Delta Air Lines, in eliminating agency base commissions this month, signaled the end of the era of automatic agency compensation from carriers and officially ushered in a new model based on performance. Within a week, Delta's move was matched by the other five largest U.S. carriers.
Other majors were widely expected to follow the move to stop paying base commissions to travel agencies throughout much of North America for all U.S. domestic and international bookings.
Hitting zero also means the airline industry, eyeing cost reductions in a harsh economic environment, has played its last base commission card in a seven-year game Delta started in 1995. As a result, travel agents and affected corporate customers will have to rework commission-based contracts one last time. In a larger sense, the Delta move to zero also is a clear indicator of industry migration toward more efficient distribution channels. "This new market reality is forcing both Delta and travel agents to adapt," Delta officials said. The carrier spent more than half a billion dollars on agency commission payments last year.
"Lowering commissions and forcing the distribution channel to charge higher fees to clients is just a way of masking the raising of ticket prices in the marketplace," said Alex Wasilov, president and COO of mega agency Rosenbluth International and author of an October white paper calling for the end of airline commissions (BTN, Oct. 25, 2001). "To create a fair system of distribution, the airlines should start charging a fulfillment fee for tickets they distribute themselves, since agencies are forced to charge for the same service of ticket distribution. Otherwise they would be underpricing the distribution channel that serves 80 percent of their market."
John Berkley, American Express vice president of corporate travel marketing, supports Rosenbluth's position. "At this point, a ticket distributed by the agency is actually less expensive to the airline than a ticket distributed by the airline itself," he said. "It might be a better long-term strategy if the airlines charged rates that included their distribution costs. At least then the agency distribution channel and the airlines would be playing on a level field."
Other mega agencies said the commission cut was no surprise and already accounted for in this year's budget. At WorldTravel BTI, for example, president Danny Hood said the hit to the company's P&L could be around 5 percent of profits, but in the WorldTravel office pool, he had predicted zero commissions would arrive by April. Smaller corporations and others on commission-plus programs account for 16 percent of WorldTravel BTI's business, but Hood said most of the company's client base "had already been de-risked." The scenario is similar at Rosenbluth. "The loss of base commission is strictly associated with a small part of our portfolio," Wasilov said, "but in today's environment any loss of revenue is material."
Meanwhile, at TQ3 Maritz Travel Solutions, president of corporate travel Jack O'Neill said, "We are already 75 percent net pricing. I think it is a bigger issue for the smaller agencies. I really do not think the major airlines want to deal with the administration and cost of 30,000 travel agencies when 29,700 are mom and pop operations."
As a result, agencies of all sizes and many of their corporate clients must now retool contracts. In fact, Delta said the elimination of published base commissions "removes one of the last vestiges of a commission program developed in a regulated environment," and that its "pay-for-performance program will reward key travel agencies that achieve superior sales results for Delta."
"The airlines will reserve the right to decide with whom they will continue to financially incentify with overrides rather than paying agency compensation universally across the board," said Kevin Iwamoto, Hewlett-Packard global airline and car supplier manager. "Understandably, there will be a cherry-picking of agencies they want to enter into partnership with."
WorldTravel BTI's Hood agreed. "Agencies performing and making the market share will do well in terms of overrides," he said, but noted zero commissions translates into a price increase passed on to agency clients: "Fees could go up $10 or $20, and it will be interesting to see if Orbitz, Travelocity and Expedia raise fees."
Several other agencies were analyzing their fees, including Montrose Travel in Montrose, Calif. "We are notifying clients that we will be contacting them within the next two weeks to negotiate costs and services," said general manager Rhonda Holguin.
Changes in agency pricing typically will affect smaller companies not yet using net fare agreements, interactive bookings, Web fare strategies, low-cost fulfillment and other cheaper processes. "But no company is able to put 100 percent of its business on net-net fare routes," said American Express' Berkley, noting the rarity of net-net deals among clients with less than $1 million in air spend. "Many of American Express One's midmarket clients have commissions passed through, but only 30 percent to 40 percent have net fare deals and they will feel this price increase."
Harold Stevens, president of New York-based Stevens Travel Management, a super regional agency that has many of its clients on a partial transaction fee basis, said, "commissions are the blood in the veins of travel agencies. Without blood, you can't stand up, you can't pay your bills and you can't stay in business." Although base commissions account for a significant portion of the agency's revenue, Stevens expects to recoup losses by renegotiating commission-based agreements, raising management fees where necessary and creating new sources of revenue by expanding services. "Plainly put," he said, "this is a time for guts. The airlines are thinning the herd of agencies."
Speaking of the potential long-term effects of removing base commissions, Brent Garback, CEO of Total Travel Management in Troy, Mich., said the move to zero "sets the stage for unbundled airfares and more surcharges. The airlines can charge what they want with impunity." In the short term, Garback will be renegotiating contracts with about 20 percent of his agency's clients that had been paying for travel management with commissions.
"As far as directing business to another carrier right now, Delta is one of our preferred suppliers and we hope to continue this relationship with them," said Lisa Scott, corporate travel manager at Dallas-based Compucom. "We were in the process of renewing our contract with them when the announcement was made, and now it's a possibility that we'll make some revisions."
Meanwhile, New York-based American Bible Association expects its transaction fees to increase once other carriers match. "Right now, I am in the process of changing agencies," said corporate travel manager Linda Heath. "Because commission is a part of the financial calculations for payment for services, I've got a feeling that I'll have to re-review my RFPs."
Because Delta led this latest—and final—base commission cut, it drew criticisms from many throughout the industry, including the regular outcry from the American Society of Travel Agents. "Delta has effectively terminated its working relationship with all U.S. travel agents," said Bill Maloney, ASTA executive vice president and COO. "We urge all travel agents to stop handling transactions for Delta, including issuing new tickets and processing refunds and exchanges. All Delta is doing is passing the cost of distribution onto its customers."
ASTA also called for "an immediate halt" to the global distribution systems' practice of selling agency transaction data to airlines, and said agencies should no longer be required to abide by productivity clauses "that penalize agents for booking outside the GDS."
Conversely, the Business Travel Coalition, an advocacy group for travel buyers, threw its support behind Delta's move, saying that an industrywide match "will reduce costs considerably for the industry and further establish that the travel agent is working for the airline customer, not the airline." However, BTC warned that in the short term, zero commissions "will represent a fare increase for business travelers on the order of some $400 million," though carriers "likely will be forced to give up those savings to lure business travelers back."
Even before Delta's announcement, several airlines re-emphasized a preference toward net-net corporate agreements as a simpler means of accounting for fees and other associated costs, including Continental Airlines (see story, page 1). "Many of the distribution costs are huge issues over which we have little control, including charge card fees, GDS fees, etc.," said United Airlines president Rono Dutta, in a BTN interview this month. "We are asking the customer to be aware of how big these numbers are and telling them they may be able to control them better than we can."
Meanwhile, Andy Menkes, president of Princeton, N.J.-based Partnership Travel Consulting, said the commission move may provide travel managers with a chance to prove their worth on even footing. "For the first time," Menkes said, "the concept of service fees, transaction fees and any other metric that is a compensation for services provided will be better understood by the travelers all the way up to the CFO."
Cheryl Hutchinson, president-elect of the Association of Corporate Travel Executives, echoed those sentiments. "The commission cut is a real opportunity for travel managers to get in front of senior management and explain the realities of supplier relationships," she said. "You'd be surprised at how many people still think they are running travel management as a revenue center."
Including the American Airlines-led cap last summer (BTN, Sept. 3, 2001), Delta's move is the sixth broad base commission reduction since its initial cut seven years ago.
Though the first in the United States to completely abolish base commissions, Delta follows foreign carriers British Airways, Lufthansa German Airlines and Singapore Airlines in enacting new agency compensation programs. European Union regulations, however, prohibit carriers from paying agency overrides.
Stateside, Salomon Smith Barney analyst Brian Harris, in a research report issued last week, estimated industrywide savings just shy of $1 billion. "For now, if one assumes that 50 percent of the savings in base commissions are offset by increased incentive pay and overrides, it would be worth about $990 million pretax to the majors, excluding Southwest Airlines."
Noting that "actual savings hinge on renegotiations with travel agencies on overrides," Harris estimated 2003 commission savings for each major carrier, assuming they match: US Airways would benefit the most, slashing 42.8 percent of commission costs, followed by America West, 41.8 percent, and United, 39.6 percent. Continental would save the least, 29.3 percent.
Delta's 2001 commission costs were $540 million, behind American's $835 million total and United's $710 million. Northwest spent half a billion even, and Continental dished out $364 million.
Deutsche Banc Alex.Brown airline analyst Susan Donofrio, also estimating industrywide savings of $1 billion, said: "We expect that this amount of cost savings is likely to help the airlines recover slightly more quickly than we were anticipating."
Finding a positive note from the agency perspective, WorldTravel's Hood quipped, "The good news is, this is the last time we have to go through this drill."