1995 Spring ACTE Quarterly: Commission Cap Controversy | ACTE and ASQC Join Forces

COMMISSION CAP CONTROVERSY

For everyone in the business travel industry, Delta's announcement that it was instituting agency commission caps on domestic airfares, and the tumult that ensued, had the same symbolic resonance as the shot heard `round the world.

"[The commission-cap issue] may have as profound an effect on travel as deregulation," said Mike Buckman, Vice President for American Express Travel Related Services, "in that the consequences are so far-reaching. The [airlines'] action has significantly altered the relationships among buyers, suppliers and their intermediaries." By now, the initial furor has simmered down. In its place: a flurry of meetings between companies and their corporate travel agencies, at which to hammer out new payment and service arrangements.

"We're buried, trying to gnarl our way through this," as one travel manager for a Fortune 500 company put it. "We're all in a race to renegotiate agreements, yet none of us-airlines, agencies, or corporate clients-has any clear idea what the future will be for overrides, revenue-sharing, any of the old paradigms of doing business. We're all in the dark."

The commission cap involves imposing a maximum commission of $25 on one-way domestic fares and $50 on roundtrips, was embraced by all major domestic carriers except Southwest (whose tickets rarely exceed $250, which would generate a 10% commission of $25), and America West. It is expected to save financially strapped airlines $500 million annually, largely by taking revenues out of the coffers of travel agents. Since most corporations do business with their agencies on a commission-only basis-Business Travel News estimates that about 75 percent of current corporate contracts are structured this way-there's been a rush not only to hammer out new contracts, but to somehow explain to senior management that those revenue-sharing checks-the ones that for multinational corporations often totalled in the millions of dollars-would be shrinking to a fraction of that size.

Even amid the uncertainty, one thing is clear: The commission-cap action has catalyzed existing efforts toward rationalizing the often irrational, or certainly clumsy, system of commissions, overrides and rebates that many companies and their agencies have jerryrigged in the 15 years since airline deregulation.

"Essentially, what we're talking about here is a complete, and almost spontaneous restructuring of an industry," said Jeffrey Harrow, president of Travel One in Mt. Laurel, N.J. But what does all this mean, on a day to day basis, for corporate travel managers? Here are predictions on likely impacts:

• Rush toward fee-based pricing. The trend toward this kind of arrangement was gaining steadily even before the commission cap, encouraged by the logic of paying a service provider for service rendered, rather than a portion of a ticket fee whose value fluctuated wildly-and which was expected to cover non-airfare-related transactions like hotel room reservations and car rental bookings.

  Mike Buckman of Amex said that he expects the number of Amex clients on a fee-based program will rise from the current 40 percent to 50 this year. Others have less modest predictions, expecting the number of fee-based arrangements negotiated in a hurry to explode. Just how fees will be structured may take several different forms. A white paper issued by World Travel Partners in March indicated three likely scenarios: 1) management fees, as a percentage of sales or a fixed dollar amounts (the agency returns 100% of commissions to the client, less actual costs and a fixed management fee); 2) transaction fees (fee for service, based on work performed, irrespective of commissions), and 3), profit sharing (e.g. a 60/40 split, with a minimum guaranteed profit of, for example, 1.5% to the agency).

  As for overrides, don't expect them to go away just yet. According to Vince Caminiti, vice president of sales for Delta and one of the architects of Delta's commission-cap plan, "we're not planning to eliminate them-just use them more efficiently."

  Will rebates go away entirely? Not necessarily, say industry analysts. What's more likely is a slightly different form of revenue sharing between agency and corporate client: splitting the net. "Rebates put the burden on travel agencies, and fees put the burden on corporations," explained Rolfe Shellenberger, senior consultant for Runzheimer. "Neither is intrinsically fair."

• New, intense focus on travel managers."One thing is for certain-the story has sure caught the attention of senior management," said Mark Williams, associate director for Price Waterhouse in Tampa. "And that has put the spotlight on us-what we do, how well we do it. With new management agreements in place, and fees to oversee, travel managers are going to have much more responsibility, especially when it comes to cost-control practices."

• Potentially tough news for travel managers. The prevailing attitude among travel managers is that these new expectations and responsibilities may be over their heads. "Travel managers will have to demonstrate a whole new skill level," said Harold Seligman, president of Management Alternatives. "If they haven't learned things like finance and negotiation, they had better be quick studies."

  Other travel managers are concerned that if they cannot come to a suitable new arrangement with their existing agency, they may have to take their business elsewhere. "That could be painful," said one. "Painful, expensive, and time-consuming."

• Loss of a travel department's view of itself as a profit center. "That has always been a myth, anyway," said Michael Whitesage, president of the Prism Group, a travel management consulting firm in Albuquerque, N.M. "Travel departments are service departments," he maintains. The transition has been brutal for some companies with significant revenue sharing agreements. Hewlett-Packard, for instance, estimates it will lose $3.1 million. If net commissions fall below the agency service fees it pays-it has been on a fee-based pricing system for five years-then it will proportionately allocate costs back to departments the way it once allocated commission revenue.

  "Commission caps severely cut into agencies' operating revenue, but not in their ability to deliver core services," Whitesage said. "Travel managers who focus on services that are critical to their company should not only improve the quality of service to their travelers but also reduce the costs of those services."

• More net-fare deals. Many industry analysts believe that the move is a signal from airlines that they're more willing to discuss net-fare arrangements with corporations. "This may be the first step in a longer-range plan for airlines to do business directly with corporations, the way they used to in the days before deregulation," said Seligman. Technology is now at a point where airlines are in a position to handle much of the corporate travel business directly without having to add thousands of new reservationists."

  Others newly appreciate the logic in joining a net-fare cooperative like the Business Travel Contractors Corp. Not surprisingly, BTCC's president, Kevin Mitchell, applauded the move. He maintains that airfares should be mileage-based, not based on the cost of issuing a ticket as other industry figures have suggested.

• A perfect time to revisit the entire travel management function. Some companies may be using the inertia created from the abrupt change in revenue streams and agency relationships to totally reengineer their travel departments. Everything from booking, reporting and reimbursement procedures are being evaluated, with the intention of creating a much more streamlined, cost-effective operation.

  Some companies are considering a return to the in-house travel department. One East Coast travel manager, who asked not to be identified, said that it now makes sense for a company like his to hire employees to arrange travel rather than pay service fees to an outside (travel agency) vendor. "You never know whether you're getting your money's worth with fees. Besides, they're harder to justify to upper management," he said.

  Rolfe Shellenberger agrees. "I don't think companies will pay fees," he said. "Corporations must move toward do-it-yourself reservation systems, because of the increase in airlines that don't participate in CRSs and because the newer reservation systems are more user-friendly."

• Higher ticket costs. "After travel agencies and travel managers dust themselves off, the real logic behind the airlines' move will become clear," Mike Buckman said. "This is a way to pass higher ticket prices on to companies."

• More widespread use of automation. With travel agencies and corporate travel departments scrambling to increase productivity, automation has gone from being optional to critical for survival. That's the view from the operations standpoint. "As this industry goes through the transition from the traditional business model to one of fee for service, the value an agency brings is going to be the determinant in an account sale. Automation systems are going to be the unique selling proposition in the future," said Matt Manley, chief technology officer for Carlson Wagonlit.

• Continued, perhaps accelerated, agency mergers. Hal Rosenbluth, President of Rosenbluth Travel, has just hired 1,000 reservations agents who had anticipated being laid off by small corporate agencies that can no longer afford to keep them on staff.

  If anything, the new post-commission cap order has put the spotlight directly on travel management, where many have argued it has long belonged in the overall corporate scheme of things. Despite the uncertainty, however, many are optimistic.

  "The Chinese character for crisis contains the concepts change and opportunity," Michael Whitesage points out. "Those travel managers who have clear objectives will find this a remarkable opportunity to change how they manage travel and strengthen their influence on the airlines and their agents."

1995 Spring ACTE Quarterly: Commission Cap Controversy | ACTE and ASQC Join Forces