One-On-One: Petruccelli Sees Promise

As president of global travel services for American Express, Charles Petruccelli is head of the world's largest travel management company. In this interview with BTN contributing editor Amon Cohen, Petruccelli threatens retaliation against global distribution systems considering ending travel agency incentives, talks about the battle with British Airways and reveals Amex's intention to get back on the acquisition trail.


BTN: It looks like GDSs will curtail the incentives they give to travel management companies. What do you think is going to happen?

Charles Petruccelli: The GDSs are under pressure to address the cost they represent to the airlines. They need to find solutions. If they believe that the best solution is to reduce or eliminate the revenue flow they have generated to the travel management companies against the value that the travel management companies create for them, we will certainly react to that because there are not many GDSs and we can switch from one to the other.

BTN: I thought you were going to agree that it was time the system was changed.

Petruccelli: The cost between the GDSs and the airlines is a problem for the GDSs and the airlines, not between the travel management companies and the GDSs. I have enough of my own problems without having to carry theirs.

BTN: But why should the GDSs pay travel management companies?

Petruccelli: It is a question of value creation. If the GDSs think we don't create value, then they shouldn't pay us. If we create value, then we intend to be paid. We don't work for free.

BTN: But you need the GDSs as much as they need you. You need them so you can book travel for your clients.

Petruccelli: What they need is our customer volume. They need us to book with them. We can choose whatever booking engine we want.

BTN: If I were one of your clients, I would expect you to choose the GDS that provided the best service, not the one that paid you the most money.

Petruccelli: You always choose the GDS that provides the best functionality for the client, but all the GDSs are doing that. Everybody is at par. Tell me the difference in functionality between Sabre, Amadeus, Galileo and Worldspan?

BTN: It seems wrong to choose a supplier based on who pays the most.

Petruccelli: I have not said that. We work with all four GDSs around the world, so we are not choosing any because they are giving us rebates. We use them according to their functionalities and their competencies according to the market. So, from a market perspective there is a difference because some of them are more local suppliers than others. In terms of their functionality worldwide, they all provide the same.

BTN: More generally, how is business?

Petruccelli: Volumes are very sluggish. Recovery versus last year pre-9/11 is slow. At the beginning of the year we were seeing an improvement month after month and we were thinking we would get back to positive growth by the summer, but it leveled off in June and has stayed still since then. September showed positive growth for the first time, but that was because of 9/11. October and November also will look better than last year, but if you look at the figures against 2000, you see that the growth is not there. The only region showing positive growth is Asia/Pacific. All the markets there are doing well. North America and Western Europe are very slow. How are we performing against that? In terms of volume, very much in line with the industry trends.

On earnings, or performance, we are doing much better than expected, and we are reasonably pleased with the results. That is essentially down to very tight expense control and major process reengineering, which started in 2001 and accelerated after 9/11. It is important that our earnings are good when the business comes back, because it puts us in a very strong position for acquisition opportunities.

BTN: Are acquisitions something you are looking at actively at the moment?

Petruccelli: Very actively. Absolutely. There are opportunities. The industry has been shaken and some competitors are vulnerable. Also, we believe that in order to be successful in travel, we need to be successful in every market. To do that, you need to have a number-one leadership position and we don't have that in every market. By acquiring new businesses, we accelerate our organic growth to get to that position.

BTN: You are generally number two in European markets.

Petruccelli: We are number one in France, Sweden and Italy; number three in the U.K.

BTN: When you bought Thomas Cook in 1995, you were way ahead at number one in the United Kingdom and then you got caught by BTI UK and Carlson Wagonlit Travel. Why did that happen and how are you going to put it right?

Petruccelli: When we integrated with the Thomas Cook business, we went through a major cost reengineering initiative because the two businesses combined together were not providing the level of profitability that we wanted. As part of that cost reengineering, we had to eliminate a lot of accounts that were not profitable. That drove down our volumes substantially. Now we are on a base where our economic model and the drivers of our revenues are very stable in the U.K., so we can go back to rapid growth through acquisition.

BTN: Can't you do that organically by being a good company and attracting new business?

Petruccelli: Organically, you can grow but not as quickly as through acquisitions. Organically, you can grow by 5 percent to 15 percent a year, so if you want to grow from a $1 billion volume to a $2 billion volume, it will take seven to 10 years. If you can supplement that with a major acquisition when your economic model is stable and your cost base is very strong, it is a fairly easy integration to achieve.

BTN: It doesn't sound very efficient that you have to keep buying companies to stay at number one, then you lose lots of accounts and have to buy another company.

Petruccelli: If you keep doing that systematically, then I agree, it is not very efficient, which is the reason we had to fix the business and economic models after we bought Thomas Cook. Thomas Cook was a global acquisition. In the United States, it worked very well because the economic model and the integration worked well. It worked well in Sweden, Germany and Asia, but not in the U.K. The economic models were not properly aligned.

BTN: When are you going to kiss and make up with British Airways? [Amex and BA are locked in a legal dispute about the airline refusing to pay merchant fees on corporate net fares. Amex has retaliated by delisting BA as a preferred supplier.]

Petruccelli: We are working toward an amicable solution.

BTN: Is this an issue where a compromise is possible?

Petruccelli: A compromise would require full acceptance of the card on all fares.

BTN: You must be worried that if judgment goes in BA's favor, then other airlines might refuse to absorb merchant fees.

Petruccelli: We aren't worried. We believe that our contract is clear with BA. We are working to find an amicable solution. It is in the interest of both parties.

BTN: One solution might be to drop your merchant fee, which is much higher than anyone else's.

Petruccelli: Our merchant fee corresponds to the value that we provide to our customers and our suppliers. The industry has always recognized the value we generate in return for the premium that we are asking them to pay. Our customers are spending five times more than other cardholders and traveling three times more. Our management information capability is very sophisticated. We operate a closed loop network. We bring a lot of value to the table.

BTN: What do you think of BA launching an AirPlus card?

Petruccelli: The UATP card has been around for many years in many markets with many airlines. It is actually a tool for the airlines to capture corporate spend. It is very different from what we provide to corporations, which is a corporate payment solution to help them manage and optimize their T&E expenses. The American Express Card has a much wider scope than providing to the airlines corporate spend and corporate data from the customer in exchange for reduced fares. UATP has not stopped the growth of our corporate card. We do not see anything in what BA will do that is very different from the others.

BTN: AirPlus has been very successful in Germany.

Petruccelli: It has never stopped the growth of our card in Germany either. We work very well with Lufthansa.

BTN: Are companies seeing that not traveling as much as in the past makes little difference to the way their businesses function?

Petruccelli: I see exactly the opposite. When I talk to corporations, they see the need to get back into the market. Travel is an investment to reach new markets. The problem is, can you afford it at a point when your revenues are very tight because your own business is not doing very well because your customers are not buying from you? When the economic situation turns around, investment will come back and you will see travel coming back. Our job is to make sure our clients' investment in travel is optimized and the way we do that is through purchasing savings, process savings, relationship management and global access.

BTN: People keep saying the airfare model is broken. Do you agree with that?

Petruccelli: The market is very erratic because tariffs vary widely for the same seats. It looks like the airlines are fighting for share through tariff reduction, playing as much as they can on their structure to a point where there seems to be a disconnect between the price of the tariff and the value of the service provided. It is becoming very confusing for customers to know where they can find the best tariff. It is our job to find them and let customers compare.

BTN: How complete is your introduction of management and transaction fees worldwide?

Petruccelli: In all the markets where the industry has moved to the new model, we are 100 percent in place with management and transaction fees. There are certain markets that still are based on commissions, overrides and rebates, and the industry is not ready to make the move. The airlines are not pushing for it either. This is more the case in Latin America and Asia rather than Europe, where most markets are now on fees. North America and the United Kingdom are 100 percent on transaction fees.

BTN: Is the travel management function likely to be replaced more and more by outsourced services from you and your competitors?

Petruccelli: The travel management function will not be replaced. It will be changed and now it will report to the CFO. It is becoming part of the overall expense management of a company. Procurement is taking more responsibility, so the travel management role and its reporting line is being defined differently. It might change the profiles of the individuals that are tending that business. They have much more of a purchasing and finance background, but the function will not disappear.