Mark Pestronk
Q: Some agencies get very high commissions from the world’s major airlines (sometimes exceeding 10%), but when our small travel agency asks a major airline what commission we will receive, the answer is usually zero. Why don’t the major airlines offer the same commissions to every ARC-accredited travel agency? Was there ever a time when they did? What happened to cause such divergences today?
A: Until 1985, domestic and international airline commissions were fixed by two airline cartels: the Washington-based Air Transport Association, which was controlled by major domestic airlines, and Montreal-based IATA, which was controlled by the major foreign airlines. A U.S. government agency conferred antitrust immunity on the cartels’ price-fixing agreements.
Commissions were fixed at different percentages at different times, but they generally averaged about 6% or 7%. Then, in the mid-1980s, antitrust immunity was revoked by the U.S. government, which meant that airlines were free to compete for agency business.
Because of airline competition and effective pressure by agency association leaders, commissions gradually rose to 10% and stayed there for a decade. Those were golden years for the travel agency business, when every mom-and-pop agency could earn a living selling airline tickets.
Starting in February 1995, Delta capped domestic commissions at $50 per ticket; other carriers matched, and there followed an avalanche of cuts by other carriers for a decade. By 2005, the official position of all U.S. and most foreign carriers was that they did not pay commissions at all.
However, a commission rate of zero was unsustainable because airlines needed to compete for travel agency loyalty. Therefore, each major airline entered into confidential, bilateral agreements with each major travel agency. Under those agreements, commissions generally vary by fare type, so undiscounted first-class and business-class fares pay the most commissions and basic economy pays nothing or next to nothing.
Under the bilateral agreements, most large agencies also receive overrides, which are bonus commissions based on the agency’s share of tickets on the override-paying airline versus all agencies’ share in a defined market. In other words, overrides reward extra loyalty.
Newer override agreements are generally offered by one of the Big Three U.S. carriers on behalf of itself and many of the carriers in its alliance (Sky Team, Oneworld and Star Alliance). Some agencies have override agreements with all the alliances and manage to earn overrides from all of them.
Commissions and overrides together can approach 10% of airfares. When you add in client-paid transaction fees and the extinction of commission rebating that was popular decades ago, the biggest U.S. agencies may be better off today than they were during the golden years.
Smaller agencies, including startups, are not left out in the cold. They and their subagents can join commission-collecting agencies as independent contractors or ARC-approved branches and share in the big agencies’ revenue.
The businesses at all levels appear to be happy with the verticalization of the retail travel industry.
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