Latest Pay Cuts Are a Cost Transfer

By Kevin Mitchell

The 20% travel agency commission cut initiated by United Airlines on Sept. 18, and matched by other carriers, is a consequence of inadequate airline industry competition that is of deepening concern to corporate, community, industry and government leaders.

Like the 1995 commission caps, this commission cut is neither reform nor true cost elimination. Rather, the action is a cost transfer to travel agencies and consumers, especially business travelers.

More disconcerting is the fact the cut comes at a time of strong airline profits and stock price performance. Major airlines continue to grow as airline competition languishes. There is linkage between growing airline industry concentration and airlines' despotic determinations of the terms and conditions upon which relationships with distributors and customers will be based.

In little more than two years, airlines have exploited near oligopolistic market power to cut commissions twice, shifting over a billion dollars in costs to consumers; pocket travelers' tax dollars when the federal excise tax lapsed, and raise business fares more than 30%.

This latest development reinforces a change in thinking about airline industry deregulation. There is a growing recognition that the structure of the industry is preventing new competition and is a root cause of irrationally high business fares, lack of responsiveness to distributors and customers and inadequate air service levels for many communities. The problem is of enormous national economic importance because affordable, modern air transportation service is the fulcrum of economic development for communities of all sizes.

The fundamental problem is a lack of competition. Even major corporations that purchase millions of dollars in air transportation services have inadequate competitive choices and face overwhelming airline negotiating leverage and pricing power.

Several questions need to be addressed: Why are corporations, as mega-purchasers of air transportation services, held hostage to unilateral airline actions? Why are agencies that sell 80% of the airlines' tickets virtually powerless? Why are there not more competitive alternatives at the nation's major airports? Why can't midsize communities secure affordable, modern air transportation services to important U.S. destinations?

Important to the analysis is that the major legacy of deregulation is the growth and contribution of the low-fare segment of the industry; its survival is of profound economic significance to the country. According to the DOT, virtually every dollar of benefit since deregulation has come from the low-fare segment. If the future is to include more influence for travel agencies and corporations -- better service to midsize communities -- and rational air fares for business travelers, then that future will be linked inextricably to the growth of competitive alternatives.

There is no other solution except reregulation, which is not desirable.

Kevin Mitchell is president of Business Travel Contractors Corp., a strategic buying and advocacy group located in Lafayette Hill, Pa.

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