Handicapping The Cap Settlement Aftermath

<FONT SIZE="+2"><B>Handicapping The Cap Settlement Aftermath

</B>We have received more phone calls and comments from clients with regard to the proposed settlement of the commission cap lawsuit than any other event in recent years. It thus seems appropriate to review several major developments on this timely topic.

<B>Commission cap lawsuit</B>

It appears that many travel agencies were not aware that the issue of reinstating the caps was not before the U.S. District Court in Minneapolis. The only issues to be addressed by the jury were whether there was collusion among the airline defendants and, if so, what damages would be assessed.

We have consistently maintained, since the lawsuits were filed, that it would be extremely difficult for the travel agency community to prove collusion. The airline industry has typically adhered to a follow-the-leader pricing mechanism since deregulation took effect almost 20 years ago.

If the plaintiffs had significant evidence to show collusion, it doesn't appear they would have resolved the matter for $86 million when the potential recovery could have been in excess of $1.5 billion. However, if there was no strong evidence of collusion, the question arises as to why the lawsuit was ever filed because of the impact that it had upon the relationship between travel agents and air carriers at that time.

It is very interesting that shortly after the case was tentatively settled, air carriers again acted with a follow-the-leader pricing routine when the 10 percent federal tax was reimposed on airline tickets. Some carriers tentatively raised their prices by 10 percent, but when USAir and Northwest refused to do so, the other carriers rolled their prices back by 10 percent. There was no outcry from the travel agency community of collusion at that time, but again, the airline industry has always priced its services in that manner.

We foresee a bitterly divided travel agency community when the court holds final hearings in mid-November on whether to approve the settlement. While it is anticipated that the lawyers involved in the litigation will receive approximately one-third of the settlement funds, the distribution of the remaining $50 to $55 million could cause further dissension within the travel agency community. While ASTA was the leader in bringing the litigation, most of its members are small travel agencies and will probably get the smallest portion of the recovery, particularly if the court approves a distribution of the funds on the basis of airline sales. If the court is inclined to distribute the funds on a pro rata basis, there will be significant objections by the largest travel agencies, which felt the greatest impact from the caps. Additionally, under many travel management contracts that exist between large travel agencies and corporations today, the settlement proceeds would probably be returned to the corporations as part of the management fee agreements.

The only good news to come out of the commission cap lawsuit is the wake-up call to travel agents that they should not be ticket takers for the air carriers, but rather sellers and marketers of travel. Regardless of the ultimate distribution of the funds, we have strongly recommended to our clients that they reduce their reliance on airline sales, concentrate on other portions of the travel industry, including niche marketing or specialization, and implement service fees.

<B>Airline commissions post-cap</B> We anticipate the Canadian air carriers reimplementing a cap on commissions between Canadian and U.S. cities, which was supposed to take effect on Sept. 1 but was withdrawn because the U.S. carriers did not match the cap. In our opinion, there was no way that U.S. flag carriers would implement a cap in the U.S. and Canadian market less than 10 days before the commission cap case was to be heard by the federal court in Minneapolis. However, in that the case will shortly be concluded, we anticipate commission caps being implemented in the U.S. and Canadian market, most likely during the first quarter of 1997.

We also expect further restructuring of the commission levels for transatlantic flights and would not rule out the possibility of further commission changes in the U.S. domestic market during 1997. It would not be surprising if some of the carriers reconsidered the concept of a set fee per ticket, regardless of the ticket value, as was initially proposed by United Airlines many years ago.

<B>Corporate travel</B> In most instances, large corporate travel agencies have restructured their contractual arrangements with corporate clients to reflect travel management fees and services as opposed to any sharing of commissions. The corporation receives all of the commissions generated by its own travel and pays a management fee, which can be based on many different formulas, to the travel agency.We have reviewed several of these contracts on behalf of our corporate clients and, in many instances, the financial terms of the contracts are extremely one-sided in benefitting the travel agency as opposed to the corporation. The key to the mutual success of these relationships in the future is the travel agency being able to document to the corporation the value of its services. Generally, this number cannot be quantified, as can be shown with rebating of commissions or other similar arrangements. Without a doubt, the travel agency-corporation relationship will continue to rapidly change even more than it has since the commission caps were implemented in February 1995.

<I>Jeffrey R. Miller is a travel industry attorney based in Ellicott City, Md.