Int'l Cap At Long Last

<B> Int'l Cap At Long Last</B>

By Michael Whitesage

<i>Michael Whitesage is president of PRISM Group Inc., an information management and consulting firm based in Albuquerque, New Mexico.</i>

The long awaited other shoe has dropped. United cut international commissions and within a week Delta and American followed suit. The new structure caps commissions on international tickets to no more than $100. The reasonableness of the commission cap may be tested against the fees that agencies charge corporate customers. Since the new international commission pays more than the fees agencies charge their customers, the new commission must pay for the cost of the agency booking.

Agencies that have not moved their customers to fees and still depend on high international ticket prices to subsidize their operations will again be knocking on their customers doors. In the corporate fee-based environment, however, the international commission cap takes on another dimension. Consider that the average international transaction for a company is $2,000. Under the old 8 percent structure, that ticket would earn approximately $160 versus today's $100 cap, over a 40 percent reduction.

The impact on companies that depend upon airline commissions to pay agency fees will be immediate. Travel managers should anticipate a 40 percent reduction in revenue from international commissions. This will put an end, once and for all, to the illusion that corporate travel is a profit center. Travel managers that have not prepared their organizations to budget for travel management may be playing catch-up to cover next year's expenses. This time the outcry from corporate customers may be louder than from the agencies.

What is a commission anyway? Since capped commissions still are higher than the cost of producing a ticket, the old commissions must have compensated some other purpose. Commissions, of course, compensated sales and directed buying not just order taking. This distinction was wisely noted by British Airways when the carrier implemented its own cap one year ago.

Rather than cutting commissions across the board, BA officials said that if you have more traveling on BA than the other guy, we will pay you a commission. If you have more on the other guy, we will pay you a transaction-processing fee. It sounds almost rational in an industry that continues to pay undisclosed overrides as incentives.

Corporate travel managers can learn a lesson from this example. If you are directing sales to a preferred international carrier, you deserve the sales commission. If you are not, the $100 fee probably covers the cost of booking your travelers' international tickets. Corporate discounts for directed buying that companies enjoy today would be diluted unless the commission cut is offset by deeper discounts by their preferred carriers.

The final question is how do companies protect themselves from future commission cuts? Again, it is an old answer to an old question: Net fares. Since net fares transfer the commission to the company as part of the discount, commission cuts are irrelevant. Companies that have identified preferred carriers and negotiated deals net of commissions and overrides are today's winners.