Travel Agents Prepare to Fight United on New Card-Acceptance Policy

A move by United Air Lines Inc. to shift to certain travel agents the costs and other responsibilities for ticket sales on credit cards has the industry in an uproar and has prompted a leading trade association to file a letter with the U.S. Department of Justice asking the agency to watch out for such actions by other airlines. “I filed a letter asking them to be super alert for any collusion here,” says Paul Ruden, senior vice president for legal and industry affairs at the American Society of Travel Agents. Ruden, who says he hopes to meet with Justice officials on the matter, says his letter summarizes United's action but stops short of requesting legal action. The Alexandria, Va.-based association on Friday sent a letter to United demanding that the Chicago-based airline rescind its policy, which takes effect July 20 and forces the selected agents to process ticket sales on their own merchant account rather than on United's. Ruden says so far ASTA, which represents some 12,000 members, has had no response from the company. Queried on the matter by Digital Transactions News, United would say only that the move was prompted by rising card-acceptance costs. “Credit card processing costs are escalating at a high rate and represent several hundred million dollars of cost each year,” a spokesperson said in an e-mail message. “We are continuing to explore ways in the current economic environment to reduce our distribution costs and run an efficient airline.” United, which unveiled its new card policy in a letter dated June 19 and sent to select travel agents, refuses to say how many such ticketing offices have been targeted or what percentage of the airline's ticket sales they account for. Ruden says “under a dozen” members received the letter and contacted ASTA. He speculates the number of affected agencies may be small?perhaps no more than a dozen?and may account for a small volume of United sales. But he fears the move could be a trial balloon to measure reaction in preparation for making the policy apply to all agents. “It may be a fairly small number, but it can't stop there because the stated purpose is to cut costs,” Ruden says. ASTA estimates the policy could impose on all agents, not just ASTA members, some $171 million a year in acceptance costs if applied industrywide. That cost could multiply rapidly if other airlines follow suit. All travel-agent ticket sales on cards in 2008 totaled $79 billion, according to ASTA estimates, with an average discount rate of 3%. At the same time, airlines depend on so-called traditional, or brick-and-mortar, agents for somewhere between 40% and 50% of their ticket sales, with online agencies accounting for another 20% to 25%, Ruden estimates. “The economic prize for getting away with this [cost shift] is very large,” he notes. Currently, most travel agents process ticket sales through an entity known as the Airlines Reporting Corp., which charges the sales to the carrier's merchant accounts. ARC also acts as an accrediting body, investigating new agencies' financial soundness and approving them to sell tickets on behalf of the airlines. With United's new policy, the targeted agencies will be forced to set up merchant accounts of their own or use an ARC account they currently use to process their service fees. Ruden and others say neither option is workable. The ARC accounts weren't designed to handle large transaction amounts, they say, and many agencies may have trouble getting a merchant account. “The travel industry has been seen as high-risk,” says Ruden. But agents will also have to shoulder the financial responsibility for chargebacks related to fraud and other factors, such as poor service by the airline. “You're putting the agent in the chargeback business now,” says Allen Weinberg of Glenbrook Partners LLC, a Menlo Park, Calif.-based payments consultancy. “That's going to kill them.” Also, some processors have steeply increased the sums they hold back on ticket sales as they eye worsening conditions for certain airlines. These so-called holdbacks are meant to protect processors against chargebacks during the time between a ticket booking and the time of the actual flight. Last year, for example, Frontier Airlines Holdings Inc. said a move by First Data Corp. to increase a holdback reserve forced the carrier to file for bankruptcy (Digital Transactions News, April 11, 2008). Such holdbacks applied to agents could be ruinous, observers say. “These agents don't have any balance sheet,” says Weinberg. “The ramifications are so scary.” Nearly one-third of surveyed ASTA members lost money last year, double the number in 2007, according to an association research study.