Mark Pestronk is an attorney at the Law Offices of Mark
It is a major honor for me and a highlight of my career to be
asked not only to present a paper today, but also to have helped
organize and judge this conference. Of course, the real
organizational credit goes to John Hawks, whose idea this
conference was, and who almost single-handedly has brought it from
concept to reality. Thank you, John, for the opportunity to help
advance the state of the industry by bringing together all these
legal experts, and placing us together end to end to see if we can
reach a single conclusion.
I am now entering my twenty-fifth year of law practice,
representing travel agencies in trade matters. Most of those trade
matters involve the airline-agency relationship. I would like to
tell you what I have learned in those 25 years. I am like both the
hedgehog and the fox. Like the fox, I know many things; my head is
just filled with facts and trivia. But, like the hedgehog, I do
know one big thing: the seven or so major U.S. airlines have all
the power in the airline-agent relationship, and the agencies have
none of the power.
I see this reality every day in my law practice, in ways large
and small. This is the essential problem for agencies, and I would
submit that the task of this symposium is to figure out how to use
the law to reverse the situation not merely to redress the balance
of power, but rather to reverse the status quo completely to give
agencies the preponderance of the power in the airline-agency
Is this possible, you ask? Can 18,000 mostly "Mom and Pop"
agencies get power over seven giant airlines? I believe that the
answer is yes, and that one means for changing the balance of power
is for agency groups to establish settlement plans that compete
Why is it that, although there are four CRS's competing
vigorously for agency allegiance, there is only one ARC? The answer
is history. It isn't that ARC is the best of all possible worlds,
as Kathi Argiropoulos would have you believe. Of course, ARC has
tried reasonably hard to help agencies: from the Advisory Council,
to the JAB-ARA, to the Arbiter's Rules of Practice and Procedure,
to David Collins' motto that he wants a "level playing field", ARC
has made tremendous strides to be fair, reasonable, and to provide
due process far agencies. But all this is besides the point. It's
just that ARC is like AT&T before telephone deregulation: it
has no economic incentive to negotiate with agencies.
Conversely, why is it that there are four competing CRS's
instead of just one? Again, the answer is history. Our job as
lawyers should be to take the best of history and use it to reform
the worst of history. So, let's proceed.
My insight is that ARC and CRS have much in common. First, they
are airline-controlled. Second, they are regulation-laden; although
ARC's regulations arise by contract and CRS's by government rule,
this is really a distinction without a difference. Third, they are
indispensable to agencies. Fourth, they have reporting mechanisms;
although ARC is used to report sales and CRS used to report
reservations, this is also really a distinction without a
difference. If we stretch our imaginations just a little, we can
see that, in many ways, ARC and CRS have more in common than anyone
has ever noticed.
At the same time, the experience of agencies in the United
States shows a gigantic difference between ARC and CRS: ARC
inhibits price competition, while the CRS is inherently
pro-competitive and fosters price competition. ARC prevents travel
agencies from making more money; CRS is a money-maker. Let us see
what lessons we can draw from this difference and what can be done
to make ARC more like CRS.
How Does ARC Dis-Empower Agencies?
In most industries, the acquisition of volume and market share
enables the acquirer to negotiate more effectively with suppliers.
However, in the travel agency industry, a large travel agency has
no special negotiating power with airlines. I believe that
agencies' powerlessness is largely due to the fact that there is
only one settlement plan. The effect of ARC is to allow airlines to
refrain from engaging in price competition for agency services.
This effect occurs in at least three ways, as follows:
The Uniform Reporting Cycle
Under the uniform weekly reporting cycle, agencies must report
all airline ticket sales on a weekly basis. The reported sales are
automatically deducted from the ARC account through a draft also
required by ARC rules. This practice fixes the price of credit
extended to agencies by the airlines.
I recognize that I cannot offer any economic proof that, if
there were competitive settlement plans, agencies would be able to
negotiate better credit terms. I cannot prove that some agencies
could obtain permission to pay some carriers monthly or even that
some agencies could actually receive a bonus for prompt payment or
for plating everything on one carrier. However, I am convinced that
these favorable possibilities would be present, just as they are in
the case of CRS.
Reporting at Full Tariff Rate
ARC rules require agencies to report all tickets sold at the
tariff rate. The tariff reporting requirement suppresses agencies'
ability to price competitively. If agencies wish to charge clients
a service fee, they cannot include the fee in the price of the
ticket. ARC's reporting system stifles the imposition of such fees
by requiring that they be charged separately from the tickets with
which they are connected.
Once again, I cannot offer any economic proof that agencies
would be able to charge higher or more comprehensive service fees
if the fee were on the ticket, but, again, I am convinced that it
would be so.
Dissemination of Sales Information to
ARC's requirement of reporting sales by individual branch
location enables the airlines to obtain detailed information about
agencies' business patterns. The airlines have, in turn, used this
information to compete directly with agencies and to suppress
agencies' ability to earn override commissions.
Many branch locations are intended to serve a single corporate
account. Discrete reports for these branches reflect volumes for
individual clients. ARC will provide any airline with this
information for a fee. Carriers use the information to sell
directly to agencies' large clients, reducing agencies' volume and
The provision of sales information to the airlines has had an
even more onerous and insidious effect. Before ARC's information
was available, override commissions were paid on the basis of fixed
sales volume targets or sales growth targets. Since it became
available, airlines have abandoned volume and growth-based
overrides for market-share overrides.
In order to earn override commissions under a market share
formula, the share of an agency's sales on a particular airline
must exceed the share that other agencies in the peer group sell on
that airline. The definition of peer groups and the identity of the
locations or city pairs clustered together for purposes of
determining market share are determined by the airlines.
Market-share overrides suppress price competition among the
airlines for agency services in at least two ways. First, they
suppress the overall amount of commission that agencies can earn by
creating a zero-sum game. Agencies cannot increase market-share on
one airline without decreasing it on another. Second, they prevent
agencies from fully benefitting from increases in overall travel
volume. If travel volume rises generally, the airlines retain the
lion's share of the increased revenues. Agencies earn no override
unless their share of the paying airline's traffic increases faster
than the share of other agencies in the peer group. The overall
effect is that market-share overrides reduce the amount of
commission income available to agencies.
While it is true that most of the major airlines now also use
CRS data to determine market-share, they still depend on ARC sales
data in their formulas to at least some extent.
With agency-owned settlement plans operating in competition with
ARC, market-share formulas would be either impossible to administer
or at least so difficult to administer that these stingy,
zero-sum-game formulas would be abandoned. Then, major U.S.
airlines would likely compensate agencies using the same
volume-based formulas used by cruiselines, tour operators, hotels,
and car-rentals. Again, I cannot prove that this would be so, but I
am persuaded by the analogy to CRS, where agency compensation keeps
getting better and better.
How Do CRS's Empower Agencies?
In the United States, the four CRS vendors compete fiercely for
travel agency services. As a result of this competition, there are
major opportunities for profit in CRS deals. In my practice, for
example, I have identified no less than 25 business issues to be
covered in every CRS negotiation 25 ways in which agencies can make
money from CRS contracts.
It is not the inherent economics of the CRS industry that makes
CRS profitable for agencies. It is not that CRSs are so inherently
lucrative that they are driven to share their revenue with travel
agencies. After all, if there were just one CRS one reservations
settlement plan, if you will I am sure that no agency would make
money from the CRS. Rather, CRS empower agencies because of
Making ARC Like CRS
I would like to propose that agency groups set up one or more
plans to compete with the airline-run settlement plans. With
competition, the settlement plan owners will need to offer
inducements for a travel agency to choose one plan over another.
Smart travel agencies will see opportunities for negotiation of
better payment terms and higher commissions.
In addition to receiving better compensation, agencies could use
competition to empower themselves further regarding the
non-compensation matters that ARC directly regulates, such as use
of ticket stock, staffing locations, opening and closing locations,
repayment terms in case of default, and a dozen other matters that
affect the daily business of the agency today. Agencies could
choose the plan that offered the best rules and could even
negotiate their own rules just as they do with CRSs.
Let me close by noting that I do not represent any agency groups
that want to set up competing settlement plans. It is simply that I
see such competition as the best hope for finally doing something
about the "one big thing" that I know.