Northwest`s Move on Commissions Hurts Travelocity, Other Online Agents

5th Mar 2001

A decision by Northwest Airlines to eliminate commissions paid on online ticket sales could spell the beginning of the end for travel agents as carriers move to cut spiraling distribution costs, several travel industry experts said Thursday.
The move deals a direct hit to the bottom lines of online services such as Microsoft`s
and Fort Worth`s
. Reeling from the blow Thursday, traders punished shares of both companies.`s stock plummeted one-third, and Expedia`s, 17 percent. While the online services suffered immediately, many experts saw Northwest`s action as a major step toward eliminating all third-party agents. Although no other airlines have followed Northwest`s lead, several carriers are set to launch a joint Web site to handle ticket sales and further alleviate the need for traditional travel agencies and online travel brokers.
“The writing is on the wall,” said airline analyst Raymond Neidl of ING Barings in New York. “If it doesn`t work this time, it eventually will.”
Starting Thursday, Northwest and its alliance partner, KLM Royal Dutch Airlines, stopped paying Internet sites commissions of 5 percent, capped at $10, for each ticket sold for travel in the United States and Canada. The carriers gave no reason for the move and declined comment. immediately countered with a $10 service fee on all Northwest and KLM tickets, also effective Thursday.
“We felt we had very little choice,” said Jim Marsicano, the company`s executive vice president for sales and service, adding that he was puzzled by the carriers` decision. “Why would they try to shoot the lowest-cost distributor that they`ve got? We can only do the best we can to continue to serve our customers. But we have to recover our costs.”
Shares of stock dropped $7.25 to close at $15 a share. Expedia Inc. stock also took a hit, falling $2.69 to $12.94 Thursday. Mr. Marsicano said the company is sticking to projections of positive earnings for the quarter. “We still believe very strongly in our fundamentals,” he said. But the travel agent industry is less sure about its future, reacting with alarm to Northwest`s decision.
“This could be the beginning of the elimination of all third parties,” said Paul Ruden, senior vice president for legal and industry affairs with the American Society of Travel Agents.
While the group represents traditional brick-and-mortar agencies, many members also offer their own Web sites. He said that Northwest has cut travel-agency commissions four or five times since 1995—going from 10 percent to 5 percent, capped at $50. This has forced agencies to assess extra service fees to make up for the shortfall, he said. Ultimately, Mr. Ruden said, “the customer is going to be left to pay extra fees or deal with the airline.”
“It`s a step in the wrong direction as far as we`re concerned,” said Cheryl Roepke, who manages Triad Travel Agency in Dallas. “It seems that the airlines don`t value our service anymore.”
But Mr. Neidl and others say that ticket distribution costs are expensive to airlines, and getting more expensive. Ending online commissions alone would have saved Northwest Airlines $10 million to $20 million last year, according to an analysis by Merrill Lynch.
Should competing airlines follow suit, total carrier savings could reach $500 million a year by 2005.
Those costs could prove particularly damaging with an economic downturn that could preclude the ability to raise fares, analysts say. Stuart Klaskin of Klaskin, Kushner & Co. predicted other airlines will take a page from Northwest.
“Ultimately, you`ve got to do one of two things: Cut costs or raise fares. And this is just a pure revenue increase, without an increase in fares,” said Mr. Klaskin, a principal partner in the Miami-based airline consulting firm. “I think it`s a terrific move for the industry.”


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