At the Controls

Meetings & Conventions - At the Controls -August 2000

August 2000

Flight instructor: George Odom has convinced his bosses at Eli Lilly & Company that net fares maximize the firm's $50 million in annual air travel.

At the Controls

More corporate planners are turning to net fare deals, foregoing travel agency rebates for steeper up-front discounts

By Cheryl-Anne Sturken

“I hate to say it, but some travel managers have made [a name for themselves] within their corporation by saying, ‘Look at me I’m a profit center,’” says George Odom, manager of travel services and corporate meetings for Indianapolis-based Eli Lilly & Company. He recalls the days when his department, too, raked in rebates from agency commissions on an air travel budget that now tops $50 million. But Eli Lilly chose to turn back those dollars when it signed a net fare agreement one of the first in 1994. Odom, a strong proponent of net fares, admits it isn’t easy for some planners to turn to management after years of showing a “profit” and say, “Actually, it is pure cost-avoidance.”

Anne Kelly is now spearheading a similar metamorphosis at Deloitte & Touche. Just two months ago, the mammoth New York City-based tax and consulting firm, under Kelly’s direction, consolidated its far-flung travel operations, claimed responsibility for group travel and sealed deals with preferred national carriers that placed its $225 million annual air travel budget under a lucrative net fare contract.

To support that deal, the company locked in a contract with a single travel agency to administer its service needs on a transaction-fee basis. “Personally, I was never a believer in the net fare contract,” says Kelly, manager of global travel. “But when you start peeling back the onion of how travel is going, net fares become very attractive. Our savings will be very, very, very significant.”

Net fare contracts airlines’ practice of offering a flat, up-front discount directly to corporations in return for a committed piece of travel volume are quickly changing the game of corporate travel management. They have been around for six years at most. But within the past two years, as the airlines have pushed ticket commissions down from a high of almost 10 percent in 1995 to a current low of 4 percent, embattled corporate travel departments predicting an inevitable end to commission rebates have jumped in ever-increasing numbers to the net fare model.

It’s not a decision made lightly. For four years Pamela Varnon took a hard look at net fares but always opted to stick with the commission rebates she got through her on-site Rosenbluth International travel agents. The sizeable commission dollars earned on the company’s $3 million air budget, of which 80 percent is meetings-generated, just never made switching to a net fare deal attractive enough. But several months ago, Varnon, manager of meetings and travel at San Antonio-based Kinetic Concepts Inc., decided it was time to bite.

“This year, with commissions dropping even further, it was definitely a better option for us,” says Varnon, who continues to contract with Rosenbluth on a transaction-fee basis. “If you are really smart, you go back to your carriers and say, ‘We are willing to consolidate even more business into your hands, but we want an even deeper discount.’”

Profit or loss?
Cost-savings isn’t the only deciding factor for firms on the fence. Buying net fares means foregoing commission rebates and paying for travel agency services. “When commissions get cut, the name of the game suddenly changes, and that is the crux of the problem for many people,” says Deloitte & Touche’s Kelly. “They are wary of dealing in net fares because it means their department will move from a profit to a cost center.” A corporate travel department that shares a 5 percent commission on its $10 million annual air budget, getting 2 percent back from its travel agency, will pull in a healthy $200,000 in commissions a year. On paper, those numbers look good, and the corporate travel manager wins kudos from an appreciative management. Move to a net fare contract, however, and those commissions go away. Instead, the corporation takes the discount up front at the point of sale.

As far as Cindy Heston is concerned, anyone who claims to be running a travel department as a profit center is misguided. “Getting commissions does not mean you’re generating income,” says Heston, manager of corporate travel worldwide at Indianapolis-based Thomson Consumer Electronics, which has had a net fare contract for the past year. “There has always been a cost involved with travel, and it should be seen as that.”

Heston manages Thomson’s $12 million air travel budget, 65 percent of which is under a net fare agreement; the remainder is subject to commissions. According to Heston, savings under the net fare agreement are at least 5 percent greater than what she received under commission rebates.

“You have to ask yourself, ‘Do I want to give the airlines a float on my money, or do I want to hold onto my money and take the discount at point of sale?’” says Heston. “I’d rather have the return right then and there when I buy the ticket.”

It’s easier to make the change if it doesn’t upset the status quo too dramatically. In retrospect, Deloitte & Touche’s transition to net fares was relatively smooth, despite the company’s size and magnitude, says Kelly. Previously the firm, which did not have a corporate travel policy, allowed its various offices to use their own preferred travel agencies. Net fares were part of the broader move to institute a new policy.

“You could say I had a luxury. I walked into our net fare contract with great volume and no broken agency deals or structure behind me,” says Kelly.

Paying the agency
When a firms moves to net fares, commissions go away. And with them go a slice of the agency’s income. To make up for the difference, travel agencies charge corporate clients a per-ticket transaction fee. This covers 24-hour customer service numbers, agents’ salaries, account management and postage.

“All a net fare does is take a revenue stream away from us,” says Ron Wagner, division president of San Francisco-based World Travel Partners and president of the Association of Corporate Travel Executives, a 2,400-member organization of corporate travel buyers and suppliers based in Alexandria, Va. “Now, the corporation has to pay the agency, because the agency still provides services the airlines don’t provide. And if you want those, you have to pay for them.”

Pamela Varnon There is no standard transaction fee. It is up to the travel manager and the travel agency to negotiate a fee that makes it worthwhile for both parties.

Odom of Eli Lilly prefers to negotiate a lower fee and have every operating cost contract labor, ticket jackets, toll-free numbers billed to his company. “This way, there are no hidden costs in my transaction fee. I know exactly what my spend is on each ticket, and I can monitor it and control it better,” says Odom.

“You have to make upper management understand that if you want a service, you have to pay for it,” adds Kinetic Concepts’ Varnon.

The deal itself
How sweet a deal one inks depends on a host of factors. Consider the following advice, culled from corporate travel professionals.

Volume speaks. Knowing where the company’s air travel spending is concentrated is crucial. The volume a company brings to the negotiating table determines the clout it can wield.

“You have to know what your activity is, what your major city pairs are and what your travel pattern is,” says Kelly. “You can’t go to the airlines without that, because that will determine the best airlines for you and your ability to shift volume to them.”

Identify key city pairs the point of origination to disembarkation. These include connecting flights but not stopovers. For example, you might have heavy traffic from New York to Chicago, or Newark to St. Louis to Sacramento.

Group travel counts. Corporations that run a combined travel and meetings department have greater leverage in negotiations because their combined volume is greater, points out Eli Lilly’s Odom.

“By adding the extra volume that meetings generate, you can get a deeper discount.” But, adds Odom, even if a company does not operate travel and meetings on a consolidated basis, it should seek out the meetings manager for details on group air needs, including total spending, key meeting locations and number of seats required.

“The meeting planner and the travel planner should be partners, not adversaries,” says Odom. “They should approach travel as the opportunity to combine their experience to get the best air deal possible.”

Policies wield power. “If a company has a corporate travel policy in place, that demonstrates to the airline that they can commit their travelers to [that carrier],” says Robert Ferruzzi, director of corporate travel and meeting planning for Deerfield, Ill.-based MMI Company, an insurance firm.

Ferruzzi, who earlier this year negotiated a net fare deal with United Airlines, agreed to steer 60 percent of the company’s air travel in United’s direction.

Heston of Thomson Consumer Electronics says her company’s mandated travel policy was a plus in negotiations. “With our travel policy, for employees to be reimbursed, everything must be booked through Maritz Travel.”

Choose a carrier wisely. Think beyond dollars. One airline might offer a deeper discount than another, but it might not service the bulk of the company’s city-pair volume. Or, it might service those cities on a limited schedule or at inconvenient times.

“The goal should be to select a carrier that can service at least 65 percent of your city pairs,” says Kelly, whose deal covers 80 percent of Deloitte & Touche’s city-pair volume. “Some people can get 100 percent, particularly if they move in limited, heavily trafficked markets. Generally, the bigger the company, the more diverse the travel patterns, the tougher it will be to get a good picture. But you can. You just have to dig deep.”

Freebies add up. Everything is negotiable at the net fare table. Which airline is willing to give what may make the difference in the final selection. “The most valuable tool of all in the net fare agreement is the soft dollars the carrier is willing to provide,” says Kinetic Concepts’ Varnon. “Every carrier in the world will give you a decent contract for a piece of the pie, but the carrier you develop a trusting relationship with will help you with freight, upgrades, last-seat availability. You have to work your deal to fit your corporation.”

Numbers aren’t everything. The best deal is one that best fits the corporation’s needs. A carrier offering free VIP upgrades but a smaller discount might actually be presenting a better deal than one offering a heftier discount and no upgrades, cautions Odom, when you consider how many travelers are permitted to upgrade on the company dime.

Think big. Some travel managers, like Ferruzzi, go into the negotiations with a specific figure in mind. Before MMI Company switched to net fares earlier this year, it had a 14 percent discount off negotiated fares. On top of that, the company also got a 5 percent commission rebate.

“I combined those two discounts and then asked for 22 percent, in exchange for giving them an increased share of our business,” says Ferruzzi. “We already had spent years developing a relationship with them, so they knew our volume had gotten better and that we could deliver what we said we would.”

Reality check. If delivering the volume required by the carrier is going to be a real stretch, it is better to pass. Think of it as buying a too-pricey house, where meeting each month’s mortgage payment is a white-knuckle experience.

“You have to be up-front and honest. If they demand a certain volume and you know you can’t produce that in certain markets, say so,” warns Ferruzzi. “The guy from the airline doesn’t want to look bad either. You’ll forfeit the contract when you can’t deliver.”

Proof or dare. The carrier will be monitoring whether a company delivers the volume it promised. The travel manager should be monitoring, too, advises Varnon. If a company’s required volume numbers are down one month, there may well be a reason. Perhaps the firm used another carrier because seats were not available, for instance. The company stands a better chance of getting a credit for that month’s performance if it can prove, through its own internal documentation, that the carrier was at fault.

Keep shopping. Six months to a year before the contract is set to expire, start looking at what is being offered in the marketplace. Says Odom, “You won’t know you have the best agreement unless you go and look. Things change. Locations change. Equipment changes.” THINK TWICE
Do net fares make sense? Rolfe Shellenberger, senior travel consultant for Runzheimer International, a travel management consulting firm based in Rochester, Wis., advises clients against them. Here’s why.

Rolfe Shellenberger You won’t always save money. “Net fares look better on paper, because you have taken the travel agency commission out of the fare. But now the company has to pay the travel agency.”

Net fares are not fixed. “Companies are at the mercy of the airlines, which will raise fares willy-nilly. Let’s say they give the company a 34 percent net fare discount. What happens when the airline raises fares next week? It neutralizes the advantage of that great up-front discount.”

There are smarter alternatives. “Companies should buy their air at commissionable fares, but fares that are reduced. Incidentally, you can get a negotiated fare with an airline on a commissionable basis.”

Who wants to be a travel agency? “Net fares only make sense for corporations who go into the agency business themselves, using their own employees and operating as a cost center. Net fares make sense in that environment, because the commission is irrelevant.”

Wholesale tickets are coming. Soon, we will see wholesale buying of airline seats, says Shellenberger. “American Express has made a tentative move in this direction by acquiring inventory on Continental and Virgin Atlantic and reselling it. This reduces the airlines’ costs enormously.

C.A.S.

AS AIRLINES SEE IT...
Delta Airlines jet

Net fares clearly benefit the airlines.Scott Slater, general manager of corporate programs for Atlanta-based Delta Air Lines, explains how corporate clients also can benefit from these noncommissionable fares.

You see the dollars up front. “It wasn’t the airlines that started the push for net fares. Companies wanted to get the benefit of the lowest point-of-sale cost, rather than waiting for a retroactive revenue stream.”

You have a choice. “Our primary goal is to increase our revenues,” admits Slater. But corporations also are benefiting. We are making both offers, commission or net fares, and letting the customer decide. We are not trying to slant our position one way or another.”

Clients have to deliver. “Corporations will get the most out of their net fare contract by their demonstrated ability to control their business and move their market share to the airline they are contracting with. That is critical.”

It’s not always the answer. “Each company has to do the math for themselves to figure out if the net offer is greater than or equivalent to the commission rebates.”

Fares will fluctuate. “Who can predict which way air fares will go? In the past few years, with the strong economy, demand has been strong and fares have been going up. It could also go the other way. Over time, net fares have proven to perform better.”

C.A.S.

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