This year's decisions by five US majors to cut commissions for on-line travel bookings in half could result in the collapse of smaller on-line travel agents, leaving this potentially lucrative market in the hands of three major companies. Northwest was the first carrier to cut the commission paid for on-line bookings, quickly followed by Continental, Delta, and, most recently, American and United. US Airways was likely to follow suit.
The airlines have already made it clear that they feel full commission payments are not justified for on-line reservations, because passengers usually do the bulk of the work, and travel agents merely issue the ticket.
But the severity of the commission cuts has fuelled concerns that they could force smaller electronic travel agencies out of business, or prevent new players from entering this fledgling market. A pioneering on-line agency, PC Travel, did shut down in the wake of American's commission cut, though the carrier's action was only one of several final blows to the agency's precarious financial health.
It is conceivable that only the giant on-line agencies with strong financial backing will survive. These are Microsoft's Expedia; Travelocity, part of the Sabre Group, which is 80 per cent owned by American's parent AMR Corporation; and Preview Travel, whose major stockholders include America Online and USWest.
This is not a happy prospect for those who favour competition, or who had expected that the Internet would provide more choice to suppliers and travellers. If the field is dominated by three giants, it is not clear what kind of leverage, if any, carriers will be able to exert over on-line agencies.
This is not an issue now because travel purchased through on-line channels in the US accounts for less than 1 per cent of all travel sold. But it poses a potential problem, since electronic travel sales are expected to grow rapidly in the next few years. Cambridge, Massachusetts-based high-tech consultancy Forrester Research projects that US on-line travel purchases will skyrocket from $276 million this year to as much as $1.6 billion in the year 2000.
The new on-line commissions are generally around 50 per cent of traditional rates, but the five majors have imposed different structures:
* Northwest and KLM: 5 per cent, capped at $25 for a roundtrip domestic ticket and $40 for a roundtrip international ticket.
In all cases, the cap on a roundtrip ticket is double the one-way limit.
In addition, the larger on-line agencies that produce significant amounts of business are thought to be receiving override payments on top of the on-line commission rates, as occurs with off-line bookings by traditional travel agencies.
The off-line commission of most US airlines is capped at $25 for a domestic one-way ticket. The majors normally pay 10 per cent commission on international tickets, with overrides sometimes taking this up to 15 per cent.
All the on-line policies except Delta's are reportedly applicable to all electronic travel agencies. Delta's applies only for selected agencies. It won't say which, but Preview Travel is believed to be affected.
The commission cuts were greeted by a tough response from some quarters. American Express, which sells travel from its own Web site and through America Online, stopped displaying Northwest and United flights in both locations because the airlines had cut commissions 'to a level that is below our operating costs.' As a result, consumers can no longer book United or Northwest flights on-line through American Express, though their flights are bookable through all of the mega-agency's other sales channels.
On-line agency executives and other observers say that the major airlines have acted prematurely. 'We always expected they would cut commissions, but the biggest surprise was that they did it at at this point in time,' says Ken Orton, president of Preview Travel. 'It really is premature. If the airlines' goal is to reduce distribution costs over time, shouldn't they have waited until [on-line sales] get bigger? Now there won't be a lot more competition. 'Maybe they acted so they'll have fewer entities to deal with. There won't be 50 major on-line travel companies,' he says.
Richard Barton, general manager of Microsoft's travel business unit, which includes Expedia, also bemoans the cuts, noting that 'although we built our business model around the better economies [of on-line] distribution, we don't want the roof to cave in on our heads, or we won't be able to make a business of it'.
Some observers believe Microsoft egged on Northwest - whose Worldspan CRS is Expedia's booking engine - to lead the airline industry in making on-line commission cuts. They claim that because Microsoft has deeper pockets than its competitors, it can survive longer with lower commission rates than others, and will benefit from new on-line agencies being discouraged from entering the business.
Barton declines to comment on these charges, stating only that Microsoft 'said out of the gate that we'd take an aggressive leadership position in cost reduction. We've had conversations for a couple of years with major suppliers about the business model for compensation, and part [of them have] been about reduced commissions.'
Jim Marsicano, vice president of Sabre Interactive, which oversees Travelocity, says his company had no discussions with American or AMR about American's commission cut before it was announced. He predicts that the new commission structures will 'put pressure on everyone to improve their processes. The question will be, who will succeed in making the transition.'
Source: Airline Business
