Fee Fight: United Airlines vs. Travel Agents

As U.S. airlines seek to cull every last cost from their operations, travel agents are gearing up for what one agent calls a "battle royale" over a recent decision by United Airlines (UAUA) to pass along credit-card processing fees to 28 travel agencies. Those costs, which amount to 2% to 3% of the price of an airline ticket on average, are currently paid by airlines as part of the ticketing process. Wall Street is eager to assess whether United's move will prove successful, given that shifting such costs to agents and fliers could represent billions in savings across the industry.

Agents argue that United's card-fee experiment makes no logical sense because such a small agency group will not yield much in cost savings for such a large carrier. Instead, some agents contend the airline is hoping to spark an industry-wide assault on distribution costs, with travel agents' card fees merely the first front.

In a July 17 letter responding to 13 members of the U.S. House of Representatives who expressed concern about the matter, United says its change is limited and "in no way was intended to be a broad move in the marketplace, as has been interpreted by outside organizations." The Chicago airline also agreed to offer a 60-day extension on the fees to agencies that request one. Senators Ron Wyden (D-Ore.) and Jeff Merkley (D-Ore.) also wrote to United CEO Glenn Tilton in the past week, urging him to delay the program.

The company's new stance on card fees is designed "to improve travel agency performance and to more closely align them with us, to create a relationship that is mutually beneficial," United spokesman Robin Urbanski says.

Driving Sales to Airline Web Sites Ending the payment of card-processing fees to agents is likely to force many of them to book United tickets on the airline's own Web site. "It would be a pain. But yeah, it could be done," says one Colorado agent, who declined to be identified because she is negotiating with United over the issue. "Ultimately, I think it might all go to that."

Airlines have long sought to drive sales to their own sites as a way to control costs, and much of the leisure travel business has migrated there. Indeed, Southwest Airlines (LUV) controls virtually its entire ticket inventory by largely restricting sales to its Web site. However, corporate travel remains largely the purview of travel agencies or, at larger corporations, internal booking systems overseen by agents or agency-affiliated travel management companies. The American Society of Travel Agents says its members generated $69 billion in sales for airlines last year, much of it in corporate travel, where companies have designed an array of cost controls on employee travel.

"At some point, consumers are going to figure out what’s going to happen to them and they’re going to rebel," Paul Ruden, senior vice-president for legal and industry affairs at the agents' trade group in Alexandria, Va., says of rising travel costs.

ASTA says United's campaign could ultimately force agents to accept liability for an airline's failure to perform if the merchant relationship changes and the agent is no longer an intermediary, but the vendor responsible for the service. Indeed, that issue—and whether United's change may alter consumer protections in the Fair Credit Billing Act—appears to have piqued the interest of some in Congress. Agents envision a worst-case scenario in which they are left as unsecured creditors in an airline bankruptcy, with scant recourse to recover money they have already paid the carrier. United says that won't happen.

Agent Numbers "Undoubtedly" Shrinking Credit-card "interchange" fees also tend to be higher for airline transactions than for other companies that do business with the major card companies such as Visa (V), MasterCard (MA), and American Express (AXP). The higher fees are designed to protect the card companies because airlines are cash-intensive operations that generate little in the way of profits and have a history of bankruptcy. Currently, card issuers often assess a "holdback" on an airline ticket sale to help repay consumers in the event an airline fails to deliver the booked flight. Travel agents say they do not have the financial wherewithal to manage the costs of such holdbacks on ticket sales, which would drive many agents out of business entirely.

"If you flash forward to five years from now…will the [agent] industry be smaller?" Ruden says. "Undoubtedly."

Jacob Marzouka, president of a suburban Miami agency that received one of the letters from United, says the share of his business that he books on the carrier has fallen from 7% to 0.04% since 2007, owing to schedule cuts the airline made in South Florida and to concerns Marzouka has about United's customer service. "Desperation breeds different outcomes at different companies—sometimes you become more customer-friendly and sometimes you become like United," says Marzouka. "There are much better airlines out there than United that I would rather put my customer on, because if there's a problem that airline is going to do something for my customer."

Travel agents also say United's move against them is misguided because agents haven't represented a true cost for airlines since the cost of paying agent commissions was largely moved from airlines to customers several years ago. Airlines' costs of ticket distribution—hundreds of millions annually for United—come predominantly in the fees they pay to the global distribution services, or GDS. Such companies as Amadeus Technology Group, Sabre Holdings, Galileo International, and Worldspan are the booking engines on which most travel agents create reservations. Those agreements are confidential, although the costs vary by airline.

United May Remain on Its Own Some agents believe that if cash-strapped airlines successfully shift credit-card fees off their books, the GDS model is likely to face attack next. Still, no other airline has said it will follow United's move and many analysts expect the industry to watch the United experiment closely before following suit. Gerard Arpey, CEO of American Airlines parent AMR (AMR), declined to comment on July 15 when an analyst asked for his view of the effort during the company's earnings call.

"My gut feel at this particular point in time is that it's not going to go anywhere," says Paul Clements, director of sales for AirTran Airways (AAI), which sells 60% of its tickets on its own site. "I haven't seen anyone else jumping on the bandwagon."

While there's no evidence that United's action is a prelude to broader changes, Wall Street analysts and many airline executives talk longingly of a new model in which airlines would be paid for their "content"—the right to display fares—much the way newspapers and magazines pay news services such as Thomson Reuters (TRI) to publish its wire stories. A spokeswoman for privately held Sabre, which also owns the online booking site Travelocity, says fierce negotiations around GDS costs are a routine topic in the industry, arising at least once a year. "We think the current GDS model serves all three parts of this—the consumers, the agents, and the airlines—very well," spokeswoman Nancy St. Pierre says.

There has also been talk in the industry about "fragmented content" as a way for U.S. airlines to regain tighter controls on pricing. Under such a scheme, an airline would not load some fares into the global systems that travel agents use. For example, a carrier might publish "private" fares on its Web site, for customers who pay to access them, and thereby exclude agents. "It's a menu effect," Clements says of the fragmented model. "If you want this much content, you pay this much to get it."

Marzouka, the South Florida travel agent, calls the GDS "a layer of cost nobody wants to pay." "If you get the GDS out of the way and you get the travel agent out of the way…the fares become opaque," giving airlines more pricing power, he says. "The cost of displaying your information for the public to buy is borne by the vendor—and if indeed this model changes…in the end the consumer is going to pay more."

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