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«Regional Development in Airlines and Travel Agents Relationship Dr Fariba Alamdari Air Transport Group, College of Aeronautics, Cranfield University, ...»

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Journal of Air Transport Management, Volume 8, Number 5, September 2002, pp. 339-348

Regional Development in Airlines and Travel Agents

Relationship

Dr Fariba Alamdari

Air Transport Group, College of Aeronautics, Cranfield University, Bedford, MK 43 OAL, UK.

Fax: +44 1234 752207, e.mail: f.alamdari@cranfield.ac.uk

Abstract

After labour and fuel, distribution is the third largest airline operating cost. On

average 17% of airline operating cost is attributed to distribution costs which are associated with commissions to travel agents, ticketing, credit card fees, CRS fees, and promotion.

Airlines both in North America and in Europe have been developing strategies to reduce distribution costs primarily through travel agent commission cutting. In recent years they are questioning the role of travel agents in the distribution chain and renegotiating commission fee structures. As a result, some large agents have introduced a management fee philosophy where the clients, especially corporates, pay a fee to the travel agent in return for predetermined services. Such services includes providing up-to-the minute reports on travel patterns of employees, effectiveness of travel policies, advice on complicated itineraries, etc.

Such changes in airline and travel agent relationships initially started in the US and were followed by the European carriers. However, Asian carriers have been slow in

following their US and European counterparts. This raises a number of questions:

What are the barriers, if any for Asian carriers, to follow their counter parts in Europe and US? Would airlines in the three regions be able to by-pass travel agents and sell directly to their customers? Would the customers prefer to go direct to airlines?

Would there be a variation in the airlines, and agents, relationship in each region?

This paper addresses the above questions by analysing the distribution strategies of major carriers in the US, Europe and Asia. It also discusses the changing relationship between airlines and travel agents, and the trend towards direct selling by airlines in each region. Through desk research and a survey of a selected number of carriers in Asia-Pacific, the future trends in distribution policy of airlines in this region is also assessed.

Keywords: airline distribution, travel agents, commission 1. Introduction The inability of airlines to distribute their products’ cost effectively created the demand for agency relationships in the first place. However in recent years the relationship between the parties has changed, firstly in the US, and latterly within

Europe. The causes of such a change were as follows:

• Airlines’ drive to reduce costs

• Airlines wishing to have more direct contact with their clients Dr Fariba Alamdari, Air Transport Group, Cranfield College of Aeronautics

• Technology providing the possibility of a direct channel between airlines and its customers- both individual and corporate customers

• Large corporates becoming more professional in the way they purchase travel products Distribution accounts for about 17% of airlines’ total operating costs and ranks as the third largest cost for an airline after labour (IATA, December 2000). Commission costs account for approximately 8% of the costs, while ticketing for 2-3%, CRS fees for 2% and credit card fees for 2-3%. It must be born in mind that in recent years airlines have been successful in reducing such costs as illustrated in Figure 1.

Figure 1: Ticketing, Sales and Distribution Costs

After labour costs, distribution costs were the second largest cost item upon which airlines could exert some influence. As technological developments meant that travel agency costs were reduced, airlines started to question the agents’ commission levels, and the value of their services. At the same time they attempted to increase their direct sale mainly through call centres and internet.

An increasing number of corporates developed travel policies to the extent that around 50% of business travellers are subject to some form of policy laid down by the company for whom they work (Mason 2001). Such corporates seek reductions in their travel costs by striking direct deals with airlines. Corporate travel managers, therefore, invite suppliers to tender for “preferred supplier” status. They appear to be looking for efficiency, value, accurate data supply and comprehension of travel policy structures. However they require business travel agents’ expertise to monitor their travel policy and provide them with management information.

While all the above have contributed towards the changes in the distribution model, it appears that it is the airlines’ drive to reduce distribution costs through lowering commission rates that has played the major part.

The changes taking place in the airlines and travel agents relationship in all regions

raise a number of questions which are as follows:

• What is the current distribution model?

• Have airlines been successful in by-passing travel agents?

• Would airlines in Asia-Pacific follow the trends in US and in Europe?

• Are there any barriers to prevent airlines in all regions to sell direct and bypass travel agents?





• Do customers prefer to go direct to airlines to purchase their tickets?

To address the above questions first the airline distribution model in general is discussed, then a review of the developments in the US and Europe in relation to airline and travel agents relationship is provided. To determine the airline and agent’s relationship in Asia Pacific a survey of key airlines in the area is carried out.

2. Airline distribution model

Dr Fariba Alamdari, Air Transport Group, Cranfield College of Aeronautics Airlines can utilise many channels to sell their tickets to the customers. As shown below, they can sell directly through their sales offices; call centres; own website and to corporates. The indirect channels which are opened to them are traditional travel agents; on-line travel agents such as travelocity, Expedia, Priceline.com, last minute.com; on-line travel portals such as Orbitz in the US, Opodo in Europe, and Asia-portal; tour operators and consolidators. The indirect channels are backed up by Global Distribution Systems (GDSs)1.

Figure 2: Airlines Distribution Channels A large proportion, as much as three quarters, of airline tickets are sold through conventional travel agents. The chart below illustrates the major European scheduled airlines distribution by different channels.

Figure 3: European Major Airline Distribution Channels While travel agents are still airlines main channel of distribution, it is the most expensive method of ticket distribution. A comparison of cost of distribution by different channel is provided in Figure 4.

Figure 4: Airline Distribution Costs by Sales Channel - $300 Ticket Source: JP Morgan, 1999

3. Airline and Agent Relationship Developments in the US and Europe Commissions, which after labour and fuel are the third largest expense faced by airlines, climbed from 4.3% of total operating costs in the USA in 1978 to 10.9% in 1993 (Airline Business Oct 2000). This was at the time when US economy was still in recession and airlines were making huge losses. Therefore, the pressure on airlines to reduce costs was more than ever. In February 1995, several US carriers including American, Continental, Delta Air Lines, Northwest and United capped travel agents commission rates for domestic travel at $25 one way and $50 return.

In September 1996, the American Society of Travel Agents (ASTA) took a number of airlines to court claiming that they had broken US competition laws by acting in collusion. The five airlines went for an out-of-court settlement by paying $77 million.

However they denied any wrongdoing, and stated that the action had been settled to avoid the diversion of management time and effort to such matters. However the capping has stayed in place.

In late 1999, most major US carriers slashed travel agent commission rates from 8% to 5%, this was at the time when travel agent groups were complaining about airlines efforts to steer customers towards Internet bookings. US carriers now pay a 5% commission on both domestic and international tickets; commissions on roundtrip GDSs link customers and airlines electronically in the travel market place. Their databases rely on access to real-time inventory and pricing information within the suppliers’ own systems.

Dr Fariba Alamdari, Air Transport Group, Cranfield College of Aeronautics domestic tickets are capped at $50, while those on roundtrip international tickets are capped at $100. Consequently, commission expenses have declined, dropping back to less than 5% of expenses from their high in the early 1990s. Figure 5 illustrates US carriers’ commission costs per revenue passenger mile

Figure 5: US Airline Commission Costs per Revenue Passenger MilesSource: ATA, 2000

Southwest Airlines, the only US major airline, which continued, paying travel agents a full 10% commission with no caps, announced in December 2000 that it would cut agent commissions starting 1 January 2001. Under a new commitment with the American Society of Travel Agents (ASTA), Southwest has agreed to pay an 8% commission on all ticketless transactions issued by traditional travel agencies, and 5% commission on all paper ticket transactions. A cap of $30 on a one-way fare and of $60 on a roundtrip fare will apply to both commission levels.

The majors were not alone in adopting the cuts. Several smaller US carriers, including American Trans Air, America West, Alaska Airlines and Midwest Express, were quick to follow with similar reductions.

Large European carriers began in 1998 to lower agent commissions in their home market from 9% to around 7% for international routes and as low as 4% on domestic routes. European majors also announced that in other European markets they would follow the commission policy of the home carrier. This is because in most cases they are the dominant carrier in the home market, whereas in other European markets they cannot exercise much leverage with agents, as their markets share is limited. British Airways was the first European carrier to reduce commission fees to agents in 1998 and eventually introduced a flat fee policy in April 2001. Table below illustrates BA’s commission levels compared with a typical commission at 7%.

Table 1: British Airways Sector Payments/Roundtrip

KLM also replaced their 7% commission rates with a fixed service fee of £22 per ticket in January 2001 (Travel Weekly, January 2001). Lufthansa is another major European airline to introduce a flat fee from 1 January 2002 in Germany. It is proposing to pay between $8 and $150 per sector booking depending on the class of travel and destination.

Large companies are also becoming more sophisticated in the way they buy travel products and are more aware of their leverage in negotiating volume discounts with airlines to reduce travel costs. An increasing number of corporates have developed travel policies to the extent that more that 50% of business travellers are subject to some form of policy laid down by the company for whom they work. A survey by Carlson Wagonlit (1998) indicated that some 79% of companies have a travel policy.

A survey by Mason (2001) in the UK market demonstrates that larger companies are more likely to have a travel policy as illustrated below.

Table 2: Company Travel Policy by Size Dr Fariba Alamdari, Air Transport Group, Cranfield College of Aeronautics Airlines are also increasingly dealing directly with their corporate customers, bypassing the agency entirely. For example, Continental, which derives over 50% of its revenues from business travellers, has established net fares for its corporate customers. Such fares, which are widespread in the USA, involve major discounts on published tariffs paid directly to the corporate customer. In these arrangements, carriers bypass the corporation's agency entirely, paying it no commission. The agency then is left to derive its income from travel management service fees it charges the corporation.

There appears a steady increase in Internet-generated bookings among US and European airlines with the low costs carriers leading the way as illustrated in Figure

6. The majority of low cost carriers’ on-line sales are on their own web site whereas the large schedule carriers on-line sales are through their own web site and on-line travel agents such as Travelocity, Expedia, Priceline.com and so on. For example 50% of Delta Air Lines’ on-line booking is done by the airline site and the rest by online travel agencies. It can be seen from Figure 6 that major carriers sell a very small proportion of their tickets on-line. This is mainly due to the fact that they are not perceived by passengers as natural.

To reduce the cost of distribution and increasing on-line sales 5 airlines - United Airlines, American Airlines, Delta Air Lines, Northwest and Continental Airlines- in the US have invested in a multi-airline travel portal, Orbitz. Some 30 airlines have become the charter associates of Orbitz. The GDS behind Orbitz is Worldspan with which the company has an agreement to rebate member carriers one-third of the usual GDS booking fee. All other carriers will have their information displayed on Orbitz, but must pay the full GDS fee (Kirby, 2001). In Europe, the same policy has been adopted by BA, Air France, Lufthansa, Alitalia, KLM, Iberia, SAS, Aer Lingus, Austrian Airlines, British Midland and Finnair to launch a European on-line portal called Opodo.

Figure 6: On-line Sales As % of Total (2000)

3.1 Travel agents’ role The role of agents has been changing from reservations to the provision of advice and consultancy for corporations. Agents, both in the US and Europe, appear to have been forced to change the nature of their business by charging corporate and leisure clients management or transaction fees for their services (Alamdari and Mason, 2000). They act as advisors to their corporate clients, helping them develop and enforce travel management policies.

They have also moved away from an over-dependence on airline commissions in recent years, concentrating instead on more lucrative market segments like cruises, tours and vacation packages.



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