Budget Planner: Myriad Variables Muddle Agency Pricing

Their reasons varied, but industry pundits interviewed last week said they did not expect dramatic changes to agency pricing in the coming year, despite pressure from a new breed of competitors and the growing penetration of online bookings. As in past years, the difficulties in comparing fees of the same fruit preclude confident predictions, instead giving way to speculation.

According to annual BTN research, very large corporate accounts in 2002 paid roughly $40 for each domestic telephone transaction, while unassisted online fees ranged between about $20 and $27. Overall average agency fees for the largest accounts have not moved far from the $40 mark since 1999. Meanwhile, the mean fee for midmarket companies in 2002 was about $34.

"I don't think fees will be moving much," said consultant Ralph Brown. "They won't be increasing because there is still a lot of competition for the business. Agencies still are trying to get back to where they were on revenue and profits, but I don't see them pushing clients any more. Some companies probably will experience better pricing than they have just by going out to bid."

A given company's place in the RFP cycle, penetration of online bookings, agency setup and other factors have an enormous impact on its agency spending, which normally amounts to a single-digit percentage of the total T&E budget.

According to John Caldwell, also an industry consultant, "I'd look at relative stability, subject to increases in labor. Fully loaded fees are unlikely to go down if labor costs go up, but profit and overhead I think will remain stable." Acknowledging that the labor market now favors employers, Caldwell said labor cost increases at minimum can follow the Consumer Price Index. "Agencies tend to follow the airlines," he added. "They make a bump up in good times and in bad times they're afraid to scare away the travelers."

Other factors, Caldwell said, include self-booking usage, auctioning for agency services and American Express' acquisition of Rosenbluth International, which is expected to close in the coming weeks.

Consulting Strategies' Mark Walton said he detected additional downward pressure on fees in recent months: "There's been a significant degree of competitiveness in pricing that is a result of the lower transaction activity that has occurred in the industry overall. I think the realization is that there hasn't been a quick recovery, and also the movement to online booking is facilitating some of it, but there are so many variables."

Wall Street analysts who follow Navigant International said that company has been reluctant to give an indication of where it expects fees to go.

"You might think the natural thing is that there's downward pressure from online competition, but that just hasn't been the case from what I'm hearing," said David Gold with Sidoti & Co. in New York. "For example, Navigant has a competing product to Expedia's $5, and anyway, most clients who start there end up picking up the phone." Further, he said, agencies are proving their value in finding low pricing and available seats for clients in situations where both are scarce. "It's getting harder to get on the plane and to find a decent deal," he said, noting, "Preliminary indications are that September was off to a roaring start."

"The historical trend is that fees go up as suppliers remove commissions, but that side of the effect may have passed," said C.E. Unterberg Towbin's Christine Min. "The GDS companies' agreements with the airlines will affect some of the agencies in terms of incentive fees, and there are a couple of things affecting labor, including a lot of consolidation." Min also acknowledged the competition from online agencies, but all sources agreed that the supposed $5 fee is not so simple. They noted, for example, that Expedia is keeping commissions.

"You have to believe, with hotel and airline overrides, that net-net it's the same," Gold said.