NB: This is a viewpoint from Alexander von Koslowski, vice president of online sales/ecommerce at Dertour
As we have seen around the world – ancillary sales and the unbundling of the airline product has led to profits for both the legacy network carriers and low cost carriers alike.
This has led to network carriers wanting to bring the sale of these products not only through their own direct websites but also via the travel agency channels and it's about time.
We have to recognize that the airline product has changed and this has to be shown in the shopping process.
But, this is where my concerns lie. NDC changes the way airlines’ products are distributed, and in doing so they are changing the business model.
Lack of trust
Airlines in the past did not build trust with their largest customer base – travel agents. They have a long history of cutting commissions, aggressively charging Agent Debit Memos (ADMs) and, in general changing rules to the disadvantage of agencies.
Yet despite this predatory behavior, somehow agencies survived and delivered a decent service, advice, price comparison and not to mention, handling crises such as SARS, the Ash Cloud, bankruptcies and strikes.
The business model for agencies evolved and it worked. As the airlines cut revenue from commissions it was replaced by segment incentives paid by the GDSs. This was the only secured income a travel agency could rely on. True airlines gave some minor support for growth, share shift or marketing support. But since 1995 when Delta Airlines first capped commissions, agency income from selling airline tickets has decreased from between 9-11% to between 2-3% and in many cases and markets around the world to flat zero.
At the same time the agencies supported full service carriers in their battle with low cost airlines while seeing nearly 30% of the airline market share go to airlines who have no interest in working with the travel agencies.
Efficiency through technology
How did the agencies do this?
Automation was the answer. Today most of the tickets are issued, without any human interaction. There are no longer any manual tickets and the majority of PNRs processed by agencies are now handled not just by GDS systems but also by third party technology in either the front, mid or back office.
The infrastructure for this technology capability is expensive and is constantly changing. The need to cover this heavy expense has driven many smaller agencies out of business and lead to a concentration of bigger agencies.
The savings the airlines achieved through agency commission cuts, did not lead to cheaper prices for the consumer. In fact the airlines simply did not cut their costs enough. The amount of money represented by commission cuts is estimated at far more than the GDS costs for the airlines. The resulting savings from the commission cuts were not passed onto the consumer.
Airlines unbundled their costs and in many markets not only cut commissions but passed on higher fees and credit card fees to the consumer. In my assessment in many markets dominated by one player, airlines only pretended that they had cut their costs. Their huge costs of operations were simply still too high.
Staff costs and prestigious management, which can be only compared to the management of the US automobile industry was almost untouched.
Before airlines touched their own infrastructure they preferred to undergo arbitrary or court managed Chapter 11 to get rid of bad business decisions, and other costs such as high pensions that many airlines had chronically under-funded.
Recent studies such as PhocusWright have shown that the switch to direct distribution has stalled. Now the airlines have realized they cannot grow their direct distribution further without increasing the cost of distribution, thus they find a new way to distribute their products.
Enter IATA’s New Distribution Capability initiative
Instead of using the tried and true existing infrastructure airlines want to control the shopping process, by delivering fares and ancillaries from their own system. In my opinion the existing infrastructure of the GDSs is still necessary to compare prices and itineraries with those carriers, who do not take part in NDC.
Further, complicated routings and interline itineraries will still have to be done by the GDSs, particularly for international trips that are more common outside of North America.
Airlines will engage in cherry picking. Taking out the simple itineraries will drastically reduce the number of segments booked through a GDS. The cost for the remaining segments (the most expensive complicated ones) must increase and will force the GDS to reduce their own high infrastructure costs as they lose scale.
Most GDSs have been already cutting costs in recent years. The only solution will be to cut the largest individual GDS cost i.e incentives for the agencies.
With no commissions, lower or no GDS incentives plus ever increasing costs it doesn’t take much to realize that agencies face a bleak future. Covering the cost for the changing infrastructure for agency front desks, internet booking engines etc have to be funded somehow.
Lest you think that agencies are technological laggards let me be clear. They wanted a few years ago (and still do)to introduce direct connect solutions from companies such as G2 Switchworks, Farelogix and LUTE Technologies, but there was a missing business model to invest into those systems.
That meant business the agent moved to a direct connect not only had the related higher cost of running multiple systems, but it also meant that each segment diverted went from the “paid for” model to a “no revenue” model. Hardly an incentive to change. And while the airlines have made noises about wanting to support such efforts, they are rare.
Let me recall the last change of infrastructure, the introduction of the GDS (CRS as they were then called) was supported with financial incentives from the airlines that owned them then. It was attractive to change. Cost reduction of the processes on both the supply side and the user agency side supported that. Now the change will be accompanied by technical challenges without any corresponding compensation on the business side of the equation.
Who will pay?
Investments will have to be made, financed and the costs for agencies must be reflected somewhere. This is likely to be in transaction booking fees for the end customer be they corporate or leisure.
The price differential between direct distribution and agency distribution has to place the agency channel at an even greater disadvantage.
Again the cherry picking will take place. Complicated routings and complex flights particularly for business customers will continue to be shunted to and serviced by the TMCs. This is business the airlines cannot or do not wish to fulfill. It just has to get more expensive. As we will see there will be a further concentration of agencies, as these high costs will prevent the remaining smaller agencies from being competitive and hence drive them from the market.
It is time to have a discussion about the value of non direct airline sales. Anybody, who is using the service of distributing its products has to pay for it. Selling airline tickets is not for free. Agencies are customers for airlines. And they are saving costs for them.
For example, in most markets we reached a fair way to sell tickets by asking the customer for a fee but the difference for a price of an airline ticket cannot be any higher than it is today, without harming the business model.
If there is no need for agencies anymore, neither I nor anyone else will ask to extend their existence, but the ratio between direct sales and agency sales has reached a level, that the agencies are selling a product at a price point, airlines cannot sell on their own, without significantly increasing THEIR costs for the fulfillment.
The travel agency business seems to be looked on as collateral damage in the war between GDSs and airlines. And believe me – airline costs are higher than those of a travel agency. This differential has to be reflected in some form of an incentive scheme.
I am therefore proposing the airlines should start to bring back the model for compensation to the agency channel. We are not asking for fat profits and we want to continue to work towards lower total costs. But we have to have a reliable form of cost recovery. It can be lower net fares for agencies or a certain amount for every ticket an agency can issue.
Further we are more than happy that this information be transparent to the consumer, something we already do for TMCs.
Simple, fair and honest – can we ask for anything less?
NB: This is a viewpoint from Alexander von Koslowski, vice president of online sales/ecommerce at Dertour
NB2: Money men image via Shutterstock