<B> Overrides Undermine</B>
By Kevin P. Mitchell
<I>Kevin P. Mitchell is chairman of the Business Travel Coalition, an advocacy group based in Lafayette Hills, Pa.</I>
Last week, a prominent travel management company CEO lamented that his company fell just short of its peer volume target to receive an override commission payment. The company suddenly began "missing" its override targets when it started supporting a new entrant airline at a Fortress Hub in 1998. Such use of overrides has undermined a deregulated market and contributed to record increases in business airfares.
Travel managers who formed the Business Travel Contractors Corp. were concerned about the inefficiencies, conflicts of interest and debasement of industry professionalism attendant with overrides. Today we understand the crude but powerful weapon overrides can be when used to discipline industry participants and close markets to competition.
Over the years, corporations have ceded control to airlines through overrides. Excessive concentration at airport hubs and skyrocketing business airfares make it vividly clear that corporations are paying a steep price for overrides and override-funded rebate checks. Indeed, the advancement of the travel management profession was delayed more than a decade while travel managers built "profit centers."
The partial industry shift to net fares and fee-based pricing has lulled some travel managers into believing that the "override problem" is solved. Nothing could be further from reality. Consider these additional consequences of overrides:
<B>1.</B> Mistrust of travel management companies remains a costly issue for corporations. Runzheimer's Rolfe Shellenberger recently stated, "Agencies sometimes tell corporate clients what their 'average' overrides are, but this is often pure fabrication. A very large agency told one of our clients that its override payments from that client's preferred airline were 2 to 3 percent; however, an airline rep told my client they were 5 percent in that market."
<B>2.</B> Overrides enable airlines to exert significant indirect control over travel management companies. The fear of loss of overrides can prevent these firms from advocating the interests of their customers.
<B>3.</B> Travel management companies' influence in Washington has been squandered. Overrides require the government to ask for whom travel companies really are working, the airlines or the consumer. Hence, travel management companies are trading real long-term influence in Washington for short-term payouts from airlines.
<B>4.</B> The RFP process is plagued by override-funded signup bonuses that create unfair advantages for mega-agencies intent on "buying" new accounts. It is not in corporations' or travel management companies' long-term interest to become slaves to override programs. Indenturement leads to an aberrant consolidation of distribution and stifled competition.
<B>5.</B> The economics of airline operations and pricing policies today are artificially distorted because of overrides. Shellenberger said, "If a corporation flies TWA, Northwest or even United on a connecting basis, which is roughly twice as expensive to manufacture as a nonstop, the price is sharply reduced. Likewise, when a travel management company feeds an override-producing patron airline lots of traffic on connecting flights, traffic that could be on competitors' nonstops, it's distributing degraded merchandise which happens to also be harmful to the environment."
Purchasing decisions in most industries produce immediate economic benefits for the buyer and encourage marketplace efficiencies. However, exclusionary airline practices and an increasingly concentrated competitive structure neutralize the effects of billions of dollars of purchasing decisions. The incestuous nature of overrides plays a central role.
What's at stake? Overrides and improperly monitored frequent flyer behavior raise business travel costs as much as 15 percent annually. Other anticompetitive practices, such as dumping massive seat capacity to drive out new entrants, likely raise fares another 15 percent.
Travel managers bear some responsibility for the state of industry affairs. Global travel programs, automated booking systems and benchmarking initiatives deserve their attention--but they also need to focus on strategic issues that keep business travel costs unnecessarily high: new entrant access to airports and restrictions on foreign investment in U.S. airlines. Only an informed and active travel manager can bring down the long-term business travel cost structure through smart purchasing decisions and sustained advocacy of pro-competition reforms.