American Express soon will begin renegotiating all of its client contracts in four key European markets following commission cuts by SAS, KLM and Austrian Airlines.
By the time renegotiations are completed, Amex no longer will have any accounts based on commission and rebate in the United Kingdom, Germany, Benelux and Scandinavia, said senior vice president head of business travel Europe Maria Lilja.
Lilja said all existing accounts, including those already on a management fee, will be reviewed in the light of the new dynamics of the European aviation market.
European carriers have been poised to change their commission structures ever since the caps were announced in the United States nearly two years ago. Although some, such as British Airways, pared their overrides, no one attacked core commissions until December 1996. In the week before Christmas, SAS declared it would cut payments for flights within Scandinavia from 9 percent to 5 percent. That was scheduled to take place on April 1, but the airline announced last week that the date will be pushed back to Sept. 1 to give agents more time to renegotiate with clients.
At the same time, SAS alliance partner Lufthansa unveiled a complex new set of commission rates, including a cut for domestic flights. Previously, it was 9 percent, the same as for international flights. It is now between 5 and 7.5 percent per booking, according to the agency's volume of business with Lufthansa and whether the ticket is electronic or paper.
The Lufthansa changes are likely to begin on July 1, although the major German travel agencies are reported to be negotiating their own commission deals.
KLM became the latest airline to join the fray on Jan. 17, when it announced that it will reduce its basic commission rate for Dutch agents starting April 1. More European carriers are expected to follow. One senior U.K. agent said he would not bet against BA cutting its rates in 1997.
Amex has told potential clients for some time that it will not accept a commission and rebate system. But Lilja said the moves by Lufthansa, SAS and KLM had forced Amex to renegotiate existing arrangements as well. "It is a new world, and we have to change our contracts," she said. "It was always part of our strategy to move from commissions, but now we have a date when our revenue streams will be affected. We would have done this anyway, but in the longer term."
An average 61 percent of the top 10 Amex clients in each European country currently work on a fee basis. In the United Kingdom, 44 percent of Amex's total sales are handled through a fee arrangement. The U.K. figures are similar to those of its two main rivals. Carlson Wagonlit has put 40 percent of its business on management fees, and Hogg Robinson BTI has converted 60 of the 150 clients who spend more than a half million pounds.
Lilja said the review will include a redoubled effort by Amex to provide a price list for specific services. "We will become much better at linking price to added value," she said. "The renegotiations are not just a case of us wanting more money."
Amex Europe has come up with eight basic remuneration models to help its client negotiations. Key elements include menu pricing and incentives for hitting service and savings targets.
Amex also is considering how the new paradigm will affect its relationship with small clients, whose less complex needs are often better served by commissions than by management fees. "We want to find a simpler way to service small companies," Lilja said. "We will not be rejecting any clients. A small client today could be a large one tomorrow."
Hogg Robinson director of business development Nick Hurrell cast doubt on the wisdom of a fee system for clients spending less than a half million pounds. "It is debatable whether a fee works for them because of the consultancy costs," he said. "Do those clients want to spend a whole day twice a year going through the numbers?"
Hogg is encouraging existing clients to give up commission and rebate. It has no plans to move them off forcibly but said those that remain can expect renegotiations at least once a year. However, it is only accepting new clients on commission if they run an open book alongside and move over to a fee basis after six months or a year.
"We will see dramatic changes in remuneration deals between agents and clients this year," Hurrell said. "We need to move toward transaction fees and we are currently carrying out trials with clients using menu-based pricing."
Carlson Wagonlit U.K. also has no plans to force clients off commission structures, but it is offering a management fee or incentive system as the first option for all rebid contracts. Its contracts also stipulate the right to renegotiate contracts if commissions change.
"Our basic policy is to move toward management fees, but the concept is rather more understood in the U.K. at the moment than in other European countries," said Carlson Wagonlit U.K. director of client services and marketing Jim Tweedie.
A KLM spokesman said the airline is reducing commission payments to Dutch agents after lengthy consultation. "We investigated what work the travel agent does and what would be a reasonable price for that," he said. "KLM decided that 7.5 percent would be a reasonable level because much of the agent's work is done by computers."
Dutch agents do not regard the KLM cuts as quite so reasonable. Their national association, ANVR, is threatening to sue the airline. KLM said that whether it cuts commissions for agents outside the Netherlands will depend on local market conditions.