Lufthansa Cuts Commissions
<B>Lufthansa Cuts Commissions</B>
By Amon Cohen
German travel managers have become the latest Europeans to deal with the new paradigm of extensive commission cuts. Lufthansa on Jan. 1 reduced rates to 5 percent on international short-haul flights and 7 percent in premium cabins on long-haul routes. Most other airlines have followed suit, although a few smaller carriers have clung to existing commission levels in the hope of gaining a competitive advantage.
Following the recent increase by SAS in Scandinavia from 4 to 7 percent, Germany now has the lowest commissions in Europe. Most countries are around 7 percent, although U.K. agent rates temporarily rose from 7 to 10 percent.
As in the United States, the new reductions will redefine the economics of travel management in Germany. For those already on a fee basis with their agencies, "it will change from where they send us a check to where we send them a check," said Dirk Bremer, European travel coordinator for Eli Lilly. Bremer estimates the cut will cost his company around $50,000. Jo-Achim Hamburger, global travel manager for Electrolux, puts the cost to his company at $60,000.
However, the shock will be even greater for the majority of German companies that are not on a fee. Market-leading agency Hapag-Lloyd, which has 35 percent market share following its recent merger with First Travel Management, on Jan. 1 will move its entire client base to transaction fees. Hapag-Lloyd currently has less than 1 percent of its business on a fee basis. It has been slower to move away from commission and rebate than its competitors--one reason why Marc Hildebrand recently was drafted as joint managing director from Business Travel International (<I>BTN</I>, Sept. 6, 1999). Still, the entire German market is less evolved in this respect than the United Kingdom and Sweden.
Clients on management fees can retain their remuneration model but also will be encouraged to move to transaction fees. Hapag-Lloyd's main rivals all have followed suit. German travel agents also have decided through their national association to introduce service fees for smaller clients with unmanaged spend. Air bookings, amendments and cancellations will cost between $12.40 and $23.30 and hotel bookings will cost between $9.80 and $15.50.
Lufthansa also is streamlining its corporate client sales proposition. Clients that spend between DM100,000 (US$51,800) and DM800,000 (US$414,400) per year will be eligible for a scheme called Partner Plus Value, which pays them a volume-based rebate. Clients spending above DM800,000 will enter a scheme called Partner Plus Profit, again providing a traditional volume rebate plus extra destination incentives and also--in certain cases--net fares.
"There will be no compensation for the commission cuts," said Lufthansa general manager for corporate key accounts Christoph Wilhelm. "If a customer thinks this is a price increase, they should realize what is really happening is that the kickback between the travel agent and the corporate is lower. This relates to the relationship between the agent and the client. It is not a supplier relationship. However, we at Lufthansa are going to offer competitive prices in the market. Commission is only part of it. It also relates, for instance, to our net deals with clients."
Both Hamburger and Bremer were sanguine about the commission cuts. Hamburger, an outspoken critic of SAS for not sharing commission savings with clients in Scandianvia, praised Lufthansa for giving him notice of the changes back in May and for being prepared to engage in dialogue. "At the moment, we will lose around DM60,000 (US$31,000) but we will renegotiate with Lufthansa and at least find a compromise," he said. "I think they understand that the impact is less income and a higher ticket price where we don't have net deals."
The commission cuts are expected to accelerate the evolution of travel management in Germany. "German companies will now start to consolidate their travel purchasing," Hildebrand said. "Until now it has only been practiced by a few players like Siemens and DaimlerChrysler but this will lead to a new awareness of the costs surrounding travel. What has happened in the U.K. over three to four years will take place in Germany in 12 to 18 months.