Airlines – United Airlines, travel agencies, and credit cards

It hasn’t gotten a lot of press outside the travel industry but a recent move by United Airlines may change how you buy airline tickets.

Here’s a brief article from USA Today.

United sent a letter to an undisclosed number of agents warning them that as of 20 July they would no longer be able to issue tickets for United Airlines in which the airline processes the credit card charge transaction.

To understand how dramatic a move this is, you need to understand how the travel agency system works.

The last time you bought an airline ticket with a credit or debit card from a travel agency – whether it was a big on-line travel agency (OTA) like Expedia or a bricks-and-mortar agency like Sally’s On the Go Travel – you would see that the charge actually came through on your account from the airline on which you were ticketed.

That would have been the same in 1999, in 1979, or in 1959.

The airlines charge the card, pay the transaction fees to the banks and credit card processors, and keep the rest.

United’s action would force travel agencies to become credit card merchants in their own right and remit the entire cost of the ticket to the airline in cash.

The result would be that travel agencies who already do not get any commission from the airlines (and have to charge consumers a fee for the research and issuance of the ticket) would need to add a further charge to cover credit card transaction costs. Not to mention the fact that if a carrier goes broke – not exactly an unusual occurrence since deregulation started trashing the airline industry 30 years ago – the travel agency will be left holding the bag.

The fates of the big OTAs and smaller travel agencies don’t always coincide but this is one instance where they would if United’s policy is extended to all travel agencies, and if other carriers match it.

The OTAs (Expedia, Travelocity, Orbitz and Priceline) recently eliminated most transaction fees for airline tickets. The result is that people who may have used the OTAs to price-shop for airline tickets but then went to the airline website directly to avoid an OTA’s fee now have no real incentive to book directly with airline.

But if the OTAs are forced to add credit card fees to the price of airline tickets, their prices will instantly be higher than what the airlines will charge.

Here’s another detail that is obscure to the public but is anything but obscure in the travel industry: the question of GDS fees.

In previous Planes, Trains & Automobiles posts I’ve mentioned the GDS (“global distribution systems”), formerly known as CRS (‘computerized reservations systems”). They are the vast interconnected systems through which travel agencies and airlines sell airline tickets (and car rentals, rail, hotels, etc.) Four systems exist and they include Sabre, Apollo, Worldspan, and Amadeus. They underlie all of the OTAs as well as all other full-service travel agencies.

Every time an airline ticket is sold by a travel agency anywhere in the world, the airline has to pay the GDS through which it was booked a fee per flight segment.

For example, a round-trip from Sacramento to Denver on United booked by a travel agent would incur two segment fees for United. A round-trip from Chico to Denver would incur four segment fees because it’s two segments each way: Chico-San Francisco, San Francisco-Denver and return. I don’t know exactly what the fees are and they probably vary but numbers I’ve heard over the years point to around $3-4 per segment.

If travel agents have to shoulder the burden of credit card fees and thus raise prices, it may push more passengers back to United’s website and call center. Interestingly in that circumstance, the airline would still have to pay the credit card fees but would avoid the GDS segment fees because the reservation was done in-house.

You may be thinking, “Ho hum. What difference does it make because I’m just looking for the lowest price and if it comes directly from the airline that’s fine.” The answer to that is that by reducing the avenues you have to find competitive fares you will be placing all of your trust in the story that the airline chooses to tell you about its fares.

Stay tuned.

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