Buyers: Take Charge Of Distribution Costs

<FONT SIZE="+3"><B> Buyers: Take Charge Of Distribution Costs</B>

<B>N</B>et fares offer the potential to both reduce corporate travel costs and increase airline profitability. A year after the commission caps, I am surprised that net fares are not more widespread, but I am not surprised that airlines have shied away from them. Distribution costs are really corporate costs, not airline costs, and companies should work to minimize them.

In the travel industry, there are several definitions of key terms, and "distribution costs" is no exception. It covers travel agency commissions and overrides. The broadest interpretation blankets everything that happens to passengers up to arriving at the airport, from advertising to ticketing to frequent flyer programs. I like to use the term "revenue-related" to describe those distribution costs that are tied directly to revenue performance-namely, commissions, overrides, credit card fees and CRS fees. While these four are technically airline costs, they are incorporated into the price of the ticket and represent 15 to 20 percent of what the typical corporation pays.

I strongly recommend that every major corporation strive to take ownership of these costs away from the airlines because it can do a better job of reducing them. Consider these three factors: First, the corporation pays a 10 percent excise tax (whenever Congress finally reinstates it) on any cost element that is bundled into the price of the ticket. A 10 percent tax on the 15 to 20 percent distribution cost component of the ticket adds 1.5 to 2 percent to the cost of air travel-money that is just being thrown away.

Second, after at least a year of working under a management or transaction fee approach, what travel manager is not yet convinced that it would be less costly if the commission plus override plus 10 percent tax were replaced by a system in which travel agent compensation is negotiated between the agency and the corporation?

Third, corporations have negotiating leverage where the airlines do not. When it comes to rate negotiations with credit card and CRS vendors, carriers have no choice but to complain and then sign because not one of them can risk the competitive impact of not being in every CRS or not accepting every major credit card. Unlike the airlines, however, a corporation needs only one card and one CRS. If corporations can find a way to take over the CRS fee and credit card discount responsibility from the airlines, they will be able to drive down these costs because credit card and CRS vendors will be forced to compete for their business.

Randall Malin is president and CEO of Travelnet Inc., a Santa Clara, Calif.-based technology developer.