Agencies Foresee Fee Hikes

Travel buyers planning their 2002 budgets should look out for rising agency costs in response to recent changes in the industry: Agencies may raise their prices in response to the terrorist attacks of Sept. 11, as well as the commission cap imposed by the major airlines in late August.

Steve Power, vice president and general manager for corporate travel at American Express, did not rule out the possibility of increased travel management costs, due to "changing conditions in the travel industry," including the slowdown predicted to come in response to the recent acts of terrorism.

"We're looking at our pricing systems right now," Power said. "We have some things to respond to. We intend to respond to the commission cut with increased fees for small and middle markets with budgets of less than $1 million, and we're looking at other cost changes in response to other developments in the industry."

Carol Salcito, president of Management Alternatives, a Connecticut-based consulting firm for travel buyers, said several of her clients had received letters from agencies indicating that they planned to raise prices in response to the projected slowdown in travel caused by the terrorist attacks on America. "None of the agencies was specific about how much they planned to raise their fees," Salcito said. "They just said they would adjust agency fees, effective Sept. 11."

Not all agencies will seek fee increases in response to the probable travel slowdown resulting from the attacks. Mike Koetting, senior vice president at TQ3 Maritz Travel Solutions in St. Louis, said his agency will not seek fee increases. "The deals agencies have in place should allow for a slowdown in corporate travel," he said, noting deals that don't allow for changes in volume are fast becoming obsolete.

Larry Austin, CEO of Austin Travel, an independent agency located in New York, also said fees shouldn't rise because of a drop in travel. "Pricing structures for travel management companies are flexible to changes in volume," Austin said. "Agency fees shouldn't go up in response to a drop in volume."

Some buyers, agencies and industry analysts expect agency costs to rise in 2002 in response to the August commission cap imposed by the airlines. Most reported a fee hike of $5 to $10 per air ticket. The rise in fees puts most management fees in the $20 to $40 range for each air ticket purchased, according to Rolfe Shellenberger, an analyst with travel consulting company Runzheimer International. Shellenberger said some travel buyers reported being charged as much as $55 per air ticket purchased, a fee he said is too high.

Agents said they had no choice but to translate the loss of commission revenue into higher fees. The size of those increases will depend on a company's contract and relationship with its agency.

Austin said the August commission cut forced his company to raise its management fees. "The fees will be based on the level of service, from $10, up to $35 for each ticket," Austin said. Next year, he said, "on average, agency fees will rise about $5 to $10 for each ticket." Accounts with net-net pricing schemes, Austin said, won't be as affected.

Richard Wooten director of corporate travel services at Lockheed Martin Corp. in Bethesda, Md., manages an air budget of $266 million. "Since we converted our airline contracts to net-net agreements in April, supposedly we should not be affected by the commission cap," he said. He expects to hold his agency costs flat next year.

But Rick Altman, travel procurement manager for Boston-based online financial services company E-Trade, which has a $5 million air budget, anticipated a substantial rise in agency fees. "The commission cut is going to hit me for about $50,000 annually in increased agency costs and higher ticket prices. It will definitely have an impact," he said.

The amount most buyers' agency costs could rise is dependent on two things, according to data supplied by Waterloo, Iowa-based travel management company Short's Travel: average ticket price and the percentage of fares spent in net-net deals. For example, if 60 percent of tickets are purchased through net-net deals, and the average ticket price is $500, the per-ticket rise in agency fees could be from $3.40 to $3.60. For a $5 million travel budget, this could mean an additional $36,000 in agency costs per year. If only 40 percent of tickets were purchased through net-net deals, and the average ticket price was $650 to $675, the buyer would pay an additional $9.25 to $9.50 in new agency fees on each ticket. This $5 million account could face $70,000 more in travel management costs per year.

Andy McGraw, vice president of sales for American Express Corporate Travel Services in New York, said that for companies with at least 70 percent of their air spending in net-net deals, agency costs for next year will not change much.

Midsize buyers may stand to lose a third of their commissions, since often that is the portion of the air budget that is not spent in net-net channels. Some of these firms can expect cost increases of about 1 percent of their total air travel budgets. Fees will go up the most for smaller buyers, which still often have profit-sharing arrangements.