UNITED WE FALL: United puts the squeeze on the Flying Public AGAIN!

United Airlines’ Dangerous Cost-Shifting Scheme

Why Consumers Will Pay Substantially More for Air Travel When Travel Agents are Forced to Pay Airline Credit Card Costs

Contact: Kate Hanni 707-337-0328
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BACKGROUND

United Airlines (UA) has told many travel agents and signaled its competitors that it will introduce on July 20, 2009 a radical new cost shifting scheme in the U.S. marketplace. If it succeeds, it will represent the most drastic and misguided scheme ever concocted since the airline industry was deregulated in 1978.

UA will endeavor to shift responsibility for payment of credit card merchant fees, an airline cost of sales, to travel agencies (TAs) who will then have virtually no choice but to pass them on to consumers in the form of higher TA service fees, or to absorb them and risk extinction. This is much more nefarious than just a price increase for consumers; it could remove trusted travel advisors from the distribution chain.

The leisure travel consumer, who purchases some 70% of all airline tickets, is a prime target UA plans to (a) extract supra premium prices from over time at united.com, (b) immediately shift substantial financial risk to and (c) exploit to build cash reserves in advance of its next bankruptcy filing.

Just barely a year after U.S. airlines turned irrevocably to charging consumers twice for product features such as baggage and seats already charged for in the price of an airline ticket, UA is now floating as a trial balloon a scheme that would have the consumer pay its credit card costs. Credit card merchant fees are likewise currently baked into the price of a ticket. This comes at a time when leisure fares have begun a double digit ascent. Consumers need to understand how they will be harmed should this unprecedented industry proposal succeed.

This document will provide the relevant facts and key assumptions, and will call out areas of likely negative impact on consumers.


RELEVANT FACTS

1. UA informed an unspecified number of TAs that effective July 20, 2009 they will not be able to sell UA tickets using UA’s credit card merchant agreements.

2. The policy applies to Visa, MasterCard, American Express, Discover, Diner's Club, JCB.

3. TAs would need to establish merchant accounts with the credit card issuers and settle in cash with UA via the Airline Reporting Corporation (ARC).

4. Under this scheme, some $171 million annually in credit card merchant fees could be transferred from UA to TAs.

5. Targeted TAs that continue using UA’s merchant facilities will receive a $75 debit memo for each ticket sold.

6. TAs can avoid merchant fees and debit memos by booking tickets on UA’s website.

7. UA indicated that TAs may have payment and settlement options through GDSs.

8. It is today not feasible for TAs using their own merchant accounts to book through GDSs. When using a consumer's credit card in the GDS, the charge is to airline’s merchant account. As such, the TA would have to sell “as cash” in the GDS, and accept a credit card outside of the normal workflow.


KEY ASSUMPTIONS

1. For competitive reasons, the only way UA can succeed in implementing its policy on July 20 is if virtually every other large airline indicates it will match UA. In short, UA’s pre-announcement of this scheme is both a trial balloon and smoke signal to its competitors. The additional assumptions and projected consumer impacts that follow are predicated upon a successful industry-wide adoption of UA's transfer of its credit card sales costs to TAs.

2. This UA policy is more than just a wholesale transfer of sales-related expenses; it is targeted. UA is not looking to transfer all its merchant fee costs, just those for consumers who use a TA.

3. Many TAs, especially in today’s tight-credit environment, would not likely be approved for merchant agreements involving high volumes of airline tickets. This would be terminal for these TAs.

4. Some TAs with their own merchant accounts would be at risk of losing their agreements because of a substantial increase in average transaction price; their credit limits would be exceeded. Today, TAs generally use their own merchant accounts for only relatively small service fees (e.g., $30) and not ticket sales (e.g., $300).

5. Those TAs approved for merchant agreements may not find the maximum charge volume allowed, or discount-rate levels offered, sufficient or affordable enough to stay in business. This scheme upends established credit relationships in the travel distribution chain and puts processing costs and financial risk in a place where they cannot and should not be borne.

6. Those TAs approved for merchant agreements may find high reserves and holds required by card companies and processors economically unworkable, forcing TAs to service customers using inefficient airline.coms where merchant fees will presumably be avoided; however, soaring administrative costs, plummeting agent productivity and customer service degradation would soon doom these TAs.

7. Well-resourced larger TAs currently possessing their own merchant agreements, or approved for such agreements because of this new airline industry policy, would be forced to pass the new merchant fees on to customers in the form of higher ticketing service fees. What’s more, most TAs today pay significantly higher discount rates than do large airlines.

8. Those TAs attempting to increase cash transactions would find their ARC bond requirements increasing substantially; in the current economic environment many TAs would simply not qualify for higher levels.

9. Ticketing service fees would be driven to even higher levels as TAs' cost of doing business would skyrocket as systems would need to be radically reprogrammed, i.e., this program is as big as Secure Flight in terms of required system changes to GDSs, back office accounting, mid and front office processing and online booking tools; the booking process would be made significantly more cumbersome and costly to execute.

10. The TA instead of being an “agent” would now be the “service provider,” aka the “merchant,” in the eyes of charge card companies. This risk-transfer to TAs would raise a multitude of new obligations and liabilities such as removing protections from TAs when airlines fail to perform.

11. In accepting merchant fee responsibility, TAs tie their very business survival to airlines’ financial viability. In the case of an airline bankruptcy, the consumer credit card transaction would have been with the TA merchant, but the TA would have paid the airline in cash within a matter of days. As such, the consumer could not request that the credit card company reverse the charge, and the TA would have no way to get the cash back from the airline since it would be just another unsecured creditor. Consumers would demand that TAs refund the ticket amount or if the consumer had not yet paid his credit card invoice, refuse to pay the charge. Consequently, a bankrupt airline would in turn cause the bankruptcy and failure of countless TAs, especially in airline dominated hub airport cities -- while being able to keep cash for tickets that it would not fulfill because it either stopped operating or cancelled the service on which the tickets were sold.

12. In an industry where many companies are serial Chapter 11 filers, it is perhaps no accident that under the UA scheme the TAs that had paid cash for ticket sales are not likely to qualify for the bankruptcy protection given to consumer deposits.

13. TAs would have to deal with the financial impact (e.g., higher costs; reduced financial flexibility) of having the necessary capital on hand to transact with ARC in cash.

14. TAs in the U.S. clear transactions with ARC, and as such, they would be on the line for the entire cost of a ticket in the event of charge card fraud, even though the airline is the service provider. Heretofore, since airlines have been the service providers they have had the means and incentives to take action by denying service to travelers involved with verified fraudulent transactions. For example, it is the airline, not the TA that has the chance after telephone or online sales to physically verify the identity of the traveler at time of check in and to refuse service as necessary.

15. Taken together, these negative impacts are lethally discriminatory toward the TA airline ticket distribution channel and would put it at an insurmountable competitive disadvantage vis-a-vis the airline-direct channel. This sets the stage for TA bypass and considerable consumer harm.


INJURIOUS CONSUMER IMPACTS

1. Consumers who continue to use TAs would pay airlines' credit card sales costs, likely finding TA service fees 50% to 100% higher due to merchant fees being passed on as well as systems reprogramming costs and significantly increased TA administrative and process costs.

2. As TAs go out of business, the independent TA channel for airline ticket distribution will have been substantially weakened, diminishing consumers’ access to complete and accurate information regarding air travel alternatives. And once airlines weaken the neutral TA channel, why would we not expect airlines to start charging all consumers who were to book directly with the airline a “credit card convenience” charge? Ironically, airlines would be in a position to justify such a move later on the grounds that “travel agencies do it.” In any event, there can be no doubt that consumers would pay unnecessarily higher airfares.

3. Better-financed TAs would be able to raise service fees even higher while offering less customer service, especially for those consumers who do not have access to the Internet or who are otherwise uncomfortable with online financial transactions or navigating complex airline websites. The UA move, if matched, would lead to more consolidation and more failures of TAs.

4. New merchant fees and additional costs would create a material price gap between the total-cost of a ticket booked via a TA versus at airline.com. Especially in a recession, unsuspecting consumers would be enticed to airline.com by perceived lower fares, and perhaps short-term inducements, but where the absence of comparison shopping and unbiased, expert TA advice would lead to higher fares paid.

5. As investigated and disclosed by the European Commission last year, the majority of airlines operating in Europe had websites that were misleading and deceptive in the way fare information was displayed. A dominant airline-direct channel, in Europe or the U.S., without the competitive discipline from online and traditional TAs, and with plenty of opportunity to tack on to quoted ticket prices other fees and charges for “extra services” -- would likely lead to ever-higher overall prices paid by consumers for air travel.

6. The consumer would be placed at risk if a booking were made through a TA who in turn had to purchase from an airline in cash and luggage were lost, or there were another airline non-performance problem. Who would be liable since the ticket form-of-payment would have been cash, even though the traveler would have paid with a credit card?

7. The consumer would be placed at risk in a dispute with an airline that, for example, refused to issue a refund. Today, the consumer can work with his credit card company. Under the proposed new process, the credit card transaction would have been with the TA who paid the airline cash. As such, the consumer would have virtually zero leverage with the airline and would be harmed financially.

8. Unknowingly, consumers would help finance UA and matching carriers' next trips into bankruptcy. A consumer would have no recourse vis-à-vis the airline in the event an airline filed bankruptcy after the TA had acted as merchant because UA and matching airlines would have required the TA to pay them in cash, which the airlines would have received from the TA and not the customer. It is the TA that would be a creditor of the bankrupt airline, not the customer. Under these circumstances, it would appear to be an open question as to whether the customer would have any ability to protest payment to the TA as the TA would not have defaulted and would in fact have fully performed its contract with the consumer by paying cash to UA. The TA, in turn, would not likely be able to enjoy any of the protections the bankruptcy law affords to consumer deposits. So, UA would, in effect, be maximizing its cash on hand in the next Chapter 11 proceeding on the backs of TAs and consumers.
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