Aug 2 2006

A Small LIttle Mathematical Exercise and American Express

So Amex announced its quarterly revenues for the 2^nd quarter. This is a fairly good representation of the year as a whole.

Amex reports travel sales up, commissions down (07/25/2006)

American Express reported that its travel sales climbed 5% to $5.9 billion in the second quarter, but its travel commissions and fees fell 4% to $483 million. In so doing, American Express’ ratio of revenue to sales, or its "effective commission rate," declined seven-tenths of a percent from 8.9% in second-quarter 2005 to 8.2% in second-quarter 2006. Amex attributed the sales increase, which occurred despite a lower level of transactions, to growth in U.S. consumer travel sales, up 34%, and global corporate and international consumer sales, which increased 2%. The transition to online booking was the culprit in the decline in transaction commission and fees, Amex stated.

So lets play a little mathematical game here and try and calculate the impact of the GDS fee reduction to Amex.

If we assume that 80% of all transactions are GDS based. That allows for hotels, tours and Cruises to make up the balance. Then Amex issued over 9 million tickets.

At $13.40 per ticket in GDS fees that means that the value of GDS fees to Amex was $126.5 million. Or about 26% of its travel commissions and fees.

Our calculation then (based on publicly available data shows that for Amex this is a significant hit if the net on GDS drops to an average of $3/Ticket. A cut of nearly $100 million on their bottom line. (ouch). To make this up they will have to up their fees by at least $10 a ticket. So look for ticket fees to rise in new contracts by between $10 for touchless and $15-$20 for full service PNRs.

Expedia’s incentive fees were $100 million from Worldspan last year (full year) so that will have a significant impact on them also.

OK so my mathematical skills may be off a little but this shows that the impact will be hard felt by many. Amex is a diversified company with a good control on their internal costs. I spoke with one of their people (some of you may remember Jan) and at the moment they are doing very little in the way of transactions on the new GDS bypass platform but its coming. Still their costs to service this WILL increase and their costs in Technology will rise.

Now try and apply that to several other players in the industry and you start to see how this can be a slice of cost increase and revenue reduction that the agencies – particularly TMCs will have to bear.

Cheers

Timothy

Timothy J O'Neil-Dunne
Managing Partner - T2Impact Ltd
Global Travel eBusiness
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