Dirty Little Air War

Bully! Crybaby! Northwest and Sun Country brawl for control of the sandbox--and billions in local air-travel revenues

"I do get some calls from people asking me not to touch these subjects, people saying there's no need for the consumer to know," he told the magazine Travel Weekly in 1989. "In fact, one operator threatened a suit, but nothing ever came of it." Wozniak has talked dirty secrets twice on Oprah and used to host radio and cable programs on travel; over the years he has also built Hobbit into a household name that did a reported $110 million in sales in 1997.

It's no surprise, then, that Wozniak relishes a chance to expound on the current air war. "Northwest loves to play with the market," he declares before launching into a trademark lecture. Today's topic: The computer reservation systems that allow travel agents to book flights and issue tickets.

All but one of those systems, Wozniak explains, are owned by airlines; by Congressional mandate, all must carry the fare data of every airline that asks to be included. The systems are the reason major airlines can raise and lower fares in harmony without ever having the backroom conversations that would violate antitrust laws: With a mere peek at a computer, executives can figure out where their competitors are flying, and for how much.

Brian Stauffer

But the systems have allowed airlines to do something else, the travel agent explains: Major carriers have used them to create a powerful set of incentives for travel agents to push their tickets. The airline that dominates a particular market simply calculates which portion of each agency's business it should be winning, based on overall travel patterns in that market. If an agency is selling more than that average, the airline pays it an "override"--a bonus commission that usually hovers around 5 percent of the ticket price, but can be as high as 17.

According to Wozniak, Twin Cities agencies can't earn overrides from Northwest unless roughly three-quarters of the tickets they sell are on that airline--the typical ratio for a hub city, according to industry publications. And at a time when commissions from airlines to travel agents have been falling, those bonuses are almost impossible to pass up. In reviewing the books of local travel agencies that were up for sale last year, Wozniak says, a theme quickly became apparent. "If they didn't have the override, they wouldn't have made any money," he says. "That makes it hard for Sun Country to come in here and compete."

At a recent industry gathering, Wozniak says, he asked the owner of a large Twin Cities agency whether he was now selling more Sun Country tickets. "He told me, 'I can't. I would lose too much money.' Instead, Sun Country has driven down fares so travel agents can offer Northwest as an alternative."

City Pages called eight local travel agents requesting the lowest fares to Boston, one of the routes on which Northwest and Sun Country compete. Four of the agents immediately located Sun Country's $208 round-trip fare. Two more offered information on Sun Country as well as Northwest's $211 fare, and two pushed Northwest tickets. One of those suggested that Northwest's schedule was more convenient, while another complained that her computer was having a hard time displaying Sun Country data. "If Sun Country would ever come up, it would probably be the same price," she said.

The override system hasn't escaped the attention of federal agencies. The U.S. Department of Justice closed an investigation in 1996 because it was "unable to show a direct anti-competitive effect of overrides." Probes by both the U.S. Department of Transportation (DoT) and Congress's General Accounting Office (GAO) asked whether the traveling public was aware that agents' advice might be tempered by the arrangements. The DoT report noted that overrides and other incentives "move travel agents toward the role of a direct distribution agent for a particular airline."

Hobbit Travel does not have an override agreement with Northwest. A few years back, Wozniak says, the airline told his agency, "'We're not doing anything with you because you're booking so much on American.'" In practical terms, he says the disfavor means that airline sales representatives don't call on his agency and Hobbit isn't notified of special promotions and packages. (Northwest's Austin won't comment on the company's agreements with travel agents, except to note that "they are important to any airline.")

Last month Northwest joined other major carriers in cutting agents' commissions from eight percent to five percent. Two weeks ago, however, Northwest offered agents an eight percent commission for ticket sales to fourteen destinations served by Sun Country, as well as to markets served by other discounters that hadn't joined in the commission cuts. When he called to ask about the promotion, Wozniak says, he was told that Hobbit would not be included. He alerted Minnesota Attorney General Mike Hatch, who promptly announced that he considered the extra commissions an attempt to undermine Sun Country, and that his office was investigating whether it should sue Northwest.

Within a day Northwest declared that it had inadvertently excluded Hobbit and up to 40 other travel agencies from the promotion. At press time neither Hatch's office nor Wozniak had said whether that would put an end to the matter. Northwest told reporters it initiated the promotion because it had been put at a "great competitive disadvantage" on routes served by carriers that had not lowered their commissions.

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