Suppliers are cutting commissions and travel management companies are moving towards service fees. How much should companies pay TMCs under this new model? Our Resident Expert, Andreas Wellauer, takes companies in Asia-Pacific through the changes and addresses the issue.

Every time we hear the words “commission cut” in one country or another, we inevitably hear the question: “What is the value of travel management companies?”

This is because many companies still see the travel department as a profit centre, meaning the individual departments pay for travel but all commissions and rebates flow back to travel, in effect showing it as “making money” for the company.

The reduction of commissions and the increasing threshold for rebates will reduce the monies flowing back to the travel department. Soon it will be seen as a cost centre. At this stage many chief financial officers will start looking at travel more closely and start questioning why they are paying for travel management in general and TMCs specifically.

Economic conditions, increased competition by low-cost carriers and strengthening of global alliances will make the complete elimination of commissions a reality worldwide in the very near future. As the Asia-Pacific region is at the beginning of this trend, it has the benefit of learning from other markets.

North America has certainly been at the forefront of commission cuts and the switch from profit- to cost-centre in travel. It started with a gradual commission cut, capping commission at US$50 and ultimately cutting it away. Europe is experiencing a similar trend with numerous variations leading to zero commission. For example, Lufthansa has introduced zero commission but charges a service fee of E30 (US$36) for European and E45 for intercontinental travel for each ticket. The airline announced that travel agencies are exempt from this fee in order not to disadvantage “their partners”, de facto setting a benchmark transaction fee level. Whatever the variations may look like, the future is zero commission not only from airlines but from most service providers.

It is important that a travel department positions itself for the inevitability of zero-commission by being proactive and changing its business model now. Next year’s budget is a perfect opportunity to prepare for such a corporate change.

The first step is a meeting with all the appropriate officers and departments to inform them of all the impending industry changes and the ultimate requirement to pay the TMC a service fee if the company wants to continue receiving any sort of travel services.

The level of this service can range from bare-bone ticketing to high-touch onsite service. Any department positioning itself for such a dramatic change must be prepared to answer the inevitable question: “Why can’t we buy direct from the airline?” In addition, it must be ready to discuss issues such as reporting, fare negotiation through data control, service factors, etc.

Even if commissions are still being paid in your country, it may be advantageous to negotiate net-net deals now while you are still in the driver’s seat. The first ‘net’ refers to commissions, the second ‘net’ refers to rebates and sometimes there is a third ‘net’ that refers to any other perks such as upgrades, free tickets, frequent flyer miles, etc). Besides the logical advantages of having locked in net fares regardless of what commissions are in the future, it is also important to see that the cashflow for your company is significantly reduced. Depending on the country, you do not need to pay a sales tax on the saved portion of the air fare and/or income tax on the refund or rebate monies.

The obvious question will be the amount of transaction fee that you will have to pay the TMC. This totally depends on the level of service that the customer ultimately requires and demands. If online booking tools are a real option in your country, and you can do as much ticketless travel as possible, your transaction fee may be very low. It is not advisable to have a “general” transaction fee for all transactions, rather several levels of fees such as “ticketless with agent assist”, “phone reservation”, “VIP service” and/or “non-air booking” (ie, hotel, car rental, rail, etc). There are some other developments specifically in North America that have helped reduce cost even further. The most highly publicised but also least developed is a so-called direct-connect with the suppliers – a process by which the customer’s online booking tool or TMC books inventory directly in the supplier computer system rather than through the CRS.

Commission cuts may have been initiated by the airlines but now ALL suppliers are very keenly looking at this development. Hotels, rail and car rental make a significant portion of their profits through business travel with large corporations, and are more then happy to go with net-net scenarios. These large companies may lead the new business model.

Whether you are a customer, TMC or supplier, be at the forefront of the industry change.

Andreas J G Wellauer, CCTE, is founder of GALIANT Consulting, which specialises in strategic travel management (www.galiant.com). Mr Wellauer's articles and comments have appeared in many international publications and he has been a frequent speaker and lecturer at global travel management conferences and seminars.

Mr Wellauer speaks five languages, is a member of the Association of British Travel Agents and ACTE, and a graduate of the prestigious Cornell University’s Certified Corporate Travel Executive programme.

GALIANT Consulting helps companies include safety and security issues, cross-cultural training, government affairs and process-flow analysis into any level travel programme, be it based in procurement, professional services, finance or operations. Headquartered in Berlin, it operates globally and has networks in Sydney, London and New York.