OP-ED: Think Before Jumping Into The 'Net'

<B> OP-ED: Think Before Jumping Into The 'Net'</B>

By Alexander Houston

<i>Alexander Houston is the manager of travel and administrative services for Cooper Industries, a worldwide, diversified manufacturing company, based in Houston, Tex. </i>

<hr><b><center><FONT COLOR="#2D6E33">Click here to respond to the following editorial on the BTNOnline Bulletin Board

<hr></b></center>The recent reduction in airline commissions has prompted renewed discussions concerning the use of net fares by corporations. Some say further reductions in commissions are sure to come. others predict the complete demise of commissions for corporate travel. Still others say the industry is changing and view this as opportunity to correct some of the inequities of the past. Many view net fares as a byproduct of these changes.

A "net fare," loosely defined as a published fare with distribution costs taken out, can be a good arrangement for all parties--corporate travel buyers, airlines and travel agencies--as long as every party understands all the numbers and the full implication of a true net agreement. At the very least, it appears that nets move air transportation purchasing closer to the norms found in other areas of purchasing.

First, a couple of reality checks. Many corporate travel managers have negotiated fare discounts and/or net agreements with airlines, as well as fee based or revenue sharing arrangements with their corporate travel agencies, yielding "net" cost levels for air transportation. "Nets" get you to a similar level of cost--they just do it in a different way.

Second, the travel industry's methods of distributing its products are definitely changing, but haven't other industries had significant changes in distribution methods over the last five or 10 years? Why should we expect the travel industry to be any different?

Finally, our role as travel managers is to assess where the industry is going and best position our companies for the future. If that means net fares, so be it. If that means commissions, that's okay too! I don't think it really matters as long as you have a good understanding of everyone's position, including the corporation, the airline and the agency partner. In these relationships, openness, trust and honest communication are critical. Let's look at each position.

THE CORPORATION. The recent commission cap represents an indirect price increase. This is in addition to the multiple price increases we have seen over that last 12 months. I don't like increases in cost any more than anyone else, but I am a firm believer that these things go in cycles and we will adjust accordingly. Meanwhile, my company, like many others, is a volume purchaser of what is essentially a commodity product: air transportation. (Air transportation doesn't have to be a commodity, but those who now provide it act as though it is and price accordingly.) There is still leverage in the hands of the corporate travel manager who can control at least a portion of air transportation expense, and who can carefully negotiate what the company spends and where it spends it. Your net or commissionable agreement should take this leverage into account.

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THE AIRLINES. Once the first commission cap hit, the "sacred cow" of distribution costs was open to challenge. The recent reductions are just a further tweaking of the overall cost of distribution. The key point to remember about airline costs is that they are largely fixed. Fixed costs, such as aircraft operation, ownership, crew time, overhead are incurred regardless of the number of passengers on board.

Distribution costs, on the other hand, are largely variable. The expense of commission, overrides, CRS fees, credit cards, etc., are not incurred if travel does not occur. The airlines are much more interested in getting the high yield corporate traveler with the $500 ticket to help offset their fixed costs than they are in the commission expense of $50 versus $40. For that very reason, if you are going to do a net deal, you should include an override, soft dollars or some sort of bonus that rewards your company for your ability to shift the high yield passengers the airlines covet.

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THE AGENCY. Travel management firms represent our window on the retail market. The agency-airline relationship always has been an interesting balance, as they need each other, though neither really wants to admit it.

Collectively, agencies are the most efficient way for airlines to reach and handle ALL of their customers. Yet individually, agencies are the most expensive means of distribution. The airlines are trying to adjust the blend of distribution methods.

Let me explain. In terms of how cost-effective each means of distribution is, we can rank them in the following order: e-ticket, ticket by mail, city ticket office, airport ticket office, travel agency.

Agencies often have said that the airlines cannot handle customers as cheaply as agencies can, but most airlines require their ticket offices (other than airport offices) to operate on a cost/revenue ratio of 5 percent or less. However, the problem is the major airlines each board in excess of 200,000 passengers a day. There is no way the airlines can (or want to) handle all those customers themselves. Moreover, most corporate travelers won't put up with the waits and hassles associated with direct handling. That is why there are so many agencies.

Agencies provide a range of value- added services to corporate travelers more cost effectively than the airlines can. Even if they are only a "rent-a- plate" operation, we value these services provided by our agency partners. More importantly, as corporations shift to net fares, we value our agencies' position in the "retail" (i.e., commissionable) market. If the airlines modify the compensation structure in the retail market, my agency relationship allows us to participate if we choose.

So where does this come out in net fares? We will continue to examine both net and commissionable arrangements. We have always viewed our travel operation as a cost avoidance center, not a profit center. While not dependent on commission, we must consider its role in reducing overall costs. The overriding benefit of net fares is that they push the net cost of air travel right to the budget of the traveler. However, net agreements are not always the best deal for the corporation. If a standard discount with a commission and override is a better "all in" agreement, we'll stay with the old way.

Ultimately, the travel manager's advantage continues to be the ability to direct air spend to preferred vendors. As long as the airlines believe we can control that traveler, then we will be able to negotiate discounts, bonuses and overrides consistent with our volume.

But if the airlines believe that we have no control and that the buy decision is driven by schedule and frequent flyer programs, we will see continued increases in air expense, net or otherwise. The math is easy. The challenge is having complete confidence in your agency and airline partners, and knowing all the numbers. If there is one certainty in all of this, it is that we have not seen the end yet. The travel industry distribution process will continue to evolve.