BRITISH Airways has been forced to tear up its contracts with agents and renegotiate them by the end of August after the European Commission ruled current deals were illegal.
ABTA has warned the decision will be a grave threat to members’ business while BA’s rivals have claimed the new rules could significantly damage the airline’s profits.
BA was fined £4.4m by the EC, which claimed the carrier had abused its dominant position by paying overrides over the past seven years. However, BA has appealed against the decision, claiming overrides are a standard industry practice.
The carrier has been given tough new guidelines which prevent it from offering leisure and business agents incentives on top of basic commissions for meeting annual sales targets. The EC ruled these were ‘loyalty discounts’ and, as BA is a dominant supplier, are illegal as they close the market to competitors.
BA director of sales Dale Moss said:”We are going through the process of pulling down agreements and are moving quickly to implement the EC principles. We are coming at this openly to devise new agreements.”
The airline held meetings with top business and leisure agents last week to explain the ECdecision and to start drawing up new contracts.
ABTA chief executive Ian Reynolds said:”It is potentially disastrous for our members, particularly those who specialise in business travel and those leisure agents who rely on scheduled fares.
“Agents are much more dependent on marketing agreements since the BA Performance Reward Scheme was ditched in March. If it isn’t replaced it is going to drive agents out of business.”
Moss could not put a figure on how much the decision would cost BA in lost bookings. But if BA is not paying overrides it will be less attractive to agents.
Rivals claimed BA’s 1998/99 pre-tax profit of £225m would be wiped out if just 2%-3% of its annual £8.9bn turnover is lost to competitors.
Virgin Atlantic, which brought the EC case against BA five years ago, said the ruling supported its claim that BA acted anti-competitively with sales incentive agreements.
Chairman Richard Branson said: “This is a complete vindication of Virgin’s complaint that BA has been abusing its dominant position in its agreements with the travel trade.”
Branson added that he filed a similar complaint in the US in 1993. If Virgin wins it could lead to BA paying its arch rival $1bn in damages.
Virgin has asked the EC to make the new rules tougher by forcing BA to be more transparent on contracts and route specific. It also wants the decision to include corporate clients.
British Midland supported Virgin’s case and a spokeswoman said the airline was delighted with the result. Ironically, Virgin and British Midland can continue to offer their own override schemes as they are not dominant carriers.
n ECverdict reaction, page 3; Virgin deals, page 4; Comment page 6