management Alternatives in Stamford, Conn., said the many buyers who still rely on commissions in a profit-center environment "will have a lot of explaining to do. Shame on them if they weren't prepared."

Prepared or not, United's largest accounts were informed about the action only shortly in advance. "Our United rep was in the office when a call came in for a 'mandatory conference call,' " said one travel manager. "Their sales reps were asked to notify their big accounts an hour or two early. I told the agents they had 'til 10 to start punching those tickets--everything they had, even if it was tentative."

Another United buyer said , "It's a lot more work to issue international tickets, and the agents' skill sets are higher, which means higher pay." That point irked other sources as well, who said United seems to be saying it costs little more to issue international than it does domestic tickets.

United's top accounts promised to come back to the airline for renegotiations to offset the cost increase, and believed they would be successful. "Obviously, the plan of action is to go in and renegotiate corporate agreements," said Walton. "The degree that the airline industry is receptive to negotiations will determine the real cost increase.