Agent Issues Agent says United's credit card plan could shutter his business By Nadine Godwin / July 06, 2009 Share 1 -- United plan a headache for GDSs and online agenciesAmadeus, Sabre and Travelport (owner of Galileo and Worldspan) are scrambling for answers about United’s policy to push its credit card fees onto travel agents. But only Amadeus was willing to comment publicly last week.Amadeus, which will take over from Galileo the hosting of United’s internal res system, said the new policy "threatens to disrupt" travel distribution."Airlines need to be cautious about adopting policies which could potentially have a detrimental effect on travel demand," said Amadeus North America spokeswoman Debbie Iannaci. "This action could potentially shift significant costs and risk to travel agencies at a time when they can least afford the burden," which "could have a detrimental effect on demand at a time when the industry needs travelers traveling."Iannaci said it’s too early to speculate about whether the United plan amounts to GDS disintermediation. There has been some speculation that the United action is about renegotiating GDS fees, but as industry consultant Bob Joselyn said, if that is so, "this is an awkward way to do that."Major online travel agencies recently removed consumer booking fees on flights, so their average compensation in GDS incentives and airline commissions would be mostly wiped out if major airlines widely adopted United’s plan, said Jake Fuller, PhoCusWright’s financial analyst.Fuller estimated that Expedia and Orbitz earn about $10 per ticket in GDS incentives and commissions, while Priceline gets about $2 on retail flights. Paying the airlines’ credit card fees would cost the online agencies about $6 to $8 per ticket, he said. In general, online agencies don't pay airlines' credit card fees because they sell their tickets using the agency model. When online agencies do sell air under the merchant model (the distributor marks up a net fare), they pay the credit card fees but are also are liable for fraudulent transactions.-- Dennis SchaalLevels of frustration and anger continued to grow last week as agents, industry groups and travel lawyers began calculating the total impact of United Airlines’ decision to cut off credit card privileges for an apparently random selection of agencies. At least one agent who was put on notice by United said he was "getting ready to go out of business," after considering all possible workarounds and discovering that any alternatives to using United’s credit card processing system would "devastate our business." The agent, who asked not to be identified, told Travel Weekly he could no longer be price-competitive because of the inefficiencies that workarounds would introduce. Moreover, he said his assessment did not even take into account the costs of fees his agency would incur if it were to function as the credit card merchant for United bookings.The resulting inconveniences and higher fees, he predicted, will cause clients to drop away over a period of a few months.With a largely corporate clientele, his agency is particularly vulnerable because its customers expect back-end reports and account-management services. Hence, it is important to clients as well as to the agency to have all data integrated and to automate as many processes as possible.The agent asked to remain anonymous not because of concerns about United’s views but because he did not want his clients to know about the issue until there is no way to avoid the subject. For one thing, he reasons that there could be a last-minute reprieve, although he is not hopeful. He said he sent a letter to United by courier and an email, both asking for answers, and got one reply: United said it would not reveal how it selected the agencies that got letters.He said his agency has had a "perfect record" with United for 25 years. As to the workarounds, United left one door open on the corporate side: The affected agencies can still use the UATP card in payment for United’s services. He called that "a kind of patch, but complicated." The airline-sponsored card can only be used to buy air or Amtrak tickets. The agent said he expects "zero success" in converting clients to UATP because most are "very loyal" to their card programs. All other options involve too many manual steps, he said. He considered three: a hosting arrangement with another agency, booking all United seats at United.com or acting as the merchant, which would mean separate steps to put the business on a card while reporting it to United as cash sales.He said he even weighed paying the $75-per-ticket debit memos United threatened to impose for any tickets his agency issues on United merchant accounts after July 20.As for acting as the merchant, he said, he "couldn’t add on enough" service charges to cover that cost. More generally, he said, if all carriers took this route, it would be impossible to carry that much liability. Agents as merchantsAccording to experts in the processing business, that liability would mean making good on all chargebacks, including when an airline goes bankrupt.Mark Pestronk, the travel lawyer who writes Travel Weekly’s Legal Briefs column, said agencies could argue that they had performed all their duties and so there were no grounds for chargebacks to them. But Pestronk added that while that can work, it takes protections away from consumers.With the threat of such liabilities, agencies that act as merchants would tend to sell away from weaker carriers, thus hastening their demise, said Doug Risser, president and co-owner of Menno Travel/American Express in Goshen, Ind.Becoming a merchant in today’s climate is harder than ever for any business. In addition, aside from restaurants and lodging, travel has always been viewed by card issuers as a risky business because customers pay for the product well before it is delivered, and a lot can go wrong in the meantime. This drives up the merchant fee and the kinds of reserves the card processors demand, which could put a small-business owner’s private wealth or home at risk.Some credit card processors simply won’t take on travel agencies. And when agencies do get accounts, using them can be expensive. Richard Lawson, a merchant service provider specializing in travel, said that agencies generally pay fees of about 3.5%, while airlines traditionally pay 1.25% to 1.75%. In other words, it would be cheaper to reimburse United for the merchant fees it complains about. But that wouldn’t reduce the reserve that card processors require of United, which could be among the carrier’s motives for changing its credit card policy."We are an approved ARC agency," the agent said. "And there are certain expectations associated with being an ARC agency [including] fair business practices without airlines using backdoor methods … seeking to keep agencies from using the system."His comment speaks to a legal argument that Pestronk offered immediately after United sent the letters: The ARC agreement, he said, implies that "the proper way to account and pay for credit card sales is at the carriers’ expense. So, UA’s change would likewise breach the implied covenant of good faith and fair dealing."The outcome of a previous dispute over credit cards suggests that United might also find itself at odds with credit card issuers. That dispute stemmed from British Airways’ decision in June 2002 to stop accepting credit cards in the U.K. for negotiated corporate airfares, affecting about 250 accounts. American Express declared BA had breached its merchant card agreement and dropped it as a preferred airline.A court case initiated by BA did not settle the matter. When the parties dropped the court action to resolve the issue "in a commercial setting," BA accepted the plastic but passed the fees on to customers.In this instance, AmEx declined to comment until "United issues a formal statement."ASTA, on the other hand, acted immediately. Last week, it alerted Department of Justice officials to possible signs of collusion among the airlines in the form of signaling between airline executives. The Society expects to meet with Justice officials as well as relevant congressional committee personnel as early as this week to expand on that theme and emphasize potential consequences for consumers.Viral potentialNot every new idea takes off. In 1980, United tried to reshape agency commissions by going to a flat $8.50 per segment, but the agency reaction was so vigorous — including selling away when no other carriers matched — that United backed down.In 2004, Northwest introduced its ill-fated shared-GDS fee of $7.50 per roundtrip ticket to defray its GDS costs. That died under pressure from the GDSs and others.It is not clear how much pressure United is under now. Some agencies are selling away from United, and trade groups like Ensemble and Vacation.com have been very clear that members should "support suppliers that support you," or words to that effect. The Brussels-based World Travel Agents Associations Alliance, of which ASTA is a member, repeated that advice, adding that it would "notify all travel agents globally of United’s actions and communicate with credit card companies on a global basis."But some carrier gambits succeed irrespective of agent outrage or pressure. Most memorably, carriers matched one another time after time as commissions were reduced, and aviation analysts predicted that United’s credit card strategy would gain traction with other carriers, as well."This will soon become a trend," said consultant Darryl Jenkins. "If it does not this year, there is always next year. But it will happen. Everybody I know has been talking about this for years." Pushing the merchant fees onto others would reap about a percentage point of revenue for carriers, he said.Another analyst said, "If UAL’s move is successful, my guess is that other airlines will follow suit. However, the risk is that other airlines don’t follow and UAL loses support and sales from those agencies that feel screwed."