U.K., Europe Cos. Slow On The Transaction Fee Take

<B>U.K., Europe Cos. Slow On The Transaction Fee Take</B>

By Amon Cohen

BTI UK is advising British clients not to shift to pure transaction fees at present, even though British Airways is preparing to cut agency commission to 0 percent next April.

BA's move will transform corporate travel departments overnight from profit centers to cost centers, requiring many travel managers to find a way of passing on their agency costs to travelers. Transaction fees are regarded as the ideal way to do this at the point of sale.

Nevertheless, BTI head of client finance Nigel Bourke told a client conference in London on Sept. 14, "the [U.K.] industry is not ready for transaction fees yet. I wouldn't recommend them at this time."

BTI is receiving many requests to discuss transaction fees, but currently has only three clients using them in the United Kingdom, compared with 297 on management fees. Across Europe, 70 percent of BTI's volume is on management fee. Alan Coles, European head of supplier relations for American Express, confirmed that his agency also has only "a few" clients on transaction fees. Transaction fees are virtually nonexistent, except in Scandinavia, where they became the norm after SAS cut commission to 4 percent (later raised to seven) in the late 1990s.

In the Corporate Travel 100 survey (BTN, Aug. 28), 64 of the largest travel spenders in the United States described their agency relationship as transaction fee-based, up from 50 in 1999. Given the widespread acceptance of transaction fees in the United States and Scandinavia, one would expect them to take hold rapidly in the United Kingdom, where commissions are being cut even more radically. However, Bourke told his audience of around 100 travel managers that transaction fees make it difficult to budget and are more difficult to define and set in Europe because travel patterns are more complex, including lengthier itineraries and use of more non-air transport, such as rail.

Bourke was anxious to point out that he was referring to the rarity of "pure" transaction fees, where clients are charged from an agreed tariff of services. Many travel professionals, he said, assumed that a transaction fee is simply a management fee divided by the number of transactions, which creates a primitive method for passing on costs to travelers, but does not accurately reflect the cost of the specific service used by the traveler. Bourke claimed that the transaction fee has proven a robust remuneration mechanism, being flexible in its charging method and deal construction, and also risk-averse, allowing budgetary control for the client.

With transaction fees, on the other hand, it is difficult to forecast how much clients are likely to end up paying, even though the basis on which they are paying is more rational. This is because the same tariff per transaction will apply, regardless of whether they end up flying 50,000 or 500,000 sectors.

"We have done deals with the procurement department that have then gone to the financial director, who did not like it because he could not control the costs," said Bourke. "We understand that."

The more complex nature of European travel means that fewer types of transactions can be tracked, which is vital if they are to be priced rationally. BTI carried out a client study in 13 countries and produced an eight-page list of services it requires. Of that list, only eight could be tracked accurately. One of the eight was the most important--air--but there are many other variables that affect the cost of the process, such as service and location. These problems are magnified for any corporation trying to define a single transaction fee across Europe, where each country is affected by different costs, accounting mechanisms and so on.

"The definition of the transactions to be charged for has to be agreed in all countries," Bourke said. "In reality the services provided will vary according to the local market need."

BTI's reluctance to recommend transaction fees in the United Kingdom may seem odd given their successful introduction in Scandinavia. This, said Bourke, is a completely different market. The proportion of small and medium enterprises in Scandinavia is much higher, and they are more willing to accept a simplified, standardized transaction fee solution. Furthermore, business culture in Scandinavia is more consensual, and companies are more inclined to adopt a standard in unison. Nevertheless, Bourke expects standardization to emerge in time in the United Kingdom.

The BTI client conference was staged the day after British Airways announced it was postponing introduction of zero commission by three months from Jan. 1 (BTN, Sept. 18). Corporate Britain largely has greeted the news with relief, since vast numbers seem not to have grasped the implications of the cuts nor how they should be reengineering their travel management processes to deal with them, especially in terms of making internal charges to travelers.

"There is a mixture of readiness," said Institute of Travel Management executive director Loraine Holdcroft. "A significant proportion have made wise moves, others are in the planning process and others are taking a 'wait and see' stance."

BA U.K. & Ireland general sales manager Tiffany Hall confirmed that some clients "are not aware at all of the changes." Amex's Coles said: "A lot of people are still trying to work out their strategy."

The problem is acute particularly outside the southeast of England, home to most of the United Kingdom's largest companies. The ITM and BA have been staging a joint road show around the country and at one meeting in the west of England attended by more than 100 travel managers, all but one were still on a commission and rebate deal with their agents. Not a single travel manager had been visited by his/her agent to discuss the imminent commission changes.