July 19, 2009 -- Business travelers may be the ultimate losers in the latest scuffle between airlines and travel agents over credit card fees. United Airlines recently notified a handful of agents they can no longer sell United tickets using the airline's credit card merchant agreement.
Merchants typically remit 2% or 3% of the purchase price to the credit card company for the right to accept that credit card as a form of payment. "Merchant fees" are contractually based on the purchase price and transaction volume for each merchant. Airlines have traditionally paid those merchant fees.
Though airlines are slashing costs and unbundling services formerly included in the price a ticket to survive, United is quick to reiterate that their action impacts a relatively small number of travel agencies. However, United spokesperson Robin Urbanski Janikowski also says "costs of distributing our services are significant and we will continue to reduce these costs while we run an efficient airline for our customers."
This leads many travel agents and corporate travel managers to believe this is only the beginning. "It is going to be a fee that will be passed on to all travel agencies eventually," projects Randy Limbacher, president of Canyon Creek Travel American Express, based in Richardson, Texas.
"Certainly, they are testing the waters to see if the other carriers will join in and also promote this initiative," says Michelle De Costa, the global travel manager for Sapient Corporation. "When Delta Air Lines was the first airline to cut commissions, basically everyone followed suit," De Costa adds. "They are going to do it with some select agencies that probably don't sell a lot of United and just see what the marketplace will bear."
De Costa wrote to United's chief executive officer, Glenn Tilton, to express her company's concerns. "I know that other travel managers have sent similar notes to United or other airlines to indicate their dissatisfaction with this new initiative," De Costa told me.
Agencies no longer permitted to use the airline's merchant agreement may still book flights on United but they must use United's website or pay for tickets in cash. Many travel agencies already have merchant agreements with credit card companies, but they would have to absorb the merchant fee for United tickets or pass that cost along to their customers.
Passing the Costs to Customers
Since commissions were eliminated, most travel agencies already charge clients a ticketing fee. "If an agency has to pay United directly for the ticket in cash but then lose the merchant fee, obviously they are going to pass that on to us and raise our fees," says De Costa. Joe da Rosa, chairman of Balboa Travel, Inc. in San Diego, agrees. "Travel management companies and agencies would have no alternative to passing on the costs in one form or another."
If all airlines adopt this policy in the U.S. it could represent a cost shift in excess of $2 billion from airlines to travel agencies, according to Paul Ruden, senior vice president for legal and industry affairs for the American Society of Travel Agents.
In addition to the increased fees there are also liability issues if airline tickets are purchased by travel agencies with cash. "Any protection that people have through their credit cards, they lose, whether it is insurance or baggage liabilities," says De Costa. "If the airline goes out of business, they lose all of that protection when a ticket is run as cash and run as an agency sale."
Limbacher and da Rosa have additional concerns. "In order to buy directly from United, agents would have to have operating capital far beyond what they currently work with," says da Rosa. "The main concern would be our ability to gain enough credit to run a merchant program of any size, that the credit card company would grant individual small businesses that ability, simply because the price point is a lot higher than a restaurant or anything else," adds Limbacher.
How the Travel Agencies will Cope
Many travel agencies would likely fold if they are unable to obtain merchant agreements. Additionally, because of their size, airlines have negotiated the lowest merchant fees. Much smaller travel agencies would likely pay higher transaction fees, adding to the cost passed along to customers.
It seems like all the cards are stacked against travel agents. The airlines "really don't care about travel agents anymore because they don't need travel agents," says aviation expert and consultant Michael Boyd. "Travel agents don't make the decisions anymore; the consumer does, directly with the airline," says Boyd. "I understand travel agents' angst, but I can see where the airlines are saying, look, if you want to book it is fine, but we are not going to pay your costs."
While leisure travelers and independent business travelers may be able to purchase tickets on airline websites, larger companies still depend on travel management companies or agencies to help them control, track, administer and manage their travel programs. For corporations, "travel agents do bring some value added," Boyd admits, "but airlines are saying, we just don't want to pay for it. For a big corporation that wants somebody to manage their travel, that management is probably going to cost more money now."
While travel agents appear to be the targets of United's initial action, many believe the airlines are also trying to reduce the fees paid to the Global Distribution Systems used by travel agents to book flights by pushing corporate customers and travel agencies to book on the airline websites. This also concerns De Costa. Booking on airline websites, you lose that competitive advantage of seeing all the prices of all the carriers, she claims. "If you are just shopping on airline sites, you are only going to see their content and their prices."
In addition, booking through airline sites creates other problems for corporate travel programs. "All of our reservations are queued to a risk management system, so with the touch of a button, we know where our travelers are at all times," De Costa says. Although United started with travel agents, Boyd believes credit card fees may eventually be borne by travelers no matter where they purchase their ticket – including airline websites. "Airlines could say, the fare is $100, and if you are going to pay with a credit card, the fee is $2.86. Airlines might go to that at some point for everybody," Boyd says. In that case perhaps travel agents may no longer feel they've been targeted unfairly, but it will be one more ancillary fee added to the price of a ticket if you use a credit card to book that trip.