United Cuts Again

<B> United Cuts Again</B>
<I>Brings Commissions To 5 Percent In 3rd Annual Round</I>

By David Jonas

United again reduced travel agency commissions late last week--this time down from 8 percent to 5 percent for both domestic and international flights--leaving many travel managers thankful for net deals, and an agency community scrambling to pass along the cost to corporate clients.

The reduced commission structure, which did not come as a shock to anyone in the industry, took effect at 12:01 a.m. last Friday and maintains the current cap on domestic flights at $50 for roundtrips and $25 one-way, as well as on international flights at $100 for roundtrips and $50 one-way. On $625 domestic roundtrip fares--the cutoff where agencies were receiving the $50 cap in the 8 percent structure--the commission now will be only $31.25.

"If you look at the savings area for the airlines, it extends out on all roundtrip fares up to $1,000," said Paine Webber analyst Sam Buttrick.

At press time, no other major U.S. airlines had matched or commented on United's move.

In a statement released Thursday, United chairman and CEO Jim Goodwin said the reduction was "part of our continuing efforts to examine all facets of our cost structure" and estimated the action would result in an annual savings of $150 million.

With that in mind, Buttrick said, "the industry savings overall will run in the $500 to $700 million range, net of mitigating circumstances including increased override activity and deeper corporate discounts."

While it is unclear what the exact effects of the agency community facing such an enormous revenue deficit will be on corporate clients, one thing is for certain: net fare agreements will spare many companies from the full brunt of United's move.

New York-based Republic National Bank, for one, will not be hit because it went with net fares last summer when switching over to an ARC-approved CTD (<I>BTN</I>, May 4, 1998). "We have been on net deals with all our preferred carriers and therefore the cuts do not affect our program," said global travel vice president Andy Menkes. "It doesn't impact our relationships with our preferreds, and if anything, reinforces them."

Mark Vilcsek, senior purchasing manager for travel services at National Semiconductor in Sunnyvale, Calif., agreed. "It won't affect us since we moved to nets. We sensed that this was coming," he said. However, Vilcsek noted that those still on commission-based programs "had better jump off that ship quick."

Even so, many corporations with net fare agreements in place do not necessarily have commissions netted out on all fares. For example, Steve Karney, travel manager at Mobil Corp. in Fairfax, Va., said that while business on United is covered fully by net fares, there will be an impact on his budget if other airlines--which account for 7 to 8 percent of travel--fall in line. "If Northwest and Delta follow suit, as they typically do, I will feel a bit of a pinch."

Pete Buchheit, director of travel and meeting services at Black and Decker said he would have no problem with the cut "if they are willing to increase my discount by 3 percent," but would not speculate on the airlines' willingness to do so. He also noted that net fares can only help corporations that have had them in place for a while, an enviable position that Black and Decker finds itself in with United. "However, if the other airlines follow, it will be a cost transfer to us and other corporations who still have some traditional deals."

Lockheed Martin, for example, has not forged any net deals and could take a substantial hit. Without executing a careful analysis, Pete Broadrick, director of administrative services, roughly determined that "on some high level average, there would be about $9 million less commission coming in over a year."

While many other corporations dodged the bullet this time around, the agency community will be hit again--broadside. The American Society of Travel Agents reacted swiftly, calling United's action "the most anti-consumer move in airline history."

"This is one more step in the strategy to disintermediate the distribution system," said Kevin Mitchell, chairman of the Business Travel Coalition. "How can an agency plan for technology and staffing investments when the revenue stream always is unreliable?"

Mitchell noted that the airlines won't completely remove commissions because they "don't yet have the infrastructure in place to replace 30,000 travel agents." Still, he said "the end game" is becoming clear: the removal of unbiased, complete and accurate information for the consumer.

ASTA president and CEO Joe Galloway echoed those sentiments, saying, "Consumers will be forced to pay more because they won't have adequate comparative information that travel agents alone provide." He added that costs will mount because the travel agent will be forced to charge or raise service fees for crucial services that consumers seek from them." Simply put, the fee-based environment that many travel managers set sail for, in many cases, will become more costly.

Indeed, Norm Sherlock, executive director of the National Business Travel Association, said that "those costs in the system don't simply vanish" and agencies will not be able to count on revenues that had been coming in. "There will have to be another look at compensation arrangements between corporations and their travel agency partners."

Dan Keller, president of the Business Travel Unit of Chicago-based McCord Travel, said United's move is just another fare increase in disguise. "Someone's got to pay for it and more than likely it will be the corporate client. It also means, in some cases, that contracts with vendors will be renegotiated." Keller noted that while 10 percent of McCord's clients have moved to net deals, about 95 percent are on some sort of fee program. "We worked hard to get those programs in place due to the instability of the marketplace," he said.

Still, for agencies to recoup their losses, those fees, in many cases, eventually must be raised accordingly. Said Michele Montgomery, president and CEO of Cassis Travel Services in Los Angeles, "As commissions head to zero, service fees obviously need to go the other way--upward. Certainly, corporate accounts will acknowledge this." Cassis has moved all U.S.-based firms off rebate systems, and Montgomery noted that "the whole idea of moving to a management fee system is that the customer takes greater liability in the commission" when it is modified by the airlines.

This is the third consecutive time that United initiated a commission reduction, the last coming in November when it set the cap on international commissions (<I>BTN</I>, Nov. 16, 1998).

"United took their licks at first and now has become oblivious to it," Vilcsek said. "However, if time passes and the others don't match, it will get very tense for them."

Highlighting the $150 million figure announced by United, some in the industry wonder what the airlines are doing with all the money they are saving. "The last time the airlines cut travel agent commissions we were told that the savings would be used to improve customer service. That was promptly followed by a period of the worst customer service the airline industry has ever known," said Terry Trippler, airline expert at Onetravel.com in Brooklyn Center, Minn. "Let's hope that this time, they use this savings for something else, because I really don't think that air travelers can afford to have the airlines spend any more of their commission savings money to improve their customer service."

While the underlying rationale of cost savings is clear, there is widespread speculation regarding some other factors that played into United's decision. "Because of improved technology, the airlines are more sensitive than ever toward Wall Street," said Trippler. "It's the beginning of the fourth quarter, a traditionally slow period, and maybe they are just looking to bump up their stock price."

"This all might have something to do with alliance partners," suggested Mary Kay Bellersen, travel manager at Citibank, noting that Lufthansa and SAS have been active with commission restructuring in Europe.

Meanwhile, in Asia, several carriers are said to be phasing out commissions completely. Singapore, for one, took a bold step last month when it eliminated agency rebates (<I>BTN</I>, Sept. 20).

Putting the whole commission situation to song, Bellersen summed up the fears of many in the industry. "Its like the Ten Little Indians," she said. "Ten little, eight little, five little percent, and soon there will be none.