To Net Or Not To Net?

<B> To Net Or Not To Net?</B>
<I>Industry Experts Debate The Pros & Cons Of Net Fare Contracts</I>

By Jay Campbell


Even as net fare agreements are becoming the norm for some organizations, new wrinkles being added by the airlines have industry pundits questioning the benefits to corporate buyers.

If a critical mass is reached, many believe, it will be the airlines and not their customers that receive the biggest return.

The best recommendation to buyers is to look at each situation individually. Indeed, there is no easy-to-follow blanket policy, as the approach of the carriers runs the gamut from demanding net fares to not offering them at all.

Lately, sources report, airlines are seeking guarantees to protect themselves against the risks associated with offering front-end discounts and the ever-present possibility of commission changes. "In reality, the airlines are taking the risk with net fares, because they're discounting up front, whether or not you buy anything," said George Odom, manager of travel and corporate meetings services for Eli Lilly & Co. in Indianapolis. "So some people are looking at making up the difference if you don't move the share."

Letters of credit that freeze funds in a bank account have surfaced as one way for airlines to deal with the risk. "I got my first net contract from an international carrier last month," said Cindy Morse, travel manager of Pennzoil/Quaker State in Houston, "and they're asking for a letter of credit."

More than any other event, changes in airline commissions lie behind the push toward net fares. The international cap "brought new vitalization to net fares because so many corporations were living off that revenue," said Phil Stumpf, manager of national and corporate sales for Northwest Airlines.

But already, some airlines are preempting them through clauses that call for renegotiations if commission changes happen. "Airlines will be looking at lower commissions, and with each new negotiation will try to factor down the level based on new lower base levels," said Bob Lichtman, global travel manager for 3Com in Santa Clara, Calif. "The part of the discount represented by backing out the commission has been fluctuating, so travel managers need to determine if there's volatility in their agreements--in other words, if commissions change, are their contracts subject to change as well?"

Kevin Iwamoto, air and car supplier manager for Hewlett-Packard in Palo Alto, Calif., and chairman of NBTA's airline committee, said another new wrinkle is the direct back-end cash incentive to corporations that meet or exceed predetermined goals--or its "shortsighted" inverse, a penalty on those that fall short.

Carlson-Wagonlit Travel vice president of global supplier relations Gary Alexander said net fares now are reaching a critical mass among the agency's clients. Similarly, John Heilner of Management Alternatives, based in Princeton, N.J., said more than half of his new client deals this year were for net fares.

"Airlines are willing to talk either way, but they're considering nets more often than not," said Dan Nevill, director of business development for Advanced Travel Management in New York. "I've seen carriers come out with discount scales where if buyers don't meet their goals, the discount goes down."

There is no conventional wisdom to let buyers know what to expect from the different airlines. Said Morse, "I'm not getting a whole lot of response from the domestic carriers yet." Agreed another buyer, "One carrier offered an attractive net deal for where they're not getting our business, but the back-end offer was so bad it might as well have been net or nothing."

In Canada, "there is one carrier that just does net fares and does not entertain rebates," said Alain Legault, manager of travel and conference for Canada Post in Ottawa. "The other carriers are a little bit more flexible." And in Europe, reported Management Alternatives consultant Annika Ortmark, often the dominant national flag carrier will say no to nets while challengers will offer them.

The differences in opinion among carriers--and even within the ranks of a single airline depending on market forces--may be a result of differences in their own capabilities, some suggested.

"The benefits of net fare agreements are arguably not evenly distributed across all airlines," said Robert Moss, president of Travel Intelligence in Belmont, Mass. "Net fares favor carriers with revenue accounting systems that can handle them, and for many carriers, especially foreign carriers, that is simply not the case."

Many smaller carriers may prefer to work through agencies, perhaps offering overrides. "Try telling VASP of Brazil, for example, that it should be entering into net fare agreements," he said.

Others agreed that net fares are becoming more attractive to carriers as the technology to track them develops. Said technology consultant Richard Eastman of Newport Beach, Calif., "The 1996-97 net fare agreements were experiments to test the economic viability of a new distribution process, and the enabling technology to ensure viable economic tracking of such agreements was not as pervasive."

While Randy Malin, principal in Malin and Associates of Los Gatos, Calif., believes that some airlines "have tried to introduce net fares in a manner that gives them a little bit more yield from their corporate customers, rather than implementing them in a revenue-neutral fashion." He also noted that "it has been hard for corporate travel managers to give up their agency rebates and discard the outdated profit-center mentality."

As travel managers accept that they, and not the airlines, should be responsible for all agency costs, Malin said, they can move on to the bigger challenge of CRS fees and credit card charges--the next frontier for negotiations.

"Net agreements have grown very rapidly and are a significant part of the evolution of the customer/supplier relationship," said United Airlines director of business markets Joe Laughlin. "A broader look at additional opportunities to continue to reduce costs has surfaced as a result of net discussions--for example, form of payment."

But even as most industry observers support net fares for buyers, they dispute the benefits--and a small contingent opposes them altogether.

"I think I'm the only person in the world who vehemently discourages net fares," said Rolfe Shellenberger, senior consultant with Runzheimer International. "They make savings on airfare more dramatic than real because companies have to buy agency services, sometimes at rates as high as $50 per transaction, with some agreements calling for fees also on trips not taken."

On the other hand, Heilner said he knew of a recent net-net deal that gave the client a 40 percent discount with one airline in every country to which the carrier flies.

"A net deal can be great or it can be lousy," said CWT's Alexander. "What really matters is what's behind it--the net savings. I've seen suppliers a number of times trying to put one over, for example, with a deal that's actually 3 points worse."

Shellenberger did note that nets offer a modest reduction in taxes based on their lower ticket price. But their impact is far greater, he argued, in weakening some of buyers' greatest advocates, travel agencies. "When a crunch comes, I expect controllers will ask, 'Why pay a fee to an agency? We have our airline deals, and we'll just book direct.' "

H-P's Iwamoto agreed that it is the airlines that truly benefit from net fares as a trend. "Critical mass is only beneficial for the airlines, as they can use nets to accelerate the process of eliminating agency commissions and eventually migrate to a per-ticket transaction fee," he said.

While not as sure commissions will reach zero, Peter Turso, director of strategic sourcing for Johnson & Johnson, also stressed the danger for agencies. "I don't see commissions going away entirely for some time," he said. "As big as business travel is, it is still the minority of air travel. Until the Internet puts more travel agents out of business, airlines must rely on agencies and must pay commissions."

The bottom line, Alexander said, is that the old business model of base and override commissions driving behavior is ceasing to exist.