A call by Patrick Diemer, managing director and chairman of AirPlus International, for airlines to shift credit card fees to buyers startled many of the nearly 200 corporate buyers and senior travel services executives at The Masters Program in Washington, D.C., last month.
Diemer said he was convinced that the industry is preparing to alter the interchange model. Under the current formula, about 18 percent to 30 percent of a merchant-fee bill is paid by buyers, the rest paid by merchants. Airlines have long targeted card-related distribution costs, said Diemer, who noted that merchants today pay a $12 card fee on an average airline ticket. He cited Northwest Airlines vice president of distribution and e-commerce Al Lenza's comments at the Masters Program two years ago: "Northwest pays more in card fees than it does in GDS fees." Lenza, from the audience last month, said Northwest was "now paying twice as much in credit card fees as GDS fees."
Diemer said that leaves airlines with three options for lowering card costs: successful negotiations, surcharges or—his preference—a "zero commission" option in which airlines would reduce their costs in this area by 90 percent, giving the buyer greater transparency and "more control, but a charge to pay."
Diemer acknowledged that this is an idea that might take hold in Europe before it does in the United States and that he hasn't seen a major player do it yet. "It will take some time, but I could envision a major test this year," he said.
When asked during a session about a theoretical airline attempt to transfer corporate card costs, American Express global travel services president Charles Petruccelli said, "We're going to fight the transferring of those costs to the customer. Again, it is a question of value. There are pressures on all costs and we're working on eliminating costs."
Lenza, speaking with BTN after the conference, noted that EasyJet and Ryanair as well as British Airways and KLM pass along at least some credit card fees. "Eventually something that like that will occur here too," he said. "It's just not sustainable. In our restructuring, we have very aggressively attacked the whole cost structure of the company in every dimension and the one thing that sticks out, beyond the price of oil, is this."
Lenza said Diemer was suggesting "something like what we attempted to do with GDS fees
(BTN, Sept. 6, 2004). Some of us have limitations on discriminating against credit card companies, whether contractually or through nondiscrimination regulations that are still out there in some states."
"Online adoption has gone up in terms of Internet transactions, which end up being all credit card," Lenza said. "We're going to try to remedy part of that by implementing PayPal as a payment method in about six weeks. PayPal will yield significant cost savings for us, but it's not just a cost play, it's a customer-convenience play. The potential is that it could be a better experience for many customers."
In addition to offering a UATP card, an affinity card—which is a preferred relationship with US Bank—and some incentives and promotions for using PayPal, Lenza said Northwest is "working with ARC to develop a product where settlement remains efficient for travel management companies and for corporations but where the payment method doesn't have to be credit card." Lenza said the details still are being worked out, but that the product, which facilitates through a cash alternative to credit the settlement of airline and other travel expenses for airlines, corporations and travel management companies, will be unveiled in a matter of weeks rather than months.
"Whatever gets done," Lenza said, "has to be not just a win for us, but also a win for the customer."
Carlson Wagonlit Travel executive vice president of global supplier relations Mike Koetting, who co-chaired this year's Masters Program along with TRX CEO Trip Davis, agreed that "credit card is the next big storm that we should expect" for our industry. "Yet there are a lot of players who get financial benefits from it. The airlines would like to complain about the high cost of cards, but certainly there is another part of their organizations that participate in loyalty programs and co-branded cards, so that's an interesting conflict."
When asked by BTN about whether the two-year legal battle over merchant fees between Amex and British Airways earlier this decade
(BTNonline, April 6, 2004) is an indicator that there is little room for movement in this area, Amex's Petruccelli said, "There will always be pressure on costs, but again, do you provide value or not? The example of BA is a very good example. We were able to get them to understand where the value was, so that this issue was addressed. When you have a card solution, it is difficult for the merchant to take a selective approach to when they will take your card, because then you have no relevance to the customer."
Koetting, who since Jan. 1 has taken on additional CWT responsibilities, agreed that nobody wants to have a bad rapport with American Express. Large clients receive some measure of rebate, he acknowledged, and it is hard to deny the process simplicity that using a card delivers buyers, plus they are getting the benefit of the float.
"Those are a lot of hurdles for the airlines to try to overcome," according to Koetting. "It would be difficult for airlines to assess a differentiated fee depending on which card you used."
As for CWT's plans to develop its own card relationship, Koetting said, "We are thinking about card relationships, and that's always a question for us. Should we have a global card or certain cards favored in certain regions? That's as yet an unresolved question for us."
The question, he said, is whether to participate in "a traditional model or in what Patrick Diemer was discussing about how that model is going to be changing. Right now, our dance card is still open."
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Petruccelli during his speech said that TMCs needed to price for value and invest in innovation. Talent is key, he said, and in that regard he noted the growing presence of private equity firms in airlines, GDSs and TMCs, and the possibility that they could have a positive long-term effect because of their management talent, ability to act quickly and focus on maximizing performance.
CWT's Koetting said he concurred with Petruccelli's comments about selling the value associated with travel management company services, rather than the commoditized transaction.
"To me, that's still the unresolved opportunity in the marketplace: getting agreement between TMCs and corporations on the value associated with the services beyond processing a transaction," Koetting said. "There is not a consensus on how the market wants to buy and value those program optimization services. I found what Charles was saying intriguing and encouraging, but there is still some work to be done in getting consensus with the buyer community about how that works from a procurement perspective."
In his speech, Petruccelli said despite movement toward commoditization in the business, new and established players have recently been paying unheard-of multiples for travel management companies. After his speech, he clarified that those multiples were as much as 14 and 16 times earnings.
"I didn't say ridiculous, I just said unheard of," he said. "If those guys are ready to pay 16 times, it is because they understand that potentially there is a lot of value there. We've been the one that has not been challenging ourselves enough with the customers. There's no reason why we should give everything away for free. We have to stop, and we've stopped."
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During the speech, Petruccelli said environmental policies were an area in which travel management companies can add value.
Afterward, he told Business Travel News, "Some large companies in the United States have asked us to provide them with input on environmental policies that could apply within their programs. We are preparing a position paper to share with them about the existing practices and then work out solutions that would make sense to them for the type of traveling that they do."