New AA Travel Agency Incentive Favors Higher Fares Over More Passengers

By | December 4, 2014

American Airlines this quarter brought to most of its North American travel agencies revised back-end “override” incentive programs. Based on revenue share rather than passenger count, the move may put some travel buyers on guard for higher costs.

It’s conceivable that the program presents agencies a reason to either transact higher fares and/or charge higher client fees. But AA isn’t looking at it that way. Vice president of global sales Derek DeCross today said the idea is to “win a greater share of high-value customers” across all customer segments.

AA Travel Agency IncentiveSources indicated that Delta Air Lines takes a similar approach with agency partners, though it declined to provide information. Like United Airlines, Delta also now bases frequent flyer points accrual on dollars spent rather than miles flown. Corporate discount programs nowadays also emphasize higher-yielding bookings over quantity.

Travel agency executives said they understood American’s rationale, even if the new program will be less lucrative for some. In the past, a narrow focus on market share led to fare wars, which helped push big airlines into insolvency. Airlines always favored higher-yield passengers and for a while have paid smaller, if any, incentives on lower fares. Revenue-share agency programs further cement that strategy.

Under previous marketshare agreements, airlines rewarded agencies that achieved a segment or passenger count target. For example, if the airline had a 25 percent market share, an agency hit the target by booking at least 25 segments or passengers on that airline out of every 100. Now, AA wants $25 for every $100 transacted in that market.

AA’s previous “peer-share-based program” was more than a decade old and too complicated, DeCross said. In the new one, “there’s not a denominator of a peer-based share that is moving around on them all the time.”

AA began developing the program two years ago, even before getting involved in the US Airways merger. It includes bookings from U.S. points of sale on joint business partners British Airways, Iberia, Japan Airlines and Qantas.

While DeCross said AA won’t exclude any bookings from the program, some of the lowest fares count only for measuring an agency’s performance and not for calculating the actual incentive payment.

Feedback from large travel agencies also prompted a change on the data source, traditionally the GDS-provided MIDT information. AA now is using the Direct Data Solutions product developed by ARC and the International Air Transport Association.

“That information is ticketed data, the same data agencies see in their own internal reporting,” DeCross explained.

Spending More?

On the surface, it would seem an added incentive to book high fares could mean business travelers are spending more of their companies’ money.

“You can never assume the agency is doing right by you, if you have any common sense,” said one travel buyer, who requested anonymity while examining an existing TMC agreement. “The travel manager is looking over one shoulder at travelers and looking over another shoulder at the travel company because they are selling fares that supposedly are all that’s available.”

Many corporate policies stipulate that travelers book the lowest available fare for a given itinerary. Ensuring that’s what agencies offer at the point of sale requires some back-end work like audits.

Blackboard corporate travel manager Valerie Fender said it’d be “really irresponsible” but also “too risky” for an agency to deliberately sell higher-priced tickets. “But I do think there’s a tendency to preference,” she continued. “Say the agency is getting close to its target with a preferred airline. Agents might be told, ‘We need some more AA.’ That’s exactly what this program is designed to do. And so in that case, there’s a risk that what’s offered is not the best option for the traveler.”

“Overrides and commissions very much are a secondary consideration when the goal is handling corporate travel,” said Mark Pestronk, an attorney hired by travel agencies. “If you incur the wrath of the travel manager by selling up even once, for no reason other than something that benefits the travel agency, the corporate travel manager will catch that. Is there a built-in conflict of interest with overrides? Well yes, in theory, but in practice it doesn’t work that way.”

Having clients’ backs, though, may come at the expense of diminished revenue from suppliers. TMCs can absorb the hit or try to make it up elsewhere. That can mean new or higher fees charged to clients.

“Travel managers always turned a blind eye to this on some level because they know to some extent it subsidizes the services they get,” explained ARC CEO Mike Premo. “They are not going to get that $7 self-booking fee if the agency is not getting some sort of override. It may not be clear to them what those revenue sources are or how much they are actually getting back, but the model doesn’t work the same way without it.”

ARC offers an accreditation program for companies interested in earning the incentives themselves. ARC has accredited about 300 entities during the Corporate Travel Department program’s history, while 145 now are active.

AA’s DeCross said he hasn’t heard concerns from corporate customers. AA isn’t out to undermine their programs or put agencies in a tough spot, he said. If a traveler works for a company that has agreements with American and another airline, and both airlines are offering a similar fare, “then the travel agency has that discretion to look between those two,” said DeCross. “As long as it’s within corporate policy and the agency is living up to its fiduciary duty, then in essence we are rewarding them for putting that higher-value transaction on AA instead of the other guy.”

Additional info: Sources included eight travel management professionals and executives from five corporate travel management companies.

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