Agencies Raising Fees: Hike Hits Those Operating On A Transaction Basis

Travel management companies are raising transaction fees by $10 to $35 in attempts to reconcile pricing with the elimination of base commissions last month.

Some corporate travel agencies already have buyers paying the new fees, while others have yet to determine how much they will raise their prices. Even corporations with net air deals are feeling some increases in the price of travel management, but buyers with largely commissionable accounts are bearing the biggest cost increases.

Although many travel buyers had netted commissions out of their primary air deals long before March 14, when Delta Air Lines went to zero, every travel department is impacted by lost commission revenue to some extent. Even in tightly managed programs, buyers lost commission revenue on the small portion of air travel that still deviated from net fare deals.

Salomon Smith Barney analyst Brian Harris estimated the airlines would save just under $1 billion in a research report issued the week Delta moved to zero. About 60 percent to 70 percent of that $1 billion was passed on to corporate accounts in revenue sharing agreements, according to analyst Ralph Brown, CEO of Chicago-based travel management RFP site Ebuyersolutions.com.

In response to the loss of whatever commission revenue was not passed on to buyers, and perhaps out of fear for the possible loss of overrides in the near future, most agencies are considering pricing adjustments, if they have not already made changes.

"Traditionally, when one kind of commission has been cut, agencies approach the airlines to make up for that loss with an increase in a different type of commission," said John Caldwell, president of Caldwell Associates, a travel management consulting firm based in Washington, D.C. "So, with the loss of base commissions, the agencies will now try to go back to the airlines and ask for bigger overrides."

Caldwell said the megas particularly are likely to seek larger overrides because the large ticketing volume they handle makes an effective bargaining chip with the airlines.

However likely agencies are to seek increased overrides, some in the travel management community are concerned that overrides could soon disappear altogether. If the remaining minority of corporate accounts that are not on net-net arrangements decide to adopt them in the next round of air negotiations, then overrides could disappear altogether.

Speaking off the record, one agency official said, "The concern is that the 30 percent of managed travel programs that did not have double net air agreements before the cut, will now negotiate double net deals. That pretty much wipes out overrides for the agencies.

"We're still evaluating what the shift would mean for us if they all go to net-net deals," the agency official continued. "We need to understand what the impact will be of the actions of our clients and the carriers. I would be very surprised if every significant agency had not contacted their air carriers to discuss the future of their relationships."

For corporations without net deals, the commission cut means a major cost increase. "We are advising our clients that base commissions have been eliminated," said Peter Klebanow, president of New York-based Ultramar Travel. "In some cases, we are renegotiating our deals with them and in some cases we are helping them renegotiate their arrangements with the airlines.

"Two-thirds of our accounts are on management fees," Klebanow continued, "but one-third are on transactions fees, and those are the ones who will see an increase in costs, because those accounts do not have net deals. Their transaction fees could go up as much as $25 per transaction, although I think it will be more like $18 per transaction." Ultramar began making changes to its fees for affected accounts last week.

Klebanow said a hypothetical corporation that used commissions to offset travel costs on $5 million in annual air spending now could face a $180,000 increase in travel costs. For accounts with net air deals and travel management fee arrangements, he said, there would be no change to current fee structures. "We pass all commissions back to those clients," Klebanow said. "Our fees don't change, but since they now have less income flowing in, the true cost of travel does increase."

The more net deals an account has, the better insulated it is from the increase in cost precipitated by the loss of commission. However, Klebanow said, "Even for many companies we serve that have net deals in place, 50 percent of their air spend is commissionable. This is a price increase for almost all of our clients."

The elimination of base commissions accounts for the loss of about half of the commission revenue on corporate travel accounts. On each booking of air, hotel and car for a business traveler, Klebanow said that around $9 would be generated in car and hotel commissions, and just over $15 in overrides, which usually account for 2.5 percent to 3 percent of ticket price. Klebanow said his travel management company would help make up for the loss of commission revenue by negotiating better air deals for Ultramar's clients, pushing online booking and attempting to roll out a Web fare solution within 90 days.

Jack O'Neill, president of St. Louis-based TQ3 Maritz Travel Solutions, said that although only one-quarter of TQ3 Maritz clients do not have net agreements with air suppliers, the commission cuts will affect the economics for everyone.

"During the month of April, we will be reviewing the impact of the commission cuts to see what changes, if any, we will have to make to our pricing system," he said. "This will definitely have an impact on accounts that do not have net arrangements, but even for corporate travel programs with long-standing net agreements, it's a price increase, probably of about 2 percent, because not all of a corporation's travel can be kept to preferred suppliers."

Ron DiLeo, senior vice president of North America for Philadelphia-based mega agency Rosenbluth International, said, "We are in the process right now of introducing a very simplified pricing process for our clients," although he said that work on the new system began before base commissions were eliminated.

"These changes don't necessarily mean increases," he said. "It's an attempt to arrange things so that we get paid for the services we deliver on a more accurate basis." At press time, DiLeo said Rosenbluth account execs are contacting clients with proposals for pricing changes.

John Berkley, American Express vice president of corporate travel marketing, said that although "99 percent" of American Express' larger clients have net agreements, smaller accounts would feel the loss of commission revenue. Users of American Express One's Local Office call centers now face a $35 fee for each transaction, up from a fee of $25 before the elimination of base commissions. Also in response to the loss of commissions, American Express began assessing smaller accounts special fees for refunds and exchanges.

Cyndi Perper, global purchasing manager for London-based Invensys, and past president of the National Business Travel Association, said even in large travel programs with net deals, the commission cut "does mean a fare increase for buyers and travelers.

"At Invensys, we have some good net-net deals in place with our preferred suppliers. We follow that 80/20 rule," Perper continued. "We try to cover 80 percent of our routes with some kind of preferred deal, but you can't have everything covered by net arrangements with preferred carriers. On that other 20 percent of our corporate travel, we are going to see an increase in costs."

Although many of Navigant International's larger accounts have gone to net fares, "Everybody uses more than just their preferred carriers. So, almost all of the customers had some commission pass-through going on, and almost all of the customers will suffer some loss of revenue," said Thom Nulty, president and COO of the Denver-based mega.

For non-net deals, Nulty said the elimination of commissions "will be pretty close to a $20 increase in fees for transactions," a change in pricing which was to begin last week.

Nulty said Navigant would help affected buyers soften the blow of the increase in costs. "We will encourage customers to monitor policy," he said. "The most recent fare war is an opportunity to lower air costs. Taking one-stop fares in some competitive nonstop markets can save 80 percent on the ticket prices."

Steve Shook, vice president of strategic sourcing at Carlson Wagonlit Travel, said the impact of the commission elimination on CWT's pricing would be "negligible since 90 percent of clients have net agreements already. We've been in negotiations with suppliers on behalf of our clients since the commission elimination was announced. Most of the new deals we are negotiating are contingent on a combination of market share and volume. Most clients are moving more of their air spending to preferred suppliers."

John Snyder, WorldTravel BTI COO, said 85 percent of the Atlanta-based mega's clients are on a fee-based pricing arrangement, "where the travel buyers will take the full hit of the commission cut. The remaining 15 percent are the small customers who were on a fee program, where we kept all of the commissions. We've had to raise their fees $10 to $35 per ticket, depending on their mix of domestic and international travel." Snyder added that his company expects to lose up to 30 percent of those small clients who are facing fee increases. He expects those companies will move their bookings to the Internet.

WorldTravel BTI has been in discussion with carriers about the possibility of raising overrides to compensate for the loss of base commissions. "Some of those discussions are more successful than others," Snyder said. "Obviously the carriers want to retain as much of those savings as they can."

Consultant John Caldwell said buyers should research the ways the commission cut affects their specific agency relationships before agreeing to pay higher prices for any service.

"The question is, What is the actual reduction in commission revenues to the agencies? Their changes in pricing might be related to their actual costs, or they might not be," Caldwell said. "You need to ask, 'Is this a mark-up that is related to costs or is it extra profit taking?'

"First, buyers should ask for financial statements from their agencies proving the increases in costs were precipitated by the commission cut," he added. "If the agency refuses to deliver written documentation of this, buyers should ask to see the CFO of the agency to discuss the reasons for changes in pricing."

Buyers can discern the validity of fee increases by sending their own auditors in to review the agency's records. "Under confidentiality agreements, auditors should examine the agency's records to help the buyer determine if the price increase is warranted," Caldwell said.

"The impact of the commission cut on travel agency economics is yet to be determined," he added. "In order to protect their interests, buyers could agree to pay increased fees for the time being as an estimate of the agency's cost increase, and demand that they get a refund at the end of the year if the impact of the commission cut is less than was expected. Buyers should have a right to ask for relief if the impact of the commission cut to agencies is not as big as agencies initially thought."