Agency Pricing Focus Is On Cut

By BTN / October 24, 1999

Agency Pricing Focus Is On Cut

BTN editors sat down to talk about agency pricing--just as Delta and American matched United's decrease in travel agency commissions to 5 percent--with Danny Hood, WorldTravel Partners-BTI Americas; Bob Lichtman, The Corporate Solutions Group; Betty Lucero, The Capital Group; John Smith, Tower Travel Management; and Mike Woodward, American Express.

BTN: How will the commission cut affect you in the short term?

Mike Woodward: The immediate impact for us is to eliminate any questions about what's happening in our business right now. We, like probably all the travel managing companies, over the past several years have been pursuing a continual grafted evolution into transaction fee pricing, but we still have some customers who are not yet there. This gives us a tremendous sense of urgency and it elevates any sort of questions about what we're doing.

Danny Hood: The first reaction is that this is a price increase to the corporations. About 65 percent of our base is net-net and fee-based, and the other 35 percent is some form of transaction fee, or hybrid cost-plus transaction fee. Like Mike said, we need to calculate the hit and talk to our customers. We know the drill since this is the fifth time in the past four years.

BTN: So how do you do the math? Is it $750 million that the airlines are keeping this time?

Hood: Right, that's correct. Basically, you have to calculate it client by client. You have to figure out how many tickets weren't affected by the 5 percent. Tickets of over $1,000 domestically and $2,000 internationally weren't affected. Our account managers are going through the algorithms in our mid-office reporting system to figure out the hit client by client, and we'll sit with them and look at the partnership pricing we put together. But for the most part, it was a fare increase to the corporations.

BTN: Can you give us a range?

Hood: Well the high is from 8 percent to 5 percent, the lowest would probably be a half a point hit.

John Smith: The math works. We had a couple of examples where there was actually a slight increase. Some people before this cut were in the 4 to 4.4 percent range and they just happened to have the unique mix of tickets that were between 6.25 percent--we're actually going to see an increase there. Client education is absolutely the number-one goal for us. Being a midsize player, we probably don't have the number of clients of our counterparts that have net fares, so there's still the commission mentality, and we really have to work hard to educate people on that.

BTN: Coming from a smaller agency, is this cut going to be a bigger challenge?

Smith: For the accounts we have on management fees, they're used to it. Yes, it's the fifth time or so that we've been through this so they know as commissions go down what the impact is to them. But we probably have a larger percentage of business on a supplemental ticket fee than the larger agencies and, for those folks, it takes more time to educate.

BTN: Does that mean more on a rebate basis?

Smith: Luckily, no. I'm not going to say that we don't have situations where the client has an overage and we had to send money back, but it's always a management fee sort of thing. I don't think of that as a rebate. It ends up being one I guess, but as long as our price is fixed we're okay.

BTN: Are there any kinds of client relationships that you're going to have to totally restructure as a result of this?

Smith: Oh, absolutely.

BTN: What percentage of your clients?

Smith: Our initial projection is that we're going to have to have some pretty serious talks with about 30 percent of our client base. That works out to only about 25 accounts, but over the course of the next couple of months, it'll obviously take time to do that.

BTN: And what about you, Mike?

Woodward: A very small percentage, roughly 10 percent of our customer base of the large corporate market still would have what we would consider a revenue risk to us, although it's marginal in some cases in the way the deal was structured. We have somewhere around 30 customers on the top of our list, most of them fairly large, that we will need to restructure. And probably about half of those are in that process right now. So a fairly small number of our larger customers are the ones who have the largest price increase proportionate to their budgets.

BTN: Have those companies continued to have a kind of rebate?

Woodward: Yeah, we have almost no percentage on the rebate but we still have a number of customers with fixed transaction and management fees that are at a positive balance--where their expenses are still less than the revenue.

BTN: Danny, how many clients are you having serious conversations with?

Hood: I always say we have to have a serious conversation with 100 percent of our clients because the corporate travel managers out there are affected--it's their year-end bonus. They've been managing all the way to a budget and they're going to miss their budget maybe for the last couple of months with the revenue shortfalls. It's always good to help them communicate what the hit is to their senior management. So the communication plan is to a 100 percent of clients whether or not you have the minimum wage, which I predicted a year ago would be 5 percent. It's amazing that I didn't think it'd be this time. We're going to have to increase fees for small unmanaged consumer-type travel, and partially managed consumer travel, to where those fees will go up and good communication will have to take place. In the large market, like Mike said, the profit centers were almost dead, but there are some people who prolonged it with GDS conversions and heavy override programs that were negotiated back-end deals. Those are the ones going from a profit center to a call center that are going to be the toughest negotiations or the most detailed. I think those'll be the ones, like Mike said, that we can count, probably, on both hands.

BTN: Bob, do you think that 5 percent is the bottom?

Bob Lichtman: No. I sincerely think that all subsidies will eventually go away as the airlines test the waters with lower and lower commissions and as the agency community is able to expense its expenses the proper way, to the customer. As the airlines see that the transaction and management fees are covering all expenses, they won't feel compelled to have any commission base.

BTN: So how long a process do you think that is?

Lichtman: Who can predict? I thought the 5 percent was going to hit last year. A rumor was spread last year by Giants or one of the consortiums that United had proposed 5 percent. Perhaps that was just testing the waters. I thought that the 5 percent would hit sooner than it did, going down to the last few points or to zero. I think it's going to be somewhat of a battle. I envision as you get down to 1 or 2 or 0 percent, that you will have some companies that will hold out because that will, to them, be their only relationship with the agency community that's left. The agency will not have any reason to work for any particular airline or to promote their services through any organization unless they can provide more compensation.

BTN: So before I ask Betty, does anyone want to take issue with that?

Woodward: It almost doesn't matter at this point whether it's 0 percent or 5 percent because what customers want to know from us is it's bad, it's a hit, we don't have a profit, this is now a cost center. So what are you going to do to help us: mitigate transaction costs, drive those costs down, get better front-end deals in terms of the customer and ultimately, provide tools to manage this budget better? Once you move into a cost center, the travel manager is scared to death of having the CFO say, "We're paying American Express or Tower Travel or WTP $40 to get airlines tickets?" And so that other piece is that ability to separate the price value beyond just sort of a transaction process. For us, this cut was the clearest signal that this is an ongoing process. Where it ends, I think I would say to our customers, really doesn't matter right now. What matters is what we do to mitigate where we are now and where we will go.

Lichtman: I couldn't agree more with Mike. This is a tremendous opportunity for consultants to help corporations explain to the controllers and the CFOs that travel is really an at-cost or at-fee item, and you had a commission revenue stream that just had been masking that. If they're in a net-net environment as my client, 3Com Corp. is, this has a negligible impact and any further cuts will be negligible because we're already in a virtual non-commission environment. So, as Mike said, it's the issue of how it affects the customer that's most important.

BTN: Betty has done a lot of work evaluating agency services and pricing, so how will this affect you at your new job? But first, have you gone to net fares?

Betty Lucero: Not yet. We're definitely headed in that direction. It's back to grinding numbers again to figure out what the total impact of it is, but the formula already is established. So it's a matter of just being able to plug the data in and that's not to say it's a simple process at all.

BTN: Do you have a ballpark estimate?

Lucero: Not yet. As Mike said, yes, there's an impact and, yes, there's a story to be told to the CFO and the CEO and anybody else who cares to listen to it, but to the point that I'm paying $40 to an agency to do this, hm, is that value? Service now becomes very prominent, more so than it has before. Show me where the value is for that $40.

BTN: Because it's already included, why is there a cost?

Lucero: Yeah, and there's nothing really we can do about it other than look at the other aspects of how we provide service and are we willing to compromise in any other ways to stay even. And that becomes a very difficult juggling act.

BTN: Is the Capital Group travel department being funded by commissions returned?

Lucero: Yes, so we know it will have an impact. It's a great time to say, "Let's go to net-net."

BTN: And the impact at 3Com?

Lichtman: There is, because one can't get net-net agreements or discount programs with every carrier out there unfortunately, but it's negligible. 3Com manages its travel expenses to the true expenses. We've determined how much a transaction costs, we estimate the number of transactions that will be created and we budget against that. We don't budget against any revenue stream. The revenue stream--while, of course, it's in the budget--is relatively small, so it's treated separately and it doesn't impact the corporation.

BTN: Let's talk about transaction costs and what they are. Ed Gilligan at NBTA said it was time to define what is a core transaction, and Mike you've been playing a role in that.

Woodward: Ed did sort of call on the industry to define what a core transaction would be. We've been doing a lot of work to determine, somewhat arbitrarily, what would be a core transaction, what would be the least expensive components of putting a business traveler on an airplane that would still be substantively differentiated from calling up an airline. So, we really began to look at a core transaction that might be in a shared reservation scenario with multiple customers, probably over multiple centers linked by sophisticated telephony with still strong answer quality, low- fare searches and so forth. But there would then be some add-ons that go into the cost--some things we're really familiar with, such as 800 numbers, information services and international. When you begin to look at what adds cost to transactions, all the stuff like managing nonrefundables, making multiple copies of an itinerary, doing manual reservations in order to secure a booking or unrated transactions, you see it as kind of a core transaction with some additional options for those types of transaction-based value-adds and some solutions around some things that are fairly obvious.

BTN: So the core transaction has been what?

Woodward: Let me give you a broad definition. A core transaction probably would be a telephone call into a center, or centers, with shared reservation, that supplies multiple customers, that has office hours that would maybe be 13 hours, that would have low-fare searches but that would be e-tickets only, that would include only automated hotel and car rental reservations. That does not mean that customers couldn't select to have manual activities, but that would be an added cost to the transaction.

BTN: Do you have a different definition?

Lucero: In a roundabout way, yes. What you're describing sounds just like a transaction going into a Business Travel Center. And there is a huge list of add-on opportunities that need to be considered, but yet the tracking of all those add-ons is very difficult. In working with Times-Mirror, we tried to share the risk in places where we had the opportunities to do so. So if we had an onsite operation, what does that mean? That would imply that there would be no facilities, telephone charges, etc., being charged to the agency; we would take that on. So, there'd be a different structure for that type of transaction and being able to put all those bits and pieces together into something that makes sense means that every single transaction could have its own separate fee, and how do you manage all of that? That becomes a nightmare.

BTN: John, do you have anything to add?

Smith: The most difficult thing about defining a transaction is finding something that is measurable on a consistent basis. The number of telephone calls works if you've got the proper call-tracking system. It seems like the more we segment the business, the more we want to charge differently for each segment and the more it drives you back to the lowest common denominator. I recognize some of those transactions could have 10 phone calls and take an hour, and others can take two minutes and be about one phone call. So it's a heavy burden trying to differentiate, but you also have to use the law of averages.

BTN: So when you sit down with clients and flip through an open book, is there a common understanding?

Smith: We make sure there is, because we can't afford to sit down whenever we're reconciling into the quarter or what have you. We can't afford to have a misinterpretation.

Woodward: The crucial part is having the components of transactions. I don't think we can separate an accounting transaction, but the huge variances and the expenses it takes to produce one of those are variable from customer to customer. So you can't separate the discussion that you have around what we're calling a bundling without thinking about platforms, because the platform creates a very different model from how you process transactions. An onsite would be the most customizable platform and it's very difficult to talk about a core transaction fee with a lot of add-ons. If there's an evolution in the pricing that we were talking about, then ultimately there would be a clear evolution of the platforms by which these transactions are processed, and right now, you're right, there are the business travel centers. But the fact is most business travel centers are congregations of individual virtual onsites. We have, other than our middle market, virtually no customer that shares reservation teams, as an example. So if you look down the line a little bit, it would look very different from a business travel center. The key thing is to look at those components in a shared environment that you can measure and can track, and take those out. The determination then is, can I afford this one? We want to be able to help our customers answer that?

Lichtman: If you make it too complicated, or if you make it seem like you're nickel and diming the corporation with the services, you're 1) affecting the ability to provide the top quality service that your organization is able to do in a fully bundled environment, and 2) frustrating the organization when it comes to setting up, justifying your budgets and managing your expenses. All the travel management companies need to have a very simple format to define a transaction and to cost or price it. Logically, you should know how much of your expenses are involved in a particular configuration in handling an account. You just divide those expenses, plus a profit line, of course, by the numbers of transactions, and that's the amount that a corporation is charged. You're assured of your profit and of getting a return on your expenses, and the company knows how much the expense of securing travel service is. If you start unbundling all of the line items and then start charging menu pricing on each, you'll create a lot of frustration.

BTN: What about John's point that some transactions are more difficult than others?

Lichtman: Oh, without a doubt, but there's thousands of transactions within any major corporation and they do average out. A transaction is something that equals an accountable document. It's something that you can measure. It's a ticket issue not somebody calling for a reservation, that's not a transaction in today's real world. And it could take a very limited amount of time; two minutes to create one transaction or two hours to create another, but they do average out when you're dealing with high numbers, a high rate of transactions.

Lucero: I would agree to an extent, but there is an opportunity to simplify the pricing so that if a customer chooses to have their travel serviced in specific ways, such as--

Smith: Configuration

Lucero: Sure, if they've got multiple configuration types, if they take electronic bookings, and so there's got to be not necessarily a full menu but an abbreviated menu.

Smith: I agree and that's part of the bid, but what I'm saying is whatever you determine, you take the big number, mark it up and divide by the estimated numbers of transactions, and that's how you price this whole thing. The point is, if they're providing service, you're going to have to pay that.

Woodward: And what our customers ask us more and more is how do I reduce that cost? It's not as simple anymore to think, here's everything, here's my cost. The answer to that is usually a collaboration between our customers and ourselves that says, well here are some technologies and some processing improvements that we're introducing to reduce cost. On the other hand, here are a lot of things that you have built into the cost yourself by the way you've chosen to handle those transactions, and here are some choices for you. I wish it was as simple as just adding up my costs. That's the way we've done it, but our customers are expecting us to be a lot more sophisticated in identifying the expense, adding a value to it and ripping it the heck out if it doesn't add value. You're right, we don't ever say we're going to charge $12 to get an airline ticket, here's a menu of 83 different things that we might do and we'll contract them on a transaction basis. Obviously there has to be some easily identifiable way, but I just think this is one of the profound evolutions of our business--that our customers are paying for these things now out of their own pockets, so they'll be looking with a much more critical eye. It's our job to tell our customers, if you were to go from a dedicated team to a shared team, I can reduce your transaction costs by 52 cents or whatever it may be. It still becomes a choice though.

BTN: So Danny, how do you define a basic transaction?

Hood: We give clients many different types of pricing. They will ask for our transaction fee if we answer all the calls within 90 percent of travel service factors, what's 85 percent, what's 80 percent, it's different. Our transaction fee is going to go down based on that service velocity. We have to measure the number of calls per transaction, what's our talk time on those calls per transaction, what's your self-service reservation percentage and what is the transaction? I have 30 different contracts with 30 different definitions of transactions.

BTN: Obviously the cost of a transaction varies by travel volume and service levels, but what is the range?

Hood: There's a lot of variables in it, but I think it ranges traditionally from $40 to $55. The weighted average on the low end should be somewhere in between $15 and $20 because there's still MIS, there's still international rate desks, there's still the value-added services that the corporation is not going to give up.

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