Jane Levere NEW YORK
Northwest Airlines and its sister carrier, KLM, last month took the bold step of totally eliminating commissions paid to online travel agents operating in North America; previously, they had paid them a 5% commission capped at $10.
Travelocity, the largest online agency, responded by imposing a $10 service fee on Northwest and KLM ticket sales; however, number two Expedia did not follow suit. Like Northwest a customer of Worldspan, Expedia said it was negotiating with the carrier about reaching a "mutually agreeable" solution.
Surprisingly, no other airlines had matched the Northwest/KLM action, despite projections that the commission cut could create meaningful savings. Michael Linenberg, airline analyst at Merrill Lynch, estimated that if Northwest's commission cut had been in effect last year, it would have saved the carrier in the region of $10-$20 million. He also projected that Northwest's Internet sales could generate as much as a quarter of its total revenues within four years, which would mean the commission cut could produce annual savings of $40-$50 million.
Henry Harteveldt, an analyst with Forrester Research, suggested that carriers like American and United had so far not matched Northwest because "they have bigger priorities, like labour negotiations and mergers". He also said they were afraid that if "they matched Northwest, it could lead to problems getting their mergers approved. If they cut commissions, they could become an easy target for the American Society of Travel Agents and the on-line travel agency association."
Linenberg, for one, expects that if other US carriers match Northwest, industry wide savings could reach $400-$500 million annually by 2005. "Given our view that the industry is unlikely to see any fare increases over the next two to three quarters, due to the economic slowdown, we think that airlines will be very much focused on reducing costs in 2001. This commission cut is a step in the right direction."
Source: Airline Business
