A shot has decidedly been fired across the bow of the ship of the travel agency community. While details are still slow in coming out, our “partner”, United Airlines, has taken the lead in a move that has been anticipated by many, including me, for quite some time. United has advised that some “select” agencies will no longer be allowed to accept credit cards on behalf of United. This move is a clear indication of the future of the industry, a clear affront to the consumers and is nothing more than a masked fare increase, and a pretty good sign that the airlines (United in particular) are in dire straits.
While ASTA has mounted an aggressive attack on Capitol Hill, travel agencies cannot sit idly by and wait to see what comes next. More likely than not, you did not receive the memo, so this may not affect you just yet. But you can be sure that this position has sent a very strong signal to the other airlines who are watching this very carefully. There are several critical issues involved here.
- Quite frankly, most agencies cannot afford to assume an additional 2% to 4% (or more) to sell a product where we already are not earning any money.
- Agencies have typically been a high credit risk. They typically do not have much equity since the industry margin is 10% and historically, the transactions have been processed by the vendors. When commissions were eliminated and fees entered the scene, it was very difficult to obtain a merchant account where your average daily volume exceeded $1000. In addition, if you are able to get an account to handle the volume, you may be subject to a hold on your funds for up to 90 days.
- Accounting will be a nightmare and the agencies that received the memo will likely not make the July 20, 2009 date. Transactions for United will need to be processed completely differently.
- The issue of debit memos was not addressed. Will United still be allowed to issue debit memos for perceived infractions?
- Host agencies may quickly become a thing of the past—or prohibitively expensive. While travel agencies operate on a small margin, host agencies tend to operate on a slimmer one and are unable to absorb the additional cost. On the plus side, MLMs may also become a thing of the past as well since so little of their income comes from travel, they will not be able to support the additional fees.
- The consumer, under the new program, will have no recourse against United. By processing the transaction, the contract is between the agency and the consumer—not the airline. So when a client denies a charge, the agency will be debited even though it may be because United failed to provide a service. Any service issues now must involve the agency.
- The client has no more consumer protection. If United goes belly up (wishful thinking), the airline owes the client nothing. They may owe the agency something, but that does not help the end user. Quite honestly, if a carrier went bankrupt and there was a rush of charge denials, it could literally put thousands of agencies out of business in short order.
There is not one easy solution. Clients are married to their points and most corporate travelers double dip on airline points (for the coveted elite status) by paying with credit cards. Clients are not going to embrace paying an agency with a check or cash—besides it is a bad business practice. In a similar vein, shifting to another carrier may not always be possible; but if there ever was a time to demonstrate the ability to move market share, this is it.
United has indicated that the agencies involved at this point are not the heavy hitters. This is most likely a test to see if they can get away with it. And others are watching. Agencies need to assume that this will not stop with United nor will it stop with a handful of agents. For those who lived through the elimination of commission, you know what the future holds.
So, how do you move forward from here? Contact your current merchant provider and find out what their restrictions would be. Be sure to let them know your estimated United volume as well as potentially all of your air volume. If they are unable to accommodate you, contact your bank, and then finally shop around for merchant accounts.
Assume that the cost of processing the transaction will be placed on you and begin to rework your business plan. It does not need to be put into action just yet; but have it at the ready for when you need it. Look at your current fee structure and decide how to best revise it. Do you want to utilize a flat fee, percentage, or a combination?
Keep in mind that the airlines are not the only ones that are incurring the merchant fees. Plenty of other suppliers have seen the airlines survive when commissions were eliminated, and you can be sure they are watching to see if the agency community is willing and able to absorb yet another cost for someone else’s business.
This is still very early and there are many questions still to be answered. But make no mistake, this is indeed a shot fired directly at the travel agencies. Gerald Arpy (American CEO) and Richard Anderson (Delta CEO) in April stated, very publicly, that they see a future when agents will pay them to sell their product. As a matter of fact, it was reported on June 22, 2009 that Arpey still held his beliefs. Do you think it was a coincidence that United’s letter was mailed the following day? The future is now, and we had best be prepared!