Prices for travel agency services are likely to remain flat in 2003, but pricing comparability and transparency continue to evade many travel management relationships, where an overall environment of secrecy reflects intense competition among agencies for corporate business. Many travel buyers, seeking to induce some clarity into new travel management contracts, are turning to unbundled fee-based pricing and line item invoices. Yet, the inherent complexity of travel management—with its myriad services and products and revenue streams that flow in all directions—still confounds attempts at apples-to-apples comparisons and clear explanations of agency costs and profits.
Travel buyers and suppliers alike decry the lack of pricing clarity in the travel management business. "It's ridiculous," said Ron DiLeo, senior vice president of North America at Philadelphia-based mega agency Rosenbluth International. "In what other business do suppliers and consumers not know what competing companies are charging for their services?"
To combat this confusion, more companies this year are moving to transaction fee-based agreements and ditching the bundled management fee arrangements that characterized agency contracts in the era of base commissions. Transaction fee arrangements also respond to changes in travel volume, unlike most management fee relationships, where the fee for travel management is fixed, regardless of volume.
According to industry experts, the growing ranks of companies that contract with agencies using transaction-based arrangements probably account for about half of all managed travel. This is because buyers and suppliers "want to separate transaction costs from management costs," DiLeo said. For all its new clients, Rosenbluth breaks out transaction costs from management costs, and legacy clients are moving to similar, more detailed contracts as their current terms expire.
By shifting to transaction-based agreements and breaking out transaction costs from management costs, "Pricing agreements are becoming much more intelligent than they were in the past," said Carol Salcito, chief consultant for Norwalk, Conn.-based Management Alternatives. She said transactions are defined more clearly in today's RFPs. "We're seeing much more intelligent pricing as it relates to fulfillment centers. Buyers are specifying exactly what they will pay for as part of the agent/traveler transaction."
Still, transaction definitions are all over the board, DiLeo said. For instance, "If you buy 10 tickets and you return five of them, some agencies charge you for 15 transactions," he said. "At Rosenbluth, we charge you for 10."
In any agency contract, detailed transaction pricing is key, said Mike Koetting, senior vice president at St. Louis-based TQ3 Maritz Travel Solutions. "The key is to define upfront what is included in the transaction price. What is the refund percentage of air sales that the agency receives from carriers? What is the price of car- and hotel-only bookings? How much does the agency charge for passive GDS segments?"
Despite the best efforts of buyers and suppliers to clarify costs and prices, key aspects of travel management pricing remain cloudy. One troublesome area, said consultant Earl Foster, is a frequently ill-defined contractual category called corporate overhead. "The corporate overhead number is often unclear, but that number is going up on many new agency contracts," he said. "Often, overhead refers to human resources, facilities costs and that kind of thing, but you have to ask, 'What exactly does this cost mean?' " Overhead costs should be carefully scrutinized, Foster added, because they "tend to be very inconsistent. They can vary by travel management company and from one customer to the next within each individual travel management company."
In many cases, airline payments to agencies also are unclear. Despite the elimination of base commissions, airline kickbacks to agencies still are a salient aspect of the travel business, said Celeste Foulger, operations coach at Westerville, Ohio-based consultancy Troilo and Associates. "Agencies have gone back to airlines for back-end override commissions from their carrier partners," she said. "Our concern is that agencies are not sharing these with the clients."
To make sure buyers are aware of all revenue their agencies receive from carriers, Foulger suggested including clauses in contracts that stipulate full disclosure of overrides and all other payments and discounts given to the agency by the airlines. "Any kind of GDS incentives are important as well," he added. "If a company is using the agency's GDS, revenue-sharing opportunities for corporations exist in that area as well." Even with buyers' best efforts, "pricing is still pretty murky," Foulger said. "We still see a lot of miscellaneous categories on pricing menus. The agencies need to break out all of those miscellaneous costs."
Savvy travel buyers respond to this murkiness with increasingly complex and specific agency contracts. "Agency contracts employ a whole plethora of line items," said John Guarneri, BP global travel manager. "We break out e-booking fulfillment, assisted bookings and telephonic bookings. We also break out domestic or international bookings."
To make things even more difficult, travel buyers typically employ separate contracts with their agencies for each country in which they do business. Guarneri has consolidated BP's travel in 46 countries with Minneapolis mega Carlson Wagonlit Travel and has a separate contract for each country.
"You have to work with each country individually," Guarneri said. "You have to be cognizant of the different laws that govern travel and business in each country. We have a global agreement with CWT, but you can't operate in the U.K. under U.S. law."
Despite the persistence of many gray areas in agency contracting, for 2003, travel management prices, generally, haven't gone up.
Sources said agency costs, for the most part, have held steady, although travel management companies would not go on record with specific pricing information.
According to agency execs, consultants and buyers, average touchless online booking transactions fees, including the price of the booking tool, will run about $15 to $20 for 2003. Bookings that originate online but require agent intervention will cost about $20 to $30. Call center bookings for domestic reservations will cost on average $35 to $45, and for international itineraries approximately $60 to $70.
These figures are consistent with Business Travel News' 2002 Corporate Travel 100 research
(BTN, Aug. 26), which indicated that the 100 largest travel companies by U.S. booked air volume—ranging from $36 million to $338 million—pay average transactions fees of about $44.
The figures also are consistent with BTN's 2002 research on midmarket companies, which indicated that companies that spend between $2 million to $10 million in U.S. booked air pay on average around $30 for each agency transaction.
However, many experts said using average transaction fees as a method for benchmarking can be deceiving.
"Transaction fees can be a misleading measure of cost for agency services, because there are so many variables that go into what defines a transaction," said consultant Salcito, who is working with a National Business Travel Association taskforce to create a standard agency request for proposals. "I've heard of companies paying as little as $3 for each booking."
Meanwhile, suppliers and consultants reported that labor costs are holding steady for 2003. Salaries of onsite agents and call center counselors are flat, or even declining slightly, said TQ3's Koetting. "Onsite consultants, in many instances, are better compensated than their call center counterparts," he said, "but the industry is certainly not facing the labor-induced price pressure we saw in 1999 and 2000."
Salaries for onsite agents vary widely according to location. "Los Angeles and New York are more expensive, but Austin might be a lot cheaper," said Ed O'Connor president of Corporate Travel Directions, a Thousand Oaks, Calif.-based consultancy specializing in RFPs and agency fees. "On average, salaries for onsite agents probably run $30,000 to $50,000 without benefits. But things are changing. A year ago, you had to pay a lot of money for a good onsite agent, now I'm usually seeing salaries in the $40,000 range."
However flat agency costs are for many companies, those corporations that were using base commissions to offset travel management fees have seen costs rise significantly this year.
"The move to zero commissions has had a huge impact on my few clients that did not have net-net airline deals," O'Connor said. "In some cases, the cost of managing the program was doubled. A $5 million account would have gotten around $180,000 in base commissions, assuming a 3.5 percent to 3.6 percent commission pass-through, which is where they were just before the carriers went to zero. It depended on what fares you took and where you flew."