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United Airlines enrages travel agents with new credit card restrictions
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A United Airlines A320 at Denver International Airport. United recently sent memos to select travel agents, saying credit card charges made to the airline's credit card processors after July 20 would receive a debit memo. (AP Photo/David Zalubowski,file)
United Airlines has sent a memo to select travel agents, revoking their authority to charge credit cards using the carrier’s credit card merchant facilities, effective July 20. United has not indicated specifically to which agents the notice was sent, however some travel agents in the blogosphere have indicated they believe the carrier sent the memo to agencies with limited United revenue generation, to minimize the effects should the plan meet negative reaction. Many have called the move similar to one by Northwest in 2004 where the airline attempted to begin charging travel agents to sell tickets via the Global Distribution Systems (GDS) used by most agents. That move was negated after several GDS operators intervened, saying it was a violation of Northwest’s user agreement to tack on fees for issuing tickets via their systems.
United’s move affects agents in a similar way, but with greater ramifications for agents. While Northwest’s attempt would have increased the cost to issue tickets for a travel agent alone, United’s proposal would effectively end many agents ability to sell space on the airline. Currently, when a United ticket is purchased through a travel agency, the agent charges the card on behalf of United Airlines, and adds a service fee through the Airlines Reporting Corp (ARC), the clearing house for airline and travel agency ticketing transactions. Membership in ARC bonds the travel agent to limited fiduciary responsibility, such as providing the airline with documentation such as credit card imprints and signatures to assist the airline in investigating fraud and credit card disputes, but the burden of merchant fees and charge-backs remains with the airline. ARC membership allows agencies to operate without the need for their own credit card merchant agreements, which many smaller agencies could not afford or qualify for. The current policy minimizes agent involvement in the financial transaction (thus the term “agent”). Increases to in-house credit card charges would increase credit card fees to agents, and increases in cash transactions reported through ARC may also increase the size of the bond ARC requires from member agencies.
Under United’s new policy, affected agencies would be required to process all United sales as cash transactions, being left to collect the ticket price from clients on their own, either by cash, check, or by charging a credit card to their own merchant account. This works out well for United, as cash transactions are paid by ARC to the carrier in cash with only a commission deducted. Credit card charges are sent to the airline’s credit card processor of choice, and most processors only pay a portion of the ticket price up front – the rest is held until travel is completed. Implementing the program on a larger scale would increase liquidity by increasing the amount of cash the carrier receives from future ticket sales, which in turn helps to preserve liquidity. The percentage of the ticket price that is withheld until travel is completed raises in increments related to the airlines’ cash position. The less cash or cash equivalent the airline has on hand, the higher the percentage of withholding on future sales.
Aside from greater cash flow, United will also benefit in a reduction of credit card service fees by requiring travel agents to process their own credit card transactions. While some travel agents might avoid this by simply making sales on United’s website, the carrier would win in the end by not having to pay commissions to ARC (tickets issued by United are not processed through ARC), as well as avoiding the cost of issuing tickets through the GDS. More complex agencies that offer online booking tools would have to rework their systems. Technological and contractual constraints prohibit agents from “filtering out” certain airlines to be processed differently than others, and only the larger, more complex agencies are able to charge their own credit card merchant accounts for online sales. Most travel agency online booking tools are provided as a turnkey solution direct from the GDS provider, effectively giving web surfers access to the agent’s GDS system while charging a service fee; the cost and complexity of integrating these systems to allow agency direct sales is too great for all but the largest agencies to consider.
United has enjoyed a stellar relationship with travel agents for years; during my days as an agent, it was always rather touching to see United still clinging to the phrase so many other airlines had abandoned in marketing copy: “Contact United or your professional Travel Agent”. It seems for that relationship, as United now says, “It’s time to fly.”
