United Airlines has capped commissions on international tickets at $50 one-way and $100 roundtrip, setting off a furore in the US travel agency community.
The move has prompted the American Society of Travel Agents (ASTA) to put together plans to file a complaint to the US Department of Justice alleging violation of the Sherman Antitrust Act by United and the carriers that have followed suit. The Association of Retail Travel Agents is considering a similar action.
This marks the third time in less than four years that US airlines have slashed agency commissions, which remain their third highest operating cost. In 1995 Delta led the way in capping domestic commissions at $50 roundtrip and $25 one-way, while in 1997 United was the first to reduce the base rate for all agency commissions, on both domestic and international travel, to 8%. All US majors, with the exception of Southwest, ultimately matched United's and Delta's first two initiatives.
Delta, American, Continental and Northwest, have similarly matched this new move by United. So have United's Star alliance partners, Lufthansa and Air Canada; American's oneworld partner Canadian; and Northwest's partner KLM. Other US carriers with overseas service and major non-US carriers are all expected to eventually follow suit.
United's commission costs for the period July 1997 through June 1998 totalled $1.38 billion, or 23% of all commissions paid by US majors, and its commissions for the first three quarters of this year were $1 billion. The carrier calls the new commission structure "one piece in our larger plan to control costs and strengthen United's bottom line. We anticipate this action will result in savings of approximately $100 million annually...allow United to operate more effectively against worldwide airline competition and...us to continue to invest in our products and services."
Delta believes this latest commission cap will provide savings of between $40 million and $45 million annually.
Although travel agency giant American Express projects the new cap will generate commission savings of $500 million for the airline industry, Sam Buttrick, airline analyst at Paine Webber, estimates the figure will be nearer to $250 million in gross savings. "Competitive offsets, from overrides and corporate discounts, will mitigate some cost savings generated by the caps," he says. Buttrick also predicts the new caps will have the greatest impact on business class air fares, since commissions that were previously passed on to employers operating under managed travel agreements with corporate travel agencies will be reduced. "The commission caps have much less to do with squeezing travel agents than with the industry indirectly raising business fares," Buttrick says.
Travel agency officials disagree. Paul Ruden, acting executive director of ASTA, calls the caps the airlines' latest attempt "to try to force the travelling public to deal with them, rather than travel agents." Ruden warns that carriers are trying to "monopolise the distribution market for air transportation. If they're successful, the public will end up with only the airlines to buy from, and the airlines do not provide a neutral source for comparative fare information."
Ruden also predicts the new caps will lead to continuing shutdowns in US travel agencies. The total number of ARC-accredited travel agency locations has declined from 23,933 in February 1995, before the the first industrywide commission action, to 21,629 in June 1998. ASTA also predicts the latest caps will force leisure travel agents to charge more frequent and higher fees to customers.
Source: Airline Business
