<H1>Brace For Tough Talks</H1><H3>by John Heilner</H3>As airlines continue their drive to cut distribution costs, the introduction of both net fares and new technology will accelerate. Pressure from new entrants and existing lower-cost competitors combined with management's desire to increase profits will continue to reduce costs as well. There will be even more pressure as labor contracts expire and "snapback provisions" return wage rates to their former higher levels, e.g., at Northwest later this year.
Airlines will seek to reduce the distribution costs of international standard commissions, up-front "sector bonuses," overrides, CRS fees and credit card merchant fees. Net fares are the perfect vehicle for eliminating these costs. Some varieties are booked directly with the airline, thereby bypassing CRSs, and some involve a direct form of payment. The major U.S. carriers, reportedly led by Delta and USAir, have plunged into the net fare market. And America West and British Airways have come up with some new variations on this theme.
Travel managers must be flexible and know how to incorporate net fares into their way of doing business to effectively cut air fare costs. Issues include travel agency compensation for transaction labor, and capture and consolidation of data for management and supplier negotiations.
The drive to reduce distribution costs also will be a catalyst in accelerating the introduction of new technologies at various steps of the travel process. While this is not necessarily linked to net fares, in many cases it will be.
Does this mean that travel managers must have advanced degrees in science, economics and anthropology to adapt? Not necessarily. But it does mean that travel managers must be comfortable with the new technologies, possess some rudimentary financial analysis skills and have a good feel of how fast the corporate culture is evolving.
Travel managers who do learn these skills and add value to their companies should be able to command higher salaries and increase their marketability.
Airlines, hotels and car rental companies have a long history of losses, despite improved results in 1995 and the first quarter of 1996. Investors-many of whom were unhappy for a long time-now see that profits actually can be made. They also have seen the impact of pricing strategies that were doomed to failure, like CALite.
In the future, suppliers will be less willing to offer very large discounts and engage in what they see as destructive price competition. As all three industries continue to consolidate, competition will decrease. Demand has finally caught up with supply in the case of airlines and hotels and, in the case of car rental companies, reduced supply because of pressure from the auto manufacturers.
Travel managers will need to negotiate even smarter with suppliers. They must bring more value (market share and consistency) than ever to supplier relations. Travel managers will be able to get more non-fare and rate enhancements by knowing which added values are truly meaningful to their travelers and their company. They should consider which amenities are less expensive to the supplier.
Travel managers and agencies will see more variation in commissions and overrides when a supplier believes its product sells itself over the competition. Of course, with client-agency financial relationships changing, less commission or override means higher prices to the client. Travel managers need to remain forever vigilant.