Megas Face Settlement Reality

By PANEL DISCUSSION / October 27, 1996

Megas Face Settlement RealityLeaders of the five largest corporate travel agencies gathered in Hartford, Conn., earlier this month to air their visions of the future for travel distributors. It was the third year in a row that the Business Travel Association of Southern New England invited Business Travel News editor-in-chief David Meyer to moderate its mega-agency panel discussion. This year's panel featured Ralph Manaker, president of BTI Americas; Michael Premo, president and CEO of SatoTravel; Dean Sivley, CIO and vice president of marketing for Rosenbluth International; Dan Neuburger, senior vice president and general manager for American Express Corporate Services, eastern region; and Cara Richardson, vice president and general manager of the New England and midatlantic region for Carlson Wagonlit.

BTN: The settlement of the commission cap lawsuit is certainly one of the biggest milestones we've passed recently. The terms of the $80 million settlement have not yet been finalized, though we understand that will occur soon. When do you all anticipate you will get your checks?

Dan Neuburger: The settlement may have been for $80 million, but that doesn't mean we're getting that sum. The real winners here are the attorneys, who will probably get 30 to 40 percent of that money off the top, and the airlines. Estimates show that on an annualized basis the commission cap will return to the airlines $700 million annually, so giving up $80 million one time is not a bad deal for them. We, and several of the others represented up here, have already made the decision that whatever we are going to get we're going to pass back to our customers, who in essence ended up eating the commission cap. When we are going to get that and the form that it is going to come in, we have no idea yet. We have folks who are trying to work through the process so that it's not in the form of air scrip, which is a pain-in-the-behind process for everybody. We'd much prefer it to be in the form of a cash settlement so that we could just write a check and be done with it. So I'd say, hopefully soon and hopefully cash.

BTN: The point about air scrip is well taken. Has anybody on the panel liquidated their clients' holdings of air scrip at this point? Not one of you.

Ralph Manaker: Dan, you mentioned that it's a really good deal for the airlines, but I'm not sure the airlines did anything wrong. I mean they settled the lawsuit because it was going to cost them more than that to go through with it. If they didn't do anything wrong, then they paid ransom.

More importantly, you made the statement that you are going to give the money back to your clients. We're going to try to do the same thing, but the question I have is, how do you distribute the money and who do you distribute it to? The travel agency was the one that was hurt by the commission cap until it was able to change some fee arrangements. I haven't a clue as to how we are going to do this, because I don't know if the settlement is supposed to cover one year or the next 10 years. If it was supposed to cover the first six months, for any client we were taking the risk for the first six months and the client refused to make it retroactive, I don't know whether that client deserves it or not. Why don't I give it to a client who was truly hurt by it?

It's not going to be an easy situation. My greatest fear is that, just like with air scrip, the economic benefit that you ultimately end up distributing is overrun by the costs of distributing it. I don't want to spend $10,000 trying to figure out how to distribute $5,000.

Neuburger: Clearly, the administrative costs of the distribution of funds have to be covered by the settlement costs. I just want to clarify that I was not making an indictment of the suppliers for doing this. It happens to be a great deal for them and if that's what the courts have decided to do, far be it from me to say that they've done anything wrong. But the airlines in essence are paying far less than what the benefit is to them. The people paying the price are the agencies to some extent and our customers to a very large extent.

BTN: So the lawyers get about $20 million and the agencies represented here, excepting SatoTravel, stand to get about what, $20 million? Cara, has Carlson Wagonlit any clue what its formula will be for sharing its piece of that with customers?

Cara Richardson: Honestly, at this point we are taking a wait-and-see attitude. It's great to say we're just going to give it all back, but the truth of the matter is it depends on what it looks like and what would be a reasonable formula.

BTN: Dean, do you have anything to add?

Dean Sivley: Fortunately, we had already moved to a lot of the cost-plus arrangements prior to the settlement. So to Ralph's point, most of our clients we did move very quickly with and we feel therefore it's their money, and we came out the next day and said we will pass it back.

BTN: Do you have any ballpark number at this point of what an individual corporation is going to receive?

Sivley: It depends on what they do in terms of volume, and what we get back less legal fees and so on, but we made it clear that whatever that is we will pass it back.

BTN: Have there already been discussions between you and your clients about this reimbursement, Ralph?

Manaker: We've had some preliminary discussions with clients. I also wanted to say that your $20 million for this group is too high. We don't represent 30 percent market share, it's probably closer to 15 or 18 percent, so the amount we should be talking about is probably half of that.

BTN: With the lawsuit settled, the airlines can now proceed to the logical next step. Conventional wisdom is that will be an international commission cap. Do any of you think we will see that in the next year?

Sivley: Lufthansa has already made it clear in Germany that they're interested in doing that. We are certainly planning on that happening. Because people are looking more at global bids, fee-based or transaction pricing is not totally new to people outside the U.S. as well. But in the international market, where things are very competitive, it will be interesting to see whether they all stick to a commission cap.

Manaker: Last year I said we would have an international commission cap in 1996.

BTN: But you didn't account for the lawsuit, which froze things. You may yet prove to be a prophet.

Manaker: British Airways was rumbling earlier in the year, and I was surprised they backed off. I'm not sure they backed off because of the lawsuit per se. But I think ultimately we'll get to commission capping and there will be further reductions of the commission structure. The airlines are still in a situation where they are paying through a cost structure that is higher than what it would cost them to do transactions internally. That will have to change.

BTN: We've also seen airlines, such as Northwest, capping commissions for online bookings. Will more airlines follow their lead?

Richardson: We anticipate that change will happen. They see it as a cheaper distribution channel and as such they shouldn't be paying as much. In putting an Internet product together, we realized that is part of the process.

Manaker: If you want to see a scam that the airlines are pulling on us, it's the one that if we book it over the Internet the commissions should be 5 percent rather than 10 percent. For the Internet products that exist today, half of the expenses of distributing the product don't go away. A very small portion of the expense really goes away. What it does is shift the workload. The travelers are doing the work rather than the travel agents, but that doesn't mean the expense has gone away.

Neuburger: I think there are going to be a lot of trial balloons sent up by the suppliers to try and limit in some way their distribution costs because it is now out of whack with just about every other industry out there.

Manaker: Distribution costs in almost every industry are less than 10 percent. In manufacturing it's down to 1 or 2 percent, in insurance and healthcare it's 6 or 7 percent. Distribution costs are 20 to 25 percent in the travel business. The 25 percent is made up of the transaction costs for an agency, which is $35 or $45, CRS fees of about $20, credit card fees of $20 and expense reporting costs of anywhere from $50 to $100.

Mike Premo: There's a lot of discussion about the economics of distribution and who is going to pay for what. The good news is that the discussion is happening, to the extent that companies that are on transaction fees or have looked at fee pricing have started to put an economic value on the services that we provide. As the suppliers squeeze distribution costs, all of us are running around trying to fit the same 20 pounds in a 15-pound bag that could become a 10-pound bag next month. But at some point that has got to give because you see it reflected in service.

The most difficult challenge we have is to find good capable people to help you and your travelers. I know agents who do a fabulous job who ought to be making $50,000 a year because of the value of the service they provide, but we can't afford to do that because we still have a commission orientation, whether it's real or not. And the clientele still hasn't completely bought into the idea that there is economic value in this.

We see a lot of disintermediation, where suppliers want to deal with you directly, whether that's in a direct purchasing mode or going a step further and booking it through the supplier's rather than the agency's system because of the costs associated with that. It's a trend we're going to continue to see expand. Airlines and other companies have Websites-they're encouraging your travelers to use those sites to go out and make reservations, and that clearly is a major challenge for all of us involved in trying to control business travel and providing the best value to the corporation. What that means is the role of the distributor is going to become even more important rather than less. Understanding how to leverage those technologies and integrate them into self-booking tools and front-end tools is going to be a critical component.

A lot of technology companies want to come in to travel but they find it to be more complicated than they thought it was. The role of the travel company is going to continue to be to provide information on a timely basis. The technology tail isn't going to wag the travel dog. The service aspect behind the technology is of more importance than the technology tool itself.

Neuburger: I agree with that. 1997 is going to be a watershed year. There is going to be an increase in automation. I think what is going to happen in the next one to two years is that you're going to see a lot of new players and then you are going to see a significant shrinkage in the number of players because of economics: Having a very small slice of the pie can't support them.

Manaker: Mike Premo said, as he did last year, that the corporations want to deal with the airlines directly. I still don't agree with that. Airlines want to negotiate with the people they feel they have the most leverage over, and they probably feel they have greater leverage over corporations, especially midsized and small corporations, than they do distribution channels. The airlines don't want to lose control of the pricing, but in most distribution systems the distributors set the price because they are in the best position to understand demand and move market share. What I've constantly heard as to why the airlines want to deal directly with corporations is that corporations can make the commitment to move market share. If distributors truly want to start adding value, they need to start making commitments to move market share by taking inventory or other means.

So what you're going to start seeing are mechanisms that enable such things as electronic transactions through self-service reservations. I don't think we'll get there within a year or two, though we have some clients using it now, but the foundation will be laid for the change that will occur in three to five years.

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