Cap In Hand, Buyers Renegotiating

<B> Cap In Hand, Buyers Renegotiating</B>

By Sarah Welt

Three weeks after the first international commission cap, many travel managers and their agencies are beginning to realize that the hit to their bottom lines is going to be even more serious than they initially thought.

Rob Callahan of SBC Communications Inc. in San Ramon, Calif., for example, at first glance guessed the cap would cost his company $10,000 (<I>BTN,</I> Nov. 16)--but already has upped the final tab to $150,000 after a formal review of its travel patterns. To arrive at that figure, SBC's agency, American Express, pulled all the international spending data of the $60 million air volume account, identified the total revenue spent on various international city pairs, and calculated the difference in commissions between the old and new scales.

SBC is not alone in rethinking the bottom line fallout from the $100 roundtrip commission cap on international tickets imposed in the last month by all major North American airlines except US Airways (<I>BTN,</I> Nov. 16). The majority of travel managers are sitting down with their agencies to assess the damage--and calling the carriers in the hope of renegotiating their airline discounts and securing net fares.

"We had 62 tickets between Dallas and Tel Aviv that cost $172,941, and 8 percent of that would have given us an average of $223 in commission on each ticket," said SBC's Callahan. "The $50 they now are giving us equals a loss of $173 for each ticket, multiplied by 62 tickets, for a total of $10,000. We did that for 200 cities--and the loss totaled $148,238."

Callahan now hopes to put discounted net fares in place by the first of the year with three of SBC's preferred carriers. "We would like to move as quickly as we can," he said.

Boston-based Keane Inc., where 20 percent of the $12 million air volume is international, also expects the cap to have a significant impact. American Express has run its numbers, too, and corporate travel manager Marianne Goodman puts the loss there at $20,000 a year. "We will probably lose less than $5,000 for the rest of this year, but next year it is going to be a major issue because we intend to grow internationally by 25 percent," she said.

Keane has a management fee contract with Amex and so far has not been told if it will change in any way. In the meantime, though, Goodman's biggest concern is getting the company to shift from a profit-center to a cost-center mentality. "The company is used to getting a check and it is going to be getting a much smaller check going forward," she said.

Goodman, who joined Keane in October, is in the midst of putting together an airline bid and wants the option to go net because "next time the airlines cut commissions I don't want to have to worry about it," she said.

EMC Corp. of Hopkinton, Mass., with $11 million in air travel, is concerned it now may have to pay American Express more to cover the cost of its onsite operation, which is funded by commissions. Thirty-one percent of its business is international, with United its primary and Delta its secondary carrier. The cap has caused travel services manager Sheri Carlsen to begin exploring alternatives, hoping to look at global net-net deals by the first quarter of 1999.

Like many of their corporate customers, many agency executives believe that net fares are the best answer to this--and any future--commission cuts.

"It makes no sense for any commission to flow between us. I'd like 100 percent of our customers to be net of all of it," said Carlson Wagonlit Travel president Travis Tanner. Roughly 30 percent of CWT's clients have some kind of net arrangement, and Tanner said he believes more net fares will be a natural outgrowth of the cap.

WorldTravel Partners-BTI Americas co-president Danny Hood agreed that the industry now will see a lot more international net-net deals. "Just as the first commission cuts pushed a lot of net-net domestic, this is going to do the same thing internationally," he said.

With 70 percent of WTP clients already on fees, Hood estimated the cap will be "a 2 to 3 percent price increase" for most corporations, and 5 percent for those who do a lot of international travel.

But at Maritz Travel Co., president and CEO Michael Boland cautioned that net fares "are not always in the client's best interests. This could stampede some people to net fares when it probably isn't the most prudent thing for them."

McCord Travel Management president and CEO Bruce Black also expressed caution. "If the whole world were net-net and airlines needed a price increase, they would find a way to push one through. Nets do not guarantee that nothing will ever change. They eliminate up-front revenue, but the cost structure is the same."

Still, the road to nets is clearly the route of choice. Said Carol Ann Salcito, president of Stamford, Conn.-based Management Alternatives, "In order to lessen the blow, corporations are going back to the airlines and getting net-net offers. Everyone I have spoken to is either reviewing a net proposal or in the process of asking for one."

But Travel Management Group president Tom Wilkinson of Alexandria, Va., shared a contrarian view. "I have not seen this have much of an impact on net fares and don't know why it would," he said. "I have had a client express gratitude for having recently shifted to a net fare strategy in a long- term contract, but at this point other than the possible assumption that there'll be further commission reductions, I can't see folks shifting to net fares."

Meanwhile, at least one airline executive has hinted publicly that he expects to renegotiate with corporate clients. "A lot of poker chips are moving around. Most of our best customers have no problem calling us and asking us to put more chips on the table," said American Airlines president and CEO Don Carty at The Masters Program (see story, page 5).

Still, noted Wilkinson, talking is not necessarily discounting. "After this cut, several clients have wanted to, demanded to, determined to negotiate with their airlines. I have not seen the airlines budge on that, though I certainly have heard rumors that they have done so for certain very large clients."

But it's travel agencies that are facing the most serious blow to their bottom lines. The cap will cost WorldTravel Partners-BTI Americas millions of dollars, said co-president Ralph Manaker, and boost the number of clients writing checks to the agency now that commissions no longer cover the cost of operating their travel programs. For now, the agency is sitting down with every client to discuss the cap's impact before determining what can be passed back to each customer.

Balboa Travel Management in San Diego will take "a million-dollar hit," said president and CEO Joe Da Rosa--about the same as Stevens Travel Management in New York. "We got about a $900,000 hit," said president Harold Stevens, estimating that half of the agency's $85 million business is international. "Under the old commission schedule we were averaging 7.5 percent commission and now we estimate an average of 6 to 6.3 percent. We have some 10,000 tickets impacted by this cut."

As a result, Stevens plans to introduce a combination of transaction fees and menu pricing in the next six weeks, and to cut the number of full-time programmers on his IT staff from five to three. Asked about laying off travel agents, Stevens said that is something he is evaluating.

But he also sees an opportunity to acquire smaller agencies in the $5 to $50 million range. "We are looking to buy. The commission cap is a terrible short-term disaster that will force lots of mergers," he said. "People who think they aren't going out of business this time are crazy."

Salcito agreed that the industry "is going to see a lot of travel agencies bite the dust on this one."

Carlson Wagonlit Travel/WTS Inc. of Louisville, Ky., with $120 million in air volume, already has heard from four small agencies anxious to sell. "It's the proverbial straw that broke the camel's back," said president Tom Lumley. "They didn't do what they should have two years ago and don't want to deal with the situation. They can't adjust to the way business is going to be done in the future."

For its part, McCord plans to pass through its commission losses to clients in the form of additional fees. Close to 75 percent of its accounts already are on fees, and for them, "this is clearly a 3 to 5 percent price increase," Black said. For those not on fees, "we are discussing with clients where we need to move them to a management fee model."

But Rosenbluth International reported that some of its customers are fighting back, and "have been pretty adamant about moving market share to carriers that have not capped commissions," said president Hal Rosenbluth.

Anticipating a trend toward centralized res centers to hold down travel costs, Rosenbluth also is "freeing up space in our low-cost Intellicenters around the country."

Other travel agencies again are considering a dealership model, where they would align themselves closely with a very limited number of airline partners.

World Travel Specialists Group, for example, wants the airlines to treat the Manhattan-based agency like a corporate customer, offering deep discounts in return for delivering high market share. "We are only talking to possibly two airlines at the most. Of course, that doesn't mean we won't sell other airlines, but there will be a different pricing structure," said chairman and CEO Paul Metselaar.

Lumley agreed that distributorships may well be the future path. "Airlines might force that issue," he said. "They might have authorized dealerships and go to Amex, or BTI or Rosenbluth, and ask, 'How much of the total distribution system can you deal with?' "

But Amex Corporate Services president Ed Gilligan hinted that the airlines may be pushing buyers too far. "The timing of this international commission cap is very poor," he said. "Companies that manage travel aggressively are getting more aggravated with every commission cut and more skilled at shifting their business to competitors." In the long run, the cap "will hasten the consolidation of the larger business travel agencies, who are going to become more formidable negotiators and demand aggregators for the corporate market.