American Airlines' move last month to further cap travel agency commissions on domestic tickets did not shock corporate buyers—large numbers of whom for years have been migrating toward net fares and agency transaction arrangements to protect against such reductions. It did, however, infuriate many now expecting either constricted revenue streams from shared commissions or increased agency fees. In particular, midmarket clients without significant net fare deals in place again were most vulnerable.
The change was the fifth commission cap and/or cut beginning with Delta Air Lines' move six years ago, but the first during a down economy. It also came earlier in the year than the past several commission reductions, giving buyers a few extra months to make budget adjustments, including renegotiated airline contracts made possible by carriers' precarious economic state.
Matched by all of the major carriers at press time, except Alaska and Southwest, the newest structure maintains a 5 percent commission structure on all domestic and transborder Canada tickets, but caps the payment to $10 one way/$20 roundtrip. The 60 percent base reduction affects all itineraries over $400, with higher-price fares impacted more dramatically.
For the airlines, reduced commissions translate directly into cost savings. UBS Warburg analyst Sam Buttrick pinned that savings at $350 million for the industry and $75 million for AA, specifically. Other analysts estimated potential industry savings as high as $500 million. In the more profitable past, corporate buyers and industry watchers pondered what the airlines were doing with savings from successive commission reductions. This time, however, it is clear the carriers are clamoring for any cost relief amid the worst revenue environment seen in a decade.
However, rather than swinging the commission axe all the way to zero, the U.S. airline industry perhaps is milking commissions savings for all they are worth, cutting and capping when they can or when they must, but holding on to a few more opportunity cards to be played incrementally in the future.
That strategy differs from approaches overseas, where British Airways and Singapore Airlines already have eliminated traditional base commissions. Interestingly, Lufthansa late last month postponed plans to scrap commissions for German travel agents in favor of flat-fee booking payments. Introduction of the scheme has been deferred 12 months from the original date of Jan. 1, 2002, in response to a threatened boycott from the 5,000 members of DRV, Germany's main travel agency association.
Many German companies already had started to restructure their agency relationships and internal financing of travel in anticipation of zero commission. Electrolux last month introduced internal transaction fees for travelers and said it would continue in spite of the postponement.
"It is the logical way to distribute costs and the time will come when commissions will be reduced, so it is best to get our budget holders used to it," said Andrew Fraser, Electrolux travel manager for Germany.
Stateside, many corporate buyers would prefer a once-and-for-all commission reduction to zero so they, too, can confidently reconstruct airline and agency deals and move on. However, it likely will not happen in the very near term. Unlike BA, Singapore and Lufthansa, no single U.S. carrier has overwhelming market dominance and a swift move to zero by one perhaps would not be matched by others. Also, carriers may not yet be willing to sacrifice benefits provided by the agency distribution network. "The airlines were concerned about the impact to their systems and revenue," said Mark Walton, principal of Consulting Strategies in Rolling Meadow, Ill. "They probably determined they could not do as good a job at this for as little money as they are paying the agency distribution system."
Instead, evolving economics and ever-changing revenue streams have meant several renegotiations in the past few years, especially for smaller travel programs. Simon Property Group in Indianapolis, for example, currently is looking to rework its $5 million annual air spend into new net-net deals. Michael Gaither, director of corporate operations, said, "I have heard that some of our airline suppliers will allow us to increase our front-end discount between 5 percent and 7 percent to make up for the lost commissions." The retail real estate company immediately stopped booking on AA after the announcement until other carriers followed suit.
While many in the industry recognize the airlines' desperate financial situation and the need to control costs further, others said the airlines are firing in the dark and ruining corporate relationships in the process. "They do not have a clear-cut strategy and they again have stirred up a hornets' nest for just a little bit of money," said Brent Garback, CEO of Total Travel Management in Troy, Mich. "Our clients are mad as hell and they are not going to take it anymore. They are asking to immediately be put back to where they were, one way or another. If that means large share shifts to other carriers that will make them whole again, then so be it."
Mega agencies came to similar conclusions. "Corporations have a lot more leverage after this commission cut and resulting price increase than they have ever had in the others, especially since it's the first in a down economy," said Danny Hood, president at WorldTravel BTI. "This will be a big third quarter for the airlines and they are counting on the cut to make their year and help stock prices. They are saying they need more market share, better yields and higher loads and are willing to deal. That is happening right now and we'll do our best to beat them up anyway we can."
The American Express outlook and strategy is comparable. "We need to punish individual carriers in individual markets to make them change their behaviors, leading to industrywide changes. They can't afford to lose market share," said Rion Needs, senior vice president for American Express corporate travel. "So we now need to unify with our clients, unify their purchasing decisions about the carriers they work with and get back these revenue streams. We realize now that our only reason we have to exist is to help create value for our clients."
Though net fares—and the corresponding change among corporate buyers from a profit center to cost center mentality—has provided shielding from commission reductions, Needs said some companies that have net and net-net fares still may feel the pinch from what amounts to a back-end fare hike.
"When they negotiated the nets, the specific economics were different. The discount should be deepened now that they have a different economic environment," Needs said. "But they are not universally saying they will renegotiate those net deals. Based only on the clout of the individual customer, the carriers can be brought back to the table."
However, some travel managers already on net fares told BTN the impact would be minimal: only a slight reduction apparent in the back-end revenue stream, determined by net fare coverage, average ticket price and travel mix.
Similar to past commission reductions, midmarket clients still covered under traditional agency arrangements, in many cases, now will try to negotiate net fares as replacements to dwindling commission rebates. "From the airline perspective, if you change the way you do business, you need to allow all your customers to change along with you and not be discriminatory against who gets net fares," said Kevin Iwamoto, global air and car supplier manager for Hewlett-Packard and president of the National Business Travel Association.
Smaller clients, who already have been moved to across-the-board transaction fees while their agency keeps commissions (BTN, Oct. 25, 1999), were not immediately impacted, though agency fee structures quickly will increase. American Express, for example, currently is reviewing adjustments to its $20 fee for small clients and WorldTravel BTI expects soon to increase transaction fees by an average of $5. Walton said such increases "will have the residual effect of moving more smaller companies to alternate distribution systems, i.e., online marketplaces."
The always vociferous American Society of Travel Agents blasted the newest commission cap, calling it a declaration of war. Said Richard Copland, ASTA president and CEO, "American is using its new power as the 900-pound gorilla in the industry to attempt to eliminate travel agencies as viable competitors in the marketplace." The ASTA board approved several measures, including the immediate expulsion of AA and subsidiary TWA Airlines LLC from its membership and requests to government officials for antitrust relief to "respond collectively to airline market power."
While agencies may fear for their survival—despite some taking in marketing and/or access fees and further customizing override agreements—corporate clients are afraid to lose the services they provide. Online booking, particularly direct from carrier Web sites, sacrifice traveler flexibility and service levels.
"I think we will be pushed to reduce headcount in the travel department because of the airlines' push to the Internet," added Simon's Gaither. "But as much as they push, the Internet right now cannot handle true business travel. The agencies provide a huge value."
WorldTravel's Hood found a silver lining in the new cap, despite its arrival a few months earlier than forecast. "We had predicted it would happen in October/November and it would go to the Internet rate of $10 per roundtrip," he said. "But the airlines recognized the complexity of traditional transactions and decided to continue paying the agent channel more than the online channel."
Meanwhile, Iwamoto said travel managers should brace for the next round of commission cuts, if they have not already. "We know it will go to zero eventually, and maybe sooner than later if the fall-off in business travel continues," he said. "You might as well plan for the inevitable instead of going through these exercises two or three more times."