British Airways Eliminates Agency Commissions

<B>British Airways Eliminates Agency Commissions</B>

By Amon Cohen

The travel department as a profit center will become history in the United Kingdom following British Airways' announcement of the abolition of the agency commission system. Although BA will compensate agents with payments for specified activities, these will not even begin to approach the 7 percent base commission it currently pays in the United Kingdom, nor even the rates paid by travel agencies in the United States.

"Most corporations currently get a check back from their travel agent; now it is more likely that they will have to pay a fee," said Tiffany Hall, BA general sales manager for the United Kingdom and Ireland, who masterminded the remuneration restructure. Whether on a fee system or still on commission and rebate, supplier incentives no longer will cover travel department activities. "All companies will have to start paying their travel agent a fee and will have to re-engineer their internal travel department as a cost center, not a profit center," Carlson Wagonlit Travel has written in a briefing paper to clients. Paying the agent a fee for every flight booking is now inevitable.

Adapting to this new paradigm will require substantial work at many companies. Carlson Wagonlit has around 80 percent of its client revenue on a fee basis (one of the highest figures for a U.K. agency), yet U.K. managing director Jim Tweedie estimates that only between 10 and 15 percent of clients treat travel as a true cost center. The Institue of Travel Management, which mainly represents smaller corporates, is even less evolved than that. Most of its members remain on commission and rebate.

The United Kingdom is not the first market to go to 0 percent. Singapore Airlines did the same in its domestic market at the beginning of this year. BA's announcement, made late last month (<I>BTN</I>, Jan. 24), will come into effect at the beginning of 2001. However, the carrier beginning in April will scrap an interim 3 percent bonus it had been paying since the European Commission deemed its incentive scheme illegal in 1999. Also commencing April 1 will be a $41 surcharge to agents and direct customers for issuing a ticket on departure where e-ticketing is available as an alternative.

Commission will disappear on Jan. 1, 2001. It will be replaced by three different types of agency payment. The first is a booking payment for making the booking and issuing of travel documentation on behalf of BA. It will be based on a per-sector payment on sold published fares. BA provisionally is proposing $8 for domestic and short-haul economy, $16 for short haul premium and long-haul economy, and $24 for long-haul premium. It claims the differentiation is based on premium and long-haul passengers being more likely to make changes to their itineraries.

Next is a money collection payment. The agent either can use BA's card acceptance agreements for free or collect the money through other methods, such as its own card agreements, for which BA is proposing paying a 1.25 percent fee.

There also will be sales and marketing payments to agents beginning April 1 for activities that help them sell and market business fares. What these payments are or what work is required to earn them is not yet clear but it is presumed to be BA's way of making amends with its better-producing agents.

Unlike most earlier episodes of commission cutting, BA acknowledges these reductions are an effective price increase for customers who pay a fee to their agency. It therefore has promised to reduce fares, both by cutting published tariffs and introducing some new fare types, such as advanced purchase discounts in the premium cabins. As with the multinational deals BA currently is promoting (<I>BTN</I>, Jan. 24), there also will be greater variations in fares according to time and day of travel. Details will be announced later this year but, Hall said, "The intention is that the corporate client is not worse off."

Until more precise figures are revealed, no one can say how true Hall's words will prove. Clearly, however, the net amount that BA pays in distribution will drop, otherwise it would not have embarked on the exercise. Both clients and agents will strive to ensure they are not the ones picking up the tab and corporates in particular will be concerned to see BA deliver on its promise of fare cuts. "The corporate must not be impacted and it would not be in BA's interests to let it impact them," warned ITM chairman Ian Hall. U.K. corporate travel consultant Ian Flint said, "There is a lot of apprehension in the marketplace as to whether BA will lower fares and then rapidly increase them again." Clients also are unclear whether agents will be allowed or indeed expected to pass BA's new-style payments on to customers as they did with commissions.

The Guild of Business Travel Agents, which represents practically every significant corporate agency in the United Kingdom, is similarly ambivalent. "We accept the basic premise that change must come about," said CEO Philip Carlisle, who also made it clear that tough negotiations lie ahead. The GBTA believes BA's proposed agency payments largely cover costs when they also should allow an element of profit for the agent. Worse still, in some cases, they do not cover costs. The 1.25 percent money collection payment comes nowhere near the merchant fee imposed by charge card providers such as American Express and Diners Club.

Also, said Carlisle, if BA is going to charge $41 for issuing TODs when e-ticketing is available, how can it justify paying agents a maximum booking and issuing payment of $24 for ordinary reservations, albeit that the TOD charge is partly punitive?

Whether agents and their clients can resist BA if they feel the new deal short-changes them will depend to some extent on how other U.K. airlines react. Like BA, most currently pay 7 percent, although Virgin Atlantic pays 10 percent. Carlson Wagonlit anticipates that most carriers will adopt a wait-and-see attitude: "A few will maintain their rate of commission in the hope of winning more business, but the likelihood in the short-to-medium term is that they will cut commission to around 5 percent rather than stay put or follow BA straight down to zero," its briefing paper said.

With BA improving its willingness to grant net fare deals, many larger clients are welcoming the zero commission environment. "I am not negative at all--we have been working net of commission for years," said Glaxo Wellcome U.K. travel manager Richard Plummer. Plummer supports BA's stated principle that the restructure rids the client-airline-agency triangle of financial illogicalities and sees each constituent rewarding the others directly based on their input.

BA's Hall hopes to improve that transparency by persuading the International Air Transport Association to reverse its refusal to mandate a dedicated box for agency charges on its tickets (<I>BTN</I>, Nov. 15, 1999). Certainly, one important consequence of zero commission is that corporate travel departments now will have to find a way to charge travelers internally for the total cost of their trips, including agency services.