PLAN “B” - Argentinafor Mr. Marco Palacios NEW AIR TICKET TRADING PROPOSALAIR TICKET TRADINGI. INTRODUCTIONThe following characteristics can be observed in the Argentine market as regards air transport: 1.- Significant increase in this means of transport, with new airline companies and more flights to different places.
2.- A relative decreasing price, through the assessment of new fees and the continuous bonus and special conditions tending to tackle the strong recession of the demand in general.
3.- Little profit margin of the transport companies and travel agencies members of the trading chain, and in many cases, with a negative profit margin due to the high operation and trading costs.
4.- The risk of impairment of quality and efficiency of the services, and therefore, of the safety and comfort of the passengers.
5.- Constant disputes among the different areas generated from the need to lower costs and prices assumed by the parties.
Particularly, as regards the disputes arisen among some airline companies and the travel agencies, we consider it important to understand and highlight the following points:
Travel agents are a supplementary part of the same service of the transport companies. We all belong to the same area and we are not involved in opposed but supplementary activities. Most of the air tickets are sold through the travel agencies. We are interested in the fact that the transport company can render better services regarding quality, efficiency, and comfort, and have no difficulty whatsoever in the profit margin that may prevent that. We are concerned and interested in the safety and comfort of the passenger, the same as the airline companies. We are interested in the market development and thus in the operating volume. We are in favor of the growth of the airline companies and of its profit margin. Taking into account the fact that we are the main sellers of the services you render, it is essential for our activity that the transport companies do not have any kind of problem. If the airline companies have problems, then the travel agencies will also have to face them. If the airline companies are successful, then the travel agencies will also be successful. The transport companies need the travel agencies to sell the highest number of tickets possible. The transport companies are interested in the fact that their sellers do not have any problem preventing them from doing business with the highest efficiency and speed.
If we understand and share the concepts above stated, it will be very easy to understand our efforts to find an alternative solution that prevents the conflicts among supplemental areas of a same activity.
That is to say:
WE ARE A SUPPLEMENTARY PART OF A SAME SERVICE
WE WANT TO FIND A SOLUTION TO THE CONFLICTS.
WE WANT TO BUILD UP TOGETHER
On the other hand, the policy of these concepts is coherent with the principles approved in the Global Consultative Committee ‘s meeting held in London among travel agents and airline companies on October 4th and 5th, 2000.- In such meeting, which was the second held among airline companies and travel agents with the purpose of preparing a new contract for travel agencies, three basic principles upon which the rest of the document shall be executed were acknowledged. Those are the following: 1. Fair Competition 2. Fair Remuneration 3. Fair distribution of the administrative job.
Accordingly, they are also within the context of some of the principles and suggestions of the New Millenium Task Force, work team formed by representatives of travel agents and airline companies. Among them, we can mention the following:
Principles
Ø The Agencies program must be kept in order to benefit the agent, the airline companies and the consumer. Ø The current Agencies Program should be reviewed in order to assure an equitable trade frame between the agency and the airline companies. SuggestionsAs regards the agent remuneration Ø Independent counselors shall perform an analysis of the costs of the distribution of the air product and of the work carried out by the agencies for the airline companies. The results shall be reviewed by the GCC with the purpose of making suggestions to the PACONF. Ø Notice of changes in the remuneration’s structure shall be given with sufficient advance. As it can be observed, the issue under consideration finds its content and importance in all the principles and suggestions above stated. As you can see in this Introduction, our interest is to build jointly, for both of us, for the area. Which will be, therefore, our objectives? Let’s see:
II. OBJECTIVESSummarily, they can be defined as follows: TO DIMINISH COSTS AND INCREASE REVENUE Someone could ask us for which of the two areas. In fact, for both areas, for the airline companies as well as for the travel agents
Our objective respects the fact that both parties earn, clearly framing itself in the concept: WIN – WIN.
But, even more, since it also benefits the traveler, allowing him to freely choose the counseling he deems convenient tending to the efficiency, comfort and safety in the rendering of the transport service.
In order to achieve this objective, we should find a methodology for the trading of the air tickets that allows the performance of the following:
Ø Transparency of the amount allotted for the trading. Ø Neutrality in the organization of the chain of sales that each company decides to implement. Indirect sale carried out by travel agents or direct sale carried out by airline companies. Ø Compulsory application. Ø Free decision for the assessment of the fees and special incentives for the sellers network. Ø Fair remuneration. As it was provided in the Global Consultative Committee. For this last point, it is necessary to consider two situations: 1.- The significant amount of costs incurred by the trading factors, regardless of the fact that such is made directly by the airline companies or by the travel agents. We are specifically referring to the following: a.- The maintenance of very expensive systems of booking. b.- The implementation and updating of state of the art technology as regards communication and information, which are essential for this service. c.-The equipment and operation of sales points in different places of the country, with duly qualified personnel for the service to the customer. d.- Also the high costs of communication and other supplementary costs.
2.- The need for obtaining a logical link between the sale prices and the fixed amount, in such a way that by avoiding on one hand that the disproportion affect the user, the reward of the fixed and variable costs are allowed through an efficient system of measured average.
As you can see from the above stated, our concern is to diminish trading costs and to increase revenues for the airline companies, and at the same time to ensure the revenue of the travel agents, solving the problems which are currently taking place. The question is how to achieve this, when the revenue of the travel agents is at the same time the trading cost of the airline companies. Undoubtedly, we could not achieve this with the use of the current methodology, that is why we propose ourselves and you to make an effort in order to do away with the paradigm and to understand that we can find a better system than the current one.
But before considering our proposal in full, let’s do a brief overview and let’s see which the current situation is.
III. BACKGROUND In the current methodology, the trading cost is included within the fee, within the price of the ticket. In this way, in the event the sale is made through a travel agency, the Transport Companies have to pay the agencies the commissions for the sale as consideration for the service rendered.
As a logical consequence, a dispute among the intervening factors as regards the percentage or allotted amount for these commissions is evidenced, with the resulting deterioration: a) in the commercial relationship among these supplementary parties of a same business, b) in the trading service itself and c) in the attention to the passengers.
This tension between these two parties is not a new issue, nor even an issue originated in our country. In fact it is a long fight held worldwide among the transport companies and their sellers, the travel agents, which takes place in stages with more intensity in some regions than in others, probably due to the higher or lower need originated by the context at that moment or due to the different policies implemented.
At this stage you will ask yourselves: If we are talking about a conflict which has been taking place for a long time in different places of the world, why intend to solve it at this moment, here and now.
No doubt we have to put all of our effort in the same direction and jointly, so that, with the best creativity and the understanding, the policy win – win - win enables us to do away with the current paradigm and to build up a new scheme that allows the achievement of our objectives.
Let’s analyze, then, which is that new system, our proposal:
IV. OUR PROPOSAL. THE NEW PLAN.
The following is a brief summary of the main aspects:
What it is about: It starts with the premise of excluding from the fee of the transport, the amount corresponding to the trading cost of it, showing this cost separately. We propose to replace the commission the airline company pays to the travel agent for a service charge to be paid by the passenger. The amount of such charge will be calculated as a percentage over the amount of the fee and will be included in the ticket as another item, in a way similar to the current D.N.T. or to foreign taxes. In fact, its implementation is really easy. In general terms, it is as if we were talking of another DNT. Once implemented, it will function in a similar way.
Therefore, it does not need any special technological or computing development neither for the calculation nor for the settlement of such concept. The only thing to be done is to create the corresponding space in the record of the ticket and to program its inclusion into the ticket. (Request IATA PSC ).
This should not complicate the settlement of the BSP either, since the calculation of the commission would be eliminated as well as the corresponding line in the settlement. Provisionally, the amounts collected for the service charge would only appear in the agency’s settlement, which would keep that amount.
A separate code will be added in the ticket, as it happens nowadays with the airports tax or the DNT.
Therefore, it will appear as a separate item to be paid by the passenger, resulting as a consequence thereof, as revenue for trading, avoiding the potential conflicts among airline companies and travel agents.
What concept it will have: It will be the consideration for the commercial service. In the ordinary terminology a Commercial Service Fee. ( CSF ). Its determination would be of percentual nature and it would be similar to a commercial right for the issuance of the ticket. Does this system comply with the principles above stated? Of course it does, let’s do a brief analysis of such principles: Transparency: As it is shown separately, its clear specification is provided. Neutrality: It is not conditioning or determining of the election of the means of trading. It allows direct sale or the sale through travel agencies. The collection of this fee benefits both parties. Compulsory nature: It is necessary to adopt rules that hinder the non collection or the reduction of the amounts corresponding to the trading fee. We will refer to this item below in order to synthetically detail which this statutory rule will be. Free decision : This new system does not hinder the setting of special incentives for the sellers network. On the other hand, since it is shown separately, it allows the free assessment thereof by the transport companies. Fair Remuneration: Its transparency and its lack of conditioning make the fair assessment of its amount easy. With the purpose of obtaining a logical link between the sale prices and the fixed amount, it was stipulated to fix percentual values applicable on the corresponding fee. The assessment of its quantum is still pending and it will depend on the joint decision of the airline companies and the travel agencies. Which the Statutory Rule will be: The new method will be supported by a compulsory rule to be passed by SECTUR specifically ruling such method. The Tourism Secretary of the Nation has agreed upon the passing of the new rule. The powers to pass this rule are within the frame of and supported by section 7th of the Act 18829 which textually reads: “ The executive power through the applicable body, will determine the rules to which the activities referred to in section 1 of this act will be subject as regards the basic requirements for the contractual documentation with the users and the availability of forms for claims and suggestions, being also able to rule the rights and obligations of hotelsmanagers and transport agents in their relationship with travel agencies and tourists, as well as any other aspect enhancing the efficient performance of the activities above mentioned. “ Sections 14 and 15 also stipulate the sanctions for the non compliance with this provisions. Section 14 : “ Any default to sections 7th and 8th of this act will be fined up to one hundred thousand pesos ( $ 100,000.- ) and the suspension to operate of up to twelve (12) months”. Section 15: “ In the event of repetition or agreement to avoid or prevent the fulfillment of the provisions set forth in this act and of the resolutions that by virtue of it will be passed, the fines and suspensions may be increased five times.” Sect. 15 of the Ruling Executive Order N° 2182 is also related, and it states: Sect. 15: “The persons referred to in section 1st of the Act 18829 are obliged to respect the official fees and cannot totally or partially assign the commission from transport companies, hotelsmanagers and other operators for their participation to the users. The prices agreed upon with the users shall not be modified, unless third parties rendering such services decide to do so, and such situation shall be duly registered.” It is worth mentioning that the Deregulation Act passed after these rules cannot affect the safety in the rendering of a public service such as air transport. This is evidenced by the fact that Transport is not deregulated and that in case that the “Open Air” policy is adopted, it will require specific rules establishing so. As we can see, the laws in force allow SECTUR, as a law enforcement entity, not only to rule the new methodology but also to establish the percentage to be fixed for the new fee to be implemented. Furthermore, we understand that these provisions benefit the transparency of the concepts involved, and are absolutely compatible with the Act of Consumers’ Defense.
Other records In Canada, there is a system which incorporates a fee through an additional voucher to the air ticket. How it will work:
At this point, we suppose that other kind of doubts might crop up; those related to the performance of the new system, regarding some practical aspects thereof, that is to say, how the system will work. Therefore, we will try to answer some of those doubts:
The effect it will cause
Regardless of the fact that the percentage of service charge is not defined and that it will depend on a joint decision by the agents and the airline companies, you will find two examples below, in which we provided a particular kind of commission without intending it to be a precedent of any kind:
Example 1Sale through agency: As an example, a 9% commission, CSF 9%, was considered:Current Suggested
Fee 1,000.- 1,000.- Commission 9% 90.- -CSF 9% - 90.-
Airline income 910.- 1,000.- Agent’s income 90.- 90.-
Example 2. Sale through agency. 9 % Commission. CSF 9% with a fixed maximum amount of $200.- Current Suggested
Fee 3,500.- 3,500.- Commission 9% 315.- - CSF 9% max.$200 - 200.-
Airline income 3,185.- 3,500.- Agent’s income 315.- 200.-
We understand that, by these examples, it is clear that we are replacing the commission paid by airline companies by a service charge paid by the traveler and which benefit both parties, respecting therefore, the win-win principle. It shall be applied to the International and National Transport : It includes both types of transport. For the purpose of convenience, it can be implemented in stages or as a whole, for both parties. If applied in stages, we could think of first implementing the one related to international transport. We suggest beginning provisionally with the international transport and then with the National one. Its implementation is expensive: We are willing to assume the costs arisen out of the system. How VAT is applied: Although the legal and tax aspects are under discussion and shall be solved at the same time, we can briefly mention that the VAT shall be applied based on the VAT Act, in the sense that what is secondary is attached to the principal base In the case of national transport, the service charge shall be within the scope of the 10,5% and in the case of the international one, it shall not be subject thereto. In this issue, since we are dealing with a new concept, we could consider that the transport is taxed in both cases by 21%. However, the laws currently in force for travel agencies, have peacefully decided that its payment be made in the same way as the principal base. Anyway, a specific rule from the tax administration shall be obtained in case it so determines (See Schedule I, Chapter I) Changes related to SETTLEMENT/BSP Neither of these tasks are hindered. Strictly, it shall be proceeded in the same way as it is done today with the commission since it will disappear and to replace it, the new service charge will be created. That is to say that in the settlement of the BSP, the column corresponding to commission will disappear, and the one corresponding to service charge will appear. The other part of the operation will remain as it is done today. (See Schedule I, Chapter II, III, IV and) So far we have detailed the theoretical and practical aspects of the new system we are proposing, as well as its basis and objectives. As we can easily observe, the new system complies with the following aspects: Ø It is simple. It does not represent more difficulties than the current ones. Ø It is creative. It seems to be the same system with different names, when actually, it implies major material changes. Ø It puts an end to the conflict between two supplementary parties of a same service. Ø It clearly benefits both parties by allowing them to increase their revenues and reduce their costs. Ø It allows us to find a solution to our market and maybe, to be taken as an example for other latitudes. We expect that you understand and approve of our proposal, and obviously as the authors of this project, we are at your disposal in case you need us to clarify some aspect that you do not find here or in the corresponding schedule. To do so, you can reach : Our counselor for administrative and accounting matters: Dr. Pascual A. Barbieri 4312-5427/9923/9574 from 10 to 12 am. For legal matters: Dr. Luis Moretti 4341-9245 from 10 a 12 am. Basis and conceptual matters: Mr. Marco Palacios, our President 15 5318-3645 24 hs a day. SCHEDULE ICHAPTER I.VALUE ADDED TAXAs regards the treatment of the new concept of this tax, the current tax treatment for travel agents’ commissions needs to be considered. In fact, it is very important to point out that commissions as service are taxable in accordance with the provisions set forth in sect. 3rd of the VAT Act itself.
However, in the case of international and national transport not exceeding 100 Km, and in accordance with the provisions set forth in sect. 22 of the Act and of sect. 61 of the Ruling Decree, which allow travel agents to deduct from their taxable base the amount collected for such tickets, and since the amount collected includes the travel agents’ commission, such commissions are actually not subject to VAT.
Obviously, the legislator had the intention of maintaining the complete exemption of the transport service stated in paragraphs 12 and 13 of subsection h) of section 7 – VAT Act, considering that the commissions are inherent to the transport service, which is the principal category.
Accordingly, the current tax construction considers that the national transport commissions exceeding 100 Km are within the scope of the reduced rate of 10,5%. (See for example the authorization of the settlement of the BSP as an input VAT and output VAT document for air companies & travel agencies.)
We consider that the new concept should also be treated in the same way as commissions are treated at present. Although it is a different concept, we do not find any tax reason which requires a different tax treatment.
On the other hand, we do not detect any drawbacks in obtaining a specific rule establishing so. CHAPTER IIBSP SETTLEMENTA special code shall be assigned to the new concept and the travel agent shall settle the net amount of the operation without including the amount corresponding to this special code, as it is the case with his/her commission nowadays. CHAPTER IIIBSP WITH CREDIT CARDIt will be settled in the same way as it is done at present. In the same way as today the transport company charges the commissions involved to the travel agent, it will have to collect the corresponding amount of the new code with the use of the new system. CHAPTER IVAIRLINE COMPANIES’ DIRECT SALESIn this case, the new item will be considered as an amount invoiced by the transport companies for trading service charges.
Daniel Manfredi
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