1995 Summer ACTE Quarterly: President's Message | Net Fares | Travel Manager's Industry Roundtable

"I hate to tell you guys I told you so, but I told you so," Fred Swaffer told an avid audience at the ACTE Global Conference in Budapest in May. Swaffer is the travel manager for Hewlett Packard; the session was on life after commission caps; and his remark had to do with the inevitability of net fares, the topic du jour in most travel management circles, now that the traditional ticket distribution system is in the process of its biggest transformation since automation.

Swaffer's quip got a big laugh, probably because it's shaping up to be true. Net fares, a concept rumbled about for several years, endlessly debated, dismissed and finally seriously revisited, now are a reality. With transaction fees quickly replacing commissions as the primary method of compensation for service, the distribution middleman the agency's getting finessed out of the once-bloated, always convoluted ticket reservation and delivery process.

Airlines are eagerly forging more direct relationships with corporate clients; corporate clients recognize the huge potential for savings; and travel agencies are repositioning themselves away from being conduits in a distribution channel and into more consultative roles. "For the largest accounts, the ones that eventually have complete fee-based arrangements with agencies, our role will be to give the best advice on when and where to put net-fare deals in place," said Charles Roumas, vice president of marketing and planning for Travel One, the 10th largest travel management company in the U.S. "There will be an incredible variety of pricing programs, and some of these net-fare deals sound great in theory, but in practice don't necessarily save the customer money."

Streamlining this triangular relationship among airlines, agencies and corporate customers is going to take time, patience, and a certain tolerance for risk, but ultimately will rationalize a grossly inefficient situation, the panelists concurred. It simply makes sense to go direct [with airlines] for net fares; it's the direction the industry has been going for a while now, and now it makes sense with fee-based pricing, said Cindy Perper, travel manager for Colgate Palmolive. "We've been doing net with hotels for a long time now, so it seems natural to do it with airlines. The commission cap issue was just the catalyst for something that already was logical."

Many companies, especially those with very large volumes, have been quietly putting net-fare programs in place over the past few months. "Most are Fortune 25 or Fortune 50 companies," says travel management consultant Carol Salcito, president of Management Alternatives, Stamford, Conn. The number of companies exploring the possibility of substantial savings through net fare arrangements will stay fairly small for now, she predicted. But once companies experiment and make their adjustments it's very likely that airlines will be willing to enter these kinds of arrangements too.

For now, the airlines aren't terribly eager to broadcast the details, but they are admitting to trying out variations on the net fare theme. And airline executives, although sensitive to the awkward predicament that commission caps have put agencies in, nonetheless seem comfortable forging these new direct relationships with corporate customers. "We know our costs are much too high, and paying overrides for corporate business is an obvious change that needs to be made," said Joe Laughlin, business markets director for United Airlines. "If I'm the successful bidder for somebody's business, why should I pay an override to the agency?" Still, Laughlin is well aware that the process of direct-dealing is complex to start, and even more so because there's little precedent.

"We have to first determine what a fair cost is and that's a complicated issue right there. There are a lot of variables to consider, and all of this is new. The most important question is, how do we get to a good partnership?" Fred Swaffer told the ACTE Global audience that he's been operating on a net-fare basis with some carriers for more than a year's something he was able to manage efficiently since he's been on a fee-based arrangement with his agencies for seven years now. Since January 1, H-P drove a harder bargain with one of the Big Three carriers (he declined to identify which one) by agreeing to swing $140 million in domestic air volume. That airline, which used to be H-P's #3 air supplier is now its #1. "The major carriers are certainly ready to move in this direction," Swaffer said. "Our goal is to eventually pay net fares worldwide."

That may be a long time in coming, since, as one travel manager put it, "it's something less than a perfect world out there with fee-based pricing, and without that kind of arrangement net fares get to be a real mess," she said. "Let's face it: some people are still in deep denial over commission caps, and they actually think the [payment structure] will swing back the way it used to be, with rebates and commissions and overrides. They're talking about whether they'll still have a job now that travel management as we know it has been turned upside down. A discussion about net fares before you've made the proper arrangement with your agency is still, in my opinion, either a theoretical conversation or a very, very ill-advised one."

What it is . . .

Before any discussion of the history, merit, future, or logic of net fares, it's essential to arrive at some sort of working definition of what is actually meant by it. What may seem self-evident frankly isn't.

The most accepted definition of a net fare is one that's devoid of commissions.

Net-net fares means no commission and no overrides.

There's also been some discussion, not entirely facetiously, of net-net-net fares, which are devoid of commissions, overrides and everything else that usually gets tacked on to a fare: credit card fees, CRS charges and harder to quantify frequent flyer points. Fred Swaffer claims a net-net-net fare could shave as much as $37 off a $500 fare.

But before you can start counting your savings before you've booked your first net-fare ticket, you have to be very careful and address your terms when you're negotiating with airlines, advises Charles Roumas. "With one of our customers, a large global carrier has what they call a net fare program in place, but it's actually a commissionable fare. They [the airline] call a noncommissionable fare "net net"; in this case it's a fixed fare, with a fixed discount, on six of our client's top city pairs. There's no volume commitment involved. It's simply a percentage -- in this case 20% off the published fare. But there are a lot of ways you can set up a net fare program, with our without your agency's involvement."

Why They Make Sense

The logic is straight forward. So too are the savings opportunities. "Customers simply want point-of-sale discounts," said John Caldwell, the Washington-based travel management consultant and attorney. "That's the trend. It's growing at the same time interest by the airlines is growing."

The wastefulness of the long-used distribution system is reason enough, the post-commission-cap panel pointed out at ACTE Global. Consider the 10 percent commission load (up to a maximum of $50), overrides of 1 to 5 percent, credit card fees of 1.5 to 2.5 percent, CRS booking fees that run between $1.60 to $3.00 per segment -- plus the soft costs of frequent

flyer programs. James Dullum, vice president of industry consulting for EDS Global Travel Services, put it this way: "In the current distribution system, there are no winners."

Then there's the matter of overpaying ticket taxes. "With the ticket price lower up-front," Swaffer pointed out, "the taxes are lower too. You pay much more tax when you have a rebate/override arrangement, and that simply doesn't make any sense. Why wait for your own money to come back to you?"

Net Fares Are Only Part of the Picture

Not only is interest in net fares growing, say travel management experts, but so too is interest in other new pricing strategies. One is bulk-fare agreements, in which a company buys a block of tickets from an airline and uses them up until they're gone. Another rather unconventional and not necessarily recommended method is to lend money to ailing airlines and burn off the value of the loan in tickets, Jim Dullum said. This was the case when several St. Louis corporations recently joined forces to lend TWA money in this manner. "[Alternative purchasing] techniques will be common in the future," Dullum said. "And when they're in place, airlines will be better able to control their costs and offer more rational pricing, --music to the ears of many (if not all) purchasers of travel, corporate or otherwise."

Caveats

Are individual net fare arrangements really going to make a dent in Corporate America's airline spending? Kevin Mitchell, president of the Business Travel Contractor's Corporation (BTCC), thinks not. "It does a company very little to simply take the millions of fares out there and unbundle 15% of commissions and overrides," he told ACTE Quarterly. "You're still as locked into all the irrational and complex fares as before. What we've got to strive for is a simplified fare structure, to get agencies more productive, which they can't be if they have to perform all those fare searches and audits for each of their corporate customers."

However companies pursue new airline ticket purchasing programs, whether through a buying cooperative like the BTCC, through net fare arrangements or through travel agents, travel management experts, no surprise, advise caution. "These new purchasing opportunities may seem exciting at first glance," says Carole Salcito. "But travel managers have got to stay patient. Gather as much historical data as possible; you'll need clean numbers to leverage your volume when you negotiate with the airlines. Make certain that senior managers know what's going on and be firm on policy. And take things slow. One travel manager told me today that his boss and the airline representative wanted to sign [a net-fare agreement] on the dotted line right then, at their initial meeting. Just because it says "net fares" doesn't mean it's going to necessarily save your company money. My advice: before rushing into any new agreement, ask for an extension on your existing ones. Net fares aren't going to go away."

1995 Summer ACTE Quarterly: President's Message | Net Fares | Travel Manager's Industry Roundtable