While groups opposing United Airlines' plan to shift merchant fees to 28 travel agencies counted the carrier's offer of a 60-day extension as a minor victory, they still hope to reverse what they call an anticompetitive move that will raise costs for travelers, expand beyond the fraction of agencies initially impacted and encourage other airlines to match the model.
United has downplayed the action, characterizing the effort as a minor move that impacts only a handful of agencies. In a letter dated June 19, United told 28 agencies that the carrier on July 20 would discontinue access to its credit card merchant agreements, including those with Visa, MasterCard and American Express, essentially shifting payment card merchant fees from the airline to those agencies. If those agencies fail to process card transactions under their own merchant agreements and provide cash settlement through ARC, United would assess a $75 debit memo per ticket, according to the letter sent by United vice president of sales for the Americas David Myrick.
The policy sparked a mounting wave of outrage that has spread from the travel industry to Washington, D.C., and now counts among its opponents the American Society of Travel Agents, the Business Travel Coalition, more than a dozen congressional representatives and a handful of senators.
"Some would say the practical effect of what United is doing is small because of the relatively few agencies involved," said Kevin Mitchell, chairman of the Business Travel Coalition. "That sort of misses the point, though. It's the strategic implications for the health of the distribution system, for the efficacy of corporate managed travel program and for consumer protections that has resulted in such a backlash."
In response to correspondence from concerned congressional representatives, United senior vice president Jeff Foland in a letter said the policy "in no way was intended to be a broad move in the marketplace, as has been interpreted by outside organizations." Still, United agreed to shift the July 20 start date by 60 days for agencies "that request more time to adjust to this change" as the carrier seeks to "ensure a smooth transition for the very limited number of impacted travel agents."
United has painted the move as yet another distribution-cost-cutting measure, part of a long-term strategy to trim expenses.
CEO Glenn Tilton during the carrier's second-quarter earnings call on July 21 said United is "examining every imaginable cost component of our overall unit cost to pursue improvement, and when we say there are no sacred cows, given the economics of this industry, I don't think anybody on the other end of the line should be surprised by our aggressive pursuit of those savings."
A United spokesperson by e-mail said the costs of processing credit cards "are escalating at a high rate and represent several hundred million dollars each year." ASTA estimated that if United deployed these measures industrywide, it would represent a $171 million cost shift.
Still, BTC's Mitchell questioned how much cash United could save by targeting a very limited number of low-yielding agents, and suspected that United intends to broaden the move.
Officials from ASTA and other travel trade groups accused United of signaling future pricing moves in the hopes that other carriers would join. To Mitchell, it's evident that "United's intentions go well beyond a handful of travel agencies."
ASTA president and chairman Chris Russo said, "The impact will definitely shutter some of those agencies, and if United is allowed to get away with this, you can be sure that other airlines are sitting on the wings and will follow suit, and still more agencies will be affected, which will affect jobs across the entire country." At press time, no other airlines had matched the move, nor would they comment on United's plan.
ASTA senior vice president of legal and industry affairs Paul Ruden said United confirmed 28 agencies were impacted by the policy. Of those, ASTA said it has identified 10 agencies, which Ruden described as geographically diverse, with the largest spending about a half-million dollars annually on United.
Ruden said, "Some of the agencies viewed as a whole entity are not small," though they seem to have one thing in common: "They don't do much business on United for a variety for reasons."
United gave little detail on its future plans with the program or why those particular agencies were selected, but president and COO John Tague said, "You can continue to expect us to take calculated risks such as these as we move to improve the economics and performance of our distribution relationships."
Tague told investors, "We have thousands of agency relationships, and I would say we have thousands of different terms among those agencies. In fact, we currently do have a number of agencies who have been merchants of record for some time. This merely represented an expansion of the definition as to how we were going to apply that initially." United would not disclose other agencies that already serve as the merchant, frustrating those at ASTA and elsewhere.
Ruden noted, "United has now also claimed that it has many relationships with agencies around the world where the agency is the merchant. Once again, 'many' is not explained and there are no details."
Opponents also lobbed the charge that United's plan "appears to undermine the protections granted to consumers by the federal Fair Credit Billing Act," according to a letter sent by 13 U.S. congressmen.
United's Foland in his response denied the charge, claiming "there will be no difference in how credit card disputes will be handled from a customer's perspective. Customers who charge their tickets with travel agents will have the same rights they have always had, including the right to dispute charges to their card issuer for nonperformed services. This is the case when the impacted travel agents use United's merchant account. It will continue to be the case when the impacted agents use their own merchant accounts."
United in the past year has targeted agencies as an area to aggressively trim distribution costs. Last summer, the airline pulled its preferred agreements with mega travel management company Carlson Wagonlit Travel and other agencies as part of an effort to reduce its agency incentive programs by $80 million
(BTNonline, Aug. 11, 2008). Within months, CWT and United reconciled, though other agencies remained subject to the cuts.
For the first half of this year, United managed to shave its distribution expenses by nearly 32 percent compared with the first six months of 2008, but the carrier attributes much of that reduction to the 26 percent decline in passenger revenue during that period, United said in its earnings report. Tague said the best measure of the carrier's progress on distribution expenses would be measured as a percentage of revenue, noting that for the first half of this year distribution costs were 4.6 percent of revenue, compared with 6 percent in 2005.