Editorials Arpey doesn't get it April 27, 2009 Share 1 -- Heads were shaking and eyes were rolling when the nation's travel agents read the recent remarks from two airline CEOs about their pesky distribution costs. It started when American CEO Gerard Arpey was asked about distribution costs during his quarterly earnings conference call. In his answer, Arpey made it clear that he and the nation's travel agents have reached the ultimate failure to communicate. For those who missed the original report last week, Arpey said he thinks he's paying too much in "commission and booking fees," and he expressed the hope that a further reduction in capacity would help on that front, "because a lot of those commissions or overrides or booking fees are paid in order to stimulate traffic." He went on to say, "I can see a day, and maybe I'm dreaming here, where those folks who are the intermediary between us and our customer have to pay for access to our product rather than us paying them to distribute our product." A few days later, Delta's Richard Anderson said something similar. There are so many things wrong with these comments that one hardly knows where to begin, so we'll play it safe and start with the facts of American's own quarterly financial report, which showed a revenue drop of 15%. Prudent management would attempt to keep expenses in line with that number, but American was only partly successful. Its largest expense, labor, rose 2.6%, to nearly $1.7 billion. Its second largest, fuel, fell nearly 37%, to $1.3 billion, but a good bit of that reflects global price movements that are beyond the control of American's prudent management. The carrier's third-largest expense, rents and landing fees, was flat at $324 million, which is a little puzzling if the carrier was landing fewer planes. That's it for the top three operating costs. American's fourth-largest expense in the quarter was maintenance, which declined 3.5%, to $305 million, not quite matching the 8% decline in capacity. The fifth-largest expense is a catch-all category that American calls "commissions, booking fees and credit card expense." This declined 15.6%, to $217 million, and remained 5.2% of passenger revenue. Now the CEO is entitled to believe that this is too much, but one can't help noticing that it's hardly a runaway cost. Notably, this line item lumps together three things: commissions, booking fees and credit card costs. In a similar way, Arpey's comment lumps together "those folks who are the intermediary between us and our customer." What's with all this lumping? It's as if Arpey regards travel agents, GDSs and Internet travel sites as some undifferentiated swarm of gnats that buzz around "between us and our customer." What the CEO of American doesn't seem to grasp is the idea of a value chain. A travel agent, for example, can add value to an American Airlines flight, at no cost to American, simply by adding a cruise to it. If American had a more constructive view of the value chain, it wouldn't be talking about intermediaries as if they were gnats that get between it and the traveler. Unfortunately, the CEO of American seems to have completely lost sight of the potential value of intermediaries to bring travelers and service providers together. They say a cynic knows the cost of everything and the value of nothing. We have never regarded Arpey as a cynic, but if these are the dreams that he dreams, maybe we've been wrong all along.