United's Merchant Fee Cost-Transfer Faces Tough Fight

Travel agents will face higher costs and competitive disadvantages if United Airlines’ (UAL) new merchant fee policy becomes effective July 20, 2009, the Business Travel Coalition (BTC) says in its analysis of the potential impact of United’s policy. Travel management companies and consumers will also feel the effects of United’s policy and the BTC urges industry wide opposition to the move.

UAL informed selected travel agents that they will not be able to sell or facilitate the sale of UAL tickets using UAL’s merchant agreement facilities. Instead, travel agents will have to provide their own merchant accounts and settle with UAL in cash. The American Society of Travel Agents (ASTA) said the scheme, if successful, would result in a massive $171 million sales cost-transfer from UAL to travel agents.

“Corporate travel managers would see travel program costs rise, as the travel management companies (TMCs) would have to pass through this significant cost transfer from the airline – making this in effect a price increase," Kevin Mitchell, chairman of the BTC said in his analysis. "But not just a price increase – it appears to be a potential price increase targeted at those travelers that use the services of travel agents and TMCs – with corporate travel programs at the front of that line. Travelers booking directly on the carrier’s website presumably would not be impacted.

“The most troubling aspect of this scheme is that this attempt to shift airline sales costs to TAs and on to their customers would only work if the airlines act in concert with UAL to affect such a radical change; something in which the U.S. DOJ should take great interest,” Mitchell continued.

ASTA said yesterday that it would be in contact with the Department of Justice within days.

The BTC noted that the way UAL “preannounced its cost-shifting scheme, to an unspecified number of TAs with an effective date 30 or so days out, leaves it the ability to run this back down the flag pole if its competitors do not agree to match. If UAL’s sales cost-transfer scheme were to be matched by other airlines, the potential impact to consumers and corporate travel programs would likewise be in the billions of dollars.”

The BTC urged corporate travel managers and sourcing executives and the industry associations that represent them “to tell UAL how misguided their scheme is; to press their charge card companies to take steps to fight this development; and to insist that their TMCs represent their corporate clients’ interests straightaway in condemning this injurious policy.”

Potential Impacts: Travel Agencies

1. Many travel agents, especially in the current economic environment, would not likely be approved for merchant agreements at all or, if approved, not at the charge volumes or affordable discount-rate levels necessary to absorb the merchant card risks from airlines. What’s more, the likely high reserves required might be unworkable for many TAs - effectively forcing these TAs to attempt to service clients using airline.com websites, where among other challenges, comparison shopping among airline options is nonexistent.

2. TAs would be forced to either pass the new airline sales costs on to customers or, more likely, for cost competitiveness purposes vis-à-vis airlines, go to airlines' websites where they would not have to pay merchant fees.

3. If matched by other airlines, the order-of-magnitude of the added complexity and newly introduced-inefficiencies would raise TA costs significantly and force up service fees for consumers and corporate travel programs. An increased cost of doing business would be certain as systems would need to be changed (i.e. this is as big as Secure Flight in terms of required system changes to GDSs, mid-office processing, online booking engines and back office accounting). The booking process would have been made significantly more cumbersome and costly to execute.

4. Terminating TA access to the UAL merchant agreement facility would put many small and mid-size TAs at risk of losing business to better-resourced mega travel management companies, further reducing consumer options and weakening an independent distribution system.

5. The TA, instead of being an “agent” in the eyes of consumers and charge card companies, would now be the “service provider,” a.k.a the merchant. This would raise a multitude of new obligations and liabilities for the TA. In becoming the merchant, it takes away some protections from TAs in events such as airline bankruptcies or charge backs related to consumer charge card fraud, because in the eyes of charge card companies TAs would become the merchants.

6. TAs would have to deal with the financial impact of having the necessary capital on hand to transact with the Airline Reporting Corporation (ARC) in cash. This would likely be harmful in the event of fraudulent charge card use. Because TAs in the U.S. clear transactions with ARC, they would be on the line for the entire cost of the ticket, even though the airline is the service provider. Traditionally, since airlines have been the service providers they have had the incentive and ability to take action by denying service to travelers involved with verified fraudulent transactions.

Potential Impacts: Consumers

1. Consumers using TAs would likely be required to pay more in service fees due to increased TA administrative and process costs as well as whatever portion of the merchant fee TAs would be forced to pass on.

2. A weakened independent travel distribution system would diminish consumers’ access to complete and accurate information regarding air travel alternatives.

3. This price increase, targeted at consumers who use a TA, would effectively cause an airfare price-gap between those offered by TAs and those at airline websites, which would drive more unsuspecting leisure and small and mid-size enterprise business travelers to airline websites where comparison shopping, travel policy and TA purchasing expertise would be nonexistent.

Potential Impact: Corporate Buyers

1. This program would affect a cost-transfer, and thus a price increase, of 2.5 percent to 3.5 percent of the total airline purchases to corporations.

2. Corporate travel programs could be expected to absorb millions of dollars in increased transaction fees from travel management companies as complexity and administrative costs are added to the process.

3. Managed travel programs would be undermined, as travelers would see the growing gap between travel-program fares and airline.com fares.

4. Once again, operating in individual industry silos, the interests of corporate customers, distribution system participants and consumers are ignored as potential collateral damage, in this case from UAL’s cost-transfer scheme, is caused across the industry.

Any corporate travel manager or other travel industry participant wanting to stay abreast of developments and or offer comments on the UAL scheme can sign up to do so on a confidential basis at http://surveymonkey.twi.bz/f.

For other information contact Kevin Mitchell at [email protected].


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