How Airline Comissions are calculated, irrationalities thereof

Rohit Khare (
Thu, 24 Jul 1997 19:34:27 -0400

[This is REALLY old bits, but I wanted to archive them to FoRK]
[I haven't seen many of these fees, but I don't use agents often. In the
long term, their business is extremely threatened. Online bookings now have
almost zero commissions... here's one set of middlemen that will have to
scale up, consolidate, and charge more]

Cap Crusaders
Source: Business Traveler International, July 95

Travelers be warned. The new booking strategies travel agents are using to
combat commission caps sometimes offer dubious benefits for passengers,
Mary Hunt reports

It is probably not true to say that American travel agents are getting
used to the idea of commission caps but they are getting creative about it.
And travelers need to be wary about what this can mean to them (see
"Getting Creative About Booking", below). The cap on commissions is $50 for
any round trip domestic ticket with a base fare of more than $500, $25 for
any one-way based more than $250, and remains 10% for tickets under those

Delta put the caps into effect on February 10 and other airlines quickly
followed (see "BT News Report", April), although some waited to fully
install the caps until later in the spring. International commissions have
also come down, at least on the American carriers, with TWA dropping its
international commissions from 15% to 11% in late winter while others had
already begun to drop their international commissions last fall: Delta to
8% on full-fare tickets (10% on others), American and Northwest to 8%
full-fare, 11% others. Continental, United and USAir remain at 10% for all
international tickets.

Early independent and industry research indicates that the effect of
domestic caps will be to drop agency commissions by about one-quarter -
from 9.2% (after tax) to about 7% per booking. The airlines anticipate that
about one-fifth of the tickets issued by travel agencies will be affected
by the caps. And a report from NatWest Securities says that Delta, United
and American can each expect to save over $100 million as a result of the
cap, followed by Northwest at $60 million, USAir at $40 million,
Continental at $30 million and TWA (if it retains the cap) at $20 million.

One immediate reaction in the travel agent community was to pass the cost
on to the consumer. This has been coming for a while. Even before the caps,
agents weren't too crazy about spending time on fare-war tickets that, at
$198 round trip, netted the agency a whopping $18.21 after tax. But at
least they had the commissions on high-ticket fares to offset the low-end
losses. Without that offset, agencies are looking to charge. Within two
weeks of the cap imposition, the two largest agencies in the country,
American Express and Carlson Wagonlit, each announced "service fees".
American Express (only at the 165 AmEx-owned locations, not including
affiliates) said it would charge $20 for any ticket under $300.

If the ticket is part of a booking that adds up to a total cost of over
$500 the fee will be waived or the customer will be issued a $20 credit
redeemable toward a booking of a cruise or tour package at a later date.
AmEx agencies will also charge $10 to reissue domestic tickets. Carlson
Wagonlit's 400 company-owned offices will charge $15 for any single ticket
not part of a larger booking; it will make one change free and charge
$12.50 for additional changes; and it will charge $25 for each cancellation
(in addition to any service charges the airlines themselves may impose
according to the ticket rules). Customers who pay the ticket fee will
receive a $25 coupon toward a tour package.

One last caveat; watch out for steering. Some carriers pay more than others
and while large agencies with corporate clients are unlikely to indulge in
noticeable policy changes, the same may not be true for smaller fish. If
you find that your agent is steering you toward foreign carriers (which are
still paying higher commissions and /or overrides), to Southwest (which is
still paying 10% commission domestically), to TWA (which recently agreed to
repeal the commissions cap at least through September 30 in the hopes that
agents will boost its business), or away from Delta (which agents still see
as the Great Satan), you might want to be firm about requesting
alternatives. MH BTI

Getting Creative About Booking

When caps were announced some agents showed excesses of zeal in looking for
ways to circumvent the caps. Booking domestic trips on international
routings is one such creative element - one that the airlines consider
illegal. For example, if you fly Los Angeles to New York one-way in
full-fare Economy, it will cost you $713, and only net the agent a $25
commission. But if you fly Los Angeles to Montreal via New York, and happen
to get off in New York, it will only cost you $555, and net the agent
$44.40. You can't check your baggage through, and the agency will get in
trouble if it's caught knowingly issuing you a ticket you don't plan to
use, but particularly if a change of airlines is involved, the chances of
getting caught are minimal. (Savings in other classes: First, $898 to
Montreal, $1145 to New York; Business, $726 to Montreal, $1040 to New
York.) Not all creative ticketing is shady, however. For example, when a
traveler books a multi-leg trip, it is generally computed on a round trip
fare basis, thus entitling the agent to a maximum $50 domestic commission,
whereas if the agent books each leg separately, the commissions mount. Take
the example of an "open-jaw" trip New York-Los Angeles-San Francisco-New
York, over a three-day period and not qualifying for any discounts. When we
priced the fare on EaasySabre,the cheapest overall fare we were quoted,
flying United for all legs, was $923. But utilizing the identical flights
and United's fare coded QUA one-way unrestricted fares, we were able to
book the same itinerary as three one-ways for $699. An agent who does this
earns $75 in commissions instead of $50. Similarly, if you are looking to
trade time for money but can't meet restrictions, the agent might suggest
you fly United round trip NY-LA and make a round trip LA-San Francisco -
for a total fare of $622, and a $100 commission for the agent (two round
trips) instead of the $50 they earn for the single open-jaw. Everybody
wins. This is totally legal by tariff rules. MH

Rohit Khare /// MCI Internet Architecture (BOS) ///
Voice+Pager: (617) 960-5131  VNet: 370-5131   Fax: (617) 960-1009