OP ED: Lower Cap To Come?

The recent actions directed toward travel agencies by the airlines remind me of cleaning up around the house before beginning a major remodeling project. These actions--particularly cutting commissions for online bookings and charging for excessive passive bookings--should not be viewed in isolation.

Instead, they should be seen for what they are, which is a small set of ongoing steps being taken by the carriers to rein in distribution costs. All the while, they carefully are monitoring agency reaction in preparation for the next major thrust.

In thinking about this, we should keep a few basic points firmly in mind. First, airlines essentially have lost their fear of agencies. I have long contended that the watershed event was the agency community's overall lack of response to events three years ago, when Southwest Airlines refused to back down from the CRSs. At that time, several vendors made it much more difficult for Southwest--and other non-participants--to be booked and ticketed by agencies. While Southwest's reliance on agencies diminished, their overall business was affected only marginally, if at all.

Airline financial managers resumed asking their salespeople to tell them again what all these distribution costs were buying. Agency reaction to commission caps and the most recent actions can only have reinforced the airline view.

Next is the dependence of U.S. agencies on domestic carriers. In many cities, between 20 percent and 40 percent of an agency's total air commissions are accounted for by one carrier. In some cities, that percentage is higher. I would be surprised if there is even just one retail agency in the country with 5 percent of its commissions tied to a foreign carrier.

Then there is the airline mix of distribution costs. Agency commissions account for more than half of total distribution costs. Of total commissions, 70 percent is for domestic travel. And of the domestic portion, between 85 to 90 percent of the total is base commissions, with the rest being overrides.

If recent actions by the carriers represent tidying up, what will be the next major remodeling? Some people have suggested that the airlines will cut overrides next. Others have argued that it will be international commissions. I don't think either of these is correct. In my opinion--and not based on anything any carrier has told me--the next major step will involve the domestic base once again.

For the carriers, overrides are paid for incremental market share. Additional market share is a positive return on carrier investment. That is something airlines are willing to pay for. Many people have overlooked the fact that while the major carriers were capping base commissions, several were increasing override opportunities for selected agencies that had demonstrated an ability to move share. Thoughtful use of overrides can be a potent weapon in an airline's arsenal, and I would be very surprised to see overrides cut.

Commissions for international travel are different. While it's true that some foreign carriers have scheduled commission cuts, they have done so for travel sold in their home countries. It's difficult to imagine a foreign airline leading the way in the United States, given that they are so small in the agency revenue mix. If commissions for international routes were to be cut, they would have to be removed first by one of the U.S. majors. And for the U.S. carriers, two considerations rule. First, international commissions aren't where the money is. Second, international travel tends to be the most profitable, and so the carriers are unlikely to rock the boat.

That leaves the domestic base, although the airlines will have slightly different variations this time. I don't know when the remodeling will take place, but I've got to believe that it's on every airline's drawing board.

<I>Robert Moss is president of Travel Intelligence Inc., a Belmont, Mass.-based firm that provides customized market intelligence to airlines and other corporate travel service providers.