Airline Commission Cuts Raise Agent Fees, Hackles

The U.S. airline industry, facing dwindling ticket sales after several years of full planes and hefty revenues, desperately wants to be your friend. Hence the rash of fare sales in the past few weeks and the likelihood that travelers may see better air fare deals this fall than they have in years.

But while they cultivate our favor, the airlines also are escalating their undeclared war against the nation’s travel agents. Late last month, American, Delta and United, the largest U.S. airlines, announced cuts in the commissions they pay travel agents. Several other carriers followed.

Here’s the problem for consumers: If you buy tickets through a traditional travel agency, as most Americans still do, you’ll probably find that your agent’s first response was to raise the service fees--also known as transaction or booking fees--that you pay. Nationwide, those agency fees averaged $13 per booking before the airlines’ most recent move. Many veteran agents said they now expect fees to increase by $5 to $10 per ticket.

Commission cuts set other dominoes in motion. Even if your agent is among the few who resist the pressure to raise fees, you may find that agent showing less interest in fussing with your air bookings but more interest in selling you a tour or cruise. Agents typically earn far higher commissions (10% or more) on those transactions.

For the growing number of do-it-yourself travelers who rely on Internet searches (or those traditional types who prefer to make multiple phone calls to airlines), these changes may still seem irrelevant. But probably not for long.

Depending on who’s talking, the long-term effect of the airlines’ move might be to exterminate traditional travel agencies, giving too much marketplace power to a handful of airlines, or to destroy plodding, old-fashioned agencies but prompt a surge of creativity and growth among agencies that can deliver valuable advice along with bookings.

The hostilities between airlines and agents flared about the time airlines were announcing fall fare sales. On Aug. 17, American Airlines cut its top commission rate on domestic flights by 60%. On Aug. 22, United and Delta announced commission cuts, which left the nation’s three largest carriers with effectively identical commission rates. All of the cuts were effective immediately.

In each case, the new commission rate is 5%, up to a cap of $20 on a round-trip domestic flight, no matter how much a consumer pays for a ticket.

The agencies that sell the most domestic tickets costing more than $400 (that is, the ones catering to business travelers who book pricey seats on short notice) will suffer most. (Commissions on international tickets are higher, but they too have fallen in recent years. Most major carriers pay agents 5% or $100, whichever is lower, for selling a round-trip international ticket.)

Together, Wall Street analysts have estimated, this round of commission cuts could save airlines and cost travel agencies as much as $365 million next year.

In news releases announcing the move, each of the big three said they would not comment further on the subject. When I called each one to give them another chance, public relations staffers turned me away, saying they’d been forbidden to say anything.

Paul Ruden, senior vice president for the American Society of Travel Agents, a trade group based in Alexandria, Va., thinks he understands the airlines’ game plan. “The ultimate strategy here is to try to force everybody onto the Web,” he said. By driving business to their own Web sites and to Orbitz (a booking site launched in June by a consortium of American, Continental, Delta, Northwest and United), the airlines are effectively launching an assault on a consumer’s ability to get independent sources of comparative information, Ruden said.

Those large airlines might disagree with this if they were willing to talk, which they aren’t. They might say that life is getting easier for the consumer. Shouldering the middleman out of a transaction typically means less markup and a tighter relationship between producer and consumer.

But the world of air fares is more complicated than that. The first problem for traditional agency customers will likely be an increase in agency service fees. Later, if the airlines can dominate the sale of tickets, travelers could find themselves starved for sources when they want advice.

“People invariably need to have human assistance, whether it’s from the airlines or from the travel agents,” said Steve Loucks, a spokesman for Carlson Wagonlit Travel, a Minneapolis-based network of 1,100 travel agency offices.

Loucks said an informal survey found that within 11 days of American’s commission-cutting move, 70% of 105 responding agencies had increased their fees (the survey didn’t ask for specific amounts), and 25% more were still deciding what to do. The rest planned no increase.

At Leisure Travel Group, a cooperative marketing organization in Marina del Rey with about 150 member travel agencies, president Michelle Morgan expects most of her member agencies to increase fees from $15 to $25 per airline booking.

As recently as six years ago, four out of five U.S. travel agencies provided their services free to consumers, relying on commissions for income. In 1995, Delta Airlines led the first round of substantial commission-cutting, followed almost immediately by most of the other major carriers.

Five rounds of commission cuts have followed, prompting many agent-owners to close or sell their businesses to larger agencies. The Airline Reporting Corp., an Arlington, Va., company that accredits most of the travel agencies that sell airline tickets, reports that the number of accredited agency offices in the U.S. slipped from more than 33,500 in 1996 to 29,368 in June 2001.

As of May, when the American Society of Travel Agents last surveyed its members, 88% were levying service fees that averaged $13.21 per ticket.

Some agencies timed their fee increases for Sept. 1. Some structured them toward pricier tickets or corporate clients. Others planned to wait a bit longer and give the question more thought.

But really, “there’s no choice,” said Ron Archer, co-owner of Archer Travel Service in Montrose. Archer estimated that for agencies in Southern California, the commission cuts mean a loss of $7 to $9 in agency revenue for every airline ticket sold. He predicted that booking fees will soon average $20 to $25. But he also predicted a bright future for the agencies that can sell themselves as expert advisors, not just reservation takers.

In the end, Archer said, “the rich get richer and the passive go broke.”