money men
2 years ago
 

New airline distribution model? Ok, but not without recognition of agents’ value in the chain

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

 
 
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About the Writer :: Special Nodes

Special Nodes is the byline under which Tnooz publishes articles by guest authors from around the industry.

 

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  1. Murray Harrold

    Alexander is right. We cannot have a little distribution, etc. We have to have it all. We also need to clear up this distinction twixt legacy and low cost carriers. Low cost boys cover short haul, simple point to point stuff and nothing more. Legacy have a much more far reaching range. Indeed, one of the big arguments around the expansion of LHR is this whole gambit in a nutshell – the need to have a hub and the need to feed into long haul services. We are already seeing many features being quietly shelved which are costing business dear, for example, remember (in Europe) Eurobudget fares?

    What legacy airlines need to do, is make what they have, work. By trying to have a foot on two stools, all one will finish up doing is falling down between the two. The history of low cost airlines is littered with failures of those that tried to accomplish this balancing act. Only those airlines that have stuck to their guns (eg RyanAir) where people know what they sign up for (ie no prisoners taken, no quarter given) have or will remain, successful.

    The other distinction is the need to differentiate between the GDS system as a means of accomplishing global (not just the rather tunnel-visioned perspective of air travel held by those in North America) – global travel and the problems airlines have in their relationship with the GDS systems. As far as an agent is concerned, the need is to have one system that can move a person form point A on the planet to point B on the planet. How “whoever” wishes to do that, I do not think anyone cares too much, as long as what comes along – what tools I am given – cover everything, quickly, simply and securely. As regards the relationship twixt airlines and GDS systems, well, that is for other heads to work out.

    There has to be a rethink on costs, too. As Alexander points out, agents charge fees and agents need to be able to make money. There are many aspects of travel which airlines cannot do – rather, choose not to do. There are alternatives to agents, of course – for example, airlines can simply employ and lot more holistically trained agents rather than the rather challenged variety of script-followers presently situated somewhere East of Suez. They can offer nothing more than online bookings. At which point, of course, a large chunk of business travel becomes hopelessly unworkable. So agents are a necessary evil.

    The obsession with “cheap” must cease. True, there are those that will go half way round the planet to save $10 but generally speaking, these are no premium passengers. The people that give airlines icing on the cake are more in the front, not the back – and invariably about half way up the fare food chain. They are also becoming increasing irritated by the unbundling of fares and the imposition of extra charges every few meters twixt checkin and seat. As witness the recent twitter conference of American Airlines – anyone ready that timeline will see a) Not one comment praising the unbundling of fares and b) a considerable amount of irritation with general service standards. Indeed, “cheap” is very dangerous from travelers’ perspective. Many of the cheapest of the cheap fares do not even allow changes at any price (an no prospect of getting unused -ahem! – “tax” back, either). In many cases, one has to read carefully the rules applicable to a particular fare, ever bearing in mind the objectives of the client for that travel event. The task is to get the person where they need to be, when they need to be there at the price that represents the best value to meet that objective. So, all this garbage about saying “We can offer you a free bag and seat reservation and a free cup of tea” is total hogwash, if the flight being offered arrives one hour after the start of the clients meeting. Airlines seem to have an issue grasping this simple premise.

    One keeps an open mind about NDA. That said, the sooner someone comes up with something which we can put through its paces in the real travel world, the better. We will then know if airlines have a winner …. or a white elephant. The proof of the pudding and all that ….

    Oh! And Richard, I do not know where you have been these past 10 years but, with respect, agents have not, for a long time, relied on anyone pushing business through their doors. Indeed, I think that is a rather jaundiced view as I would venture that agents have always been acutely aware that it is down to them to get business. The other point is, of course, that in this….errrr ….. “open and transparent (really?) world of digital information”, customers are being taken for a ride left, right and centre. Indeed, tech is beginning to weigh heavily upon the customers pocket. I am not going to give examples of how and where…. but my fellow travel agents know exactly what I am on about :-)

     
  2. Timothy O'Neil-Dunne

    Oh another nail on the head. Transitioning from a “one size fits all” to a Heterogeneous world where some distribution is paid and others are not presents a serious dilemma for the user community.

    Today the accepted practice for LCC distribution is that the consumer and by association the intermediary has to pay. But is that fair? If there is a comparable product would the consumer choose the one that was lower cost or not? No need to answer!

    But we have a situation where the GDS model tends to fall apart. In Germany for example it is well known that the largest airline group is paying a far lesser fee to the largest GDS than its brethren. In effect that means that the other airlines are indeed cross subsidizing that one airline. I wonder how the competition authorities view what is in effect a subsidy by one group of airlines to the largest airline in the market? is that fair and equitable? Again don’t answer – these are rhetorical questions. I am posing them because these are all valid points allied to Alex’s core question raised in his article.

    I believe that this is an honest debate that the industry needs to have out in the open.

    Any takers?

    Cheers

    Timothy

     
  3. Stuart

    Good article Alexander.

    “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.”

    Aye, now there’s the rub…

    Let’s take it further though.

    So one, fairly experienced consultant at an agency on say $40-50K a year can book say 800-1000 complex bookings or say 6000 GDS sectors pa.

    Now airlines pay say $20-25K to the GDS for said sectors (of which, incidentally, the agent gets maybe 20% but 20% guaranteed is better than nothing…)

    So if a good consultant can do 6000 complex sectors a year how much would it cost an airline to get that business direct?

    Do they really want to set up 5 or 6 Trailfinders-style centres (at $1 million a pop and annual running costs of $2million and the rest) to get that biz? That’s a lot of upfront wonga and cost on the bottom line in advance. If an airline CEO lasts 5 years, it’s doubtful he’ll even see that come to fruition in his lifetime….The GDS integrated model is suddenly looking a little healthier.

    Interesting times. Only thing that is certain is that change is coming.

    http://www.tnooz.com/2013/02/19/news/before-and-after-in-the-world-of-passenger-service-systems-for-airlines/

    The smarter airlines will do their sums and think long term (although short-termism is rife…).
    Let’s hope good math(s) stays in fashion….

     
    • Richard Eastman

      It’s been a while since I’ve been involved in a discussion of this nature. On balance, I concur with Timothy … particularly <>

      But I am concerned with Timothy’s premise <> Customers are not cheap and lazy. Customers do not know enough to be cheap and lazy. If customers knew what we (agents, airline staff, consolidators, tour operators, etc.) know – then they’d be in the travel business.

      The problem is that “we” (as defined above) do not sell the value of our services. “We” just “do it” … and expect the customer to know what we know.

      Murray Harrold says, <>. My reaction to that is that customers will pay for value-add … just as airlines will pay for value-add. So the key is to prove the value-add … to create a need or a desire for the value-add that you bring to the table. But most agents/agencies in particular have grown accustomed to having somebody else (airline, tour operator, cruise operator, etc.) drive business through their door – and don’t understand that in the open and transparent world that the digital information era is rapidly becoming, it is necessary to create and promote your own value-add. Without it … you become a commodity offering; competing solely on the base of price (or lack there-of where others perceive that they can get the same value-add for free using a different medium).

      People pay more when commodity items are packaged together … and essentially, packaged commodities become goods. If you package a number of goods together … particularly if it’s tailored to a specific customer or group of customers; you offer a service. Bundle a number of tailored services together, and you deliver an experience. At each step up that ladder … from commodity to goods to service to experience … there is the value-add; which creates/commands a higher price than the collection of individual commodities can get if sold separately. It is incumbent on any intermediary in the distribution channel to be sure that BOTH SIDES of the relationship understand clearly the value-add that the intermediary is bringing to the transaction.

      In that sense, it is not about what airlines should/could pay … or customers should/could pay – but rather – about what your value-add brings to each party. Making sure they understand and compensate you for that value-add is what the new digital distribution era (and NDC) is all about!

       
      • Timothy O'Neil-Dunne

        Richard… great to have you weigh in on this topic.

        I will add one caveat. I did not say WHY customers are cheap and lazy. I stated that when confronted with choices this is their behaviour. I do concur that they are bereft of accurate easy to interpret information. That remains a challenge,

        Cheers

         
        • Alexander von Koslowski

          Thanks so much for joining this discussion. Richard, I agree that the customer will recognize the value of added services. But my point is, that the infrastructure created for all fares, all city pairs and developed by the airlines, will now be fragmented and we agents have to pay the infrastructure for
          our fare distribution. We cannot provide a little fare distribution, a little interline or a little ticketing, We have to have it all. The number of segments will decrease, as some major airlines will distribute the fares and tickets via NDC.
          Who is topping the bill for maintaining a GDS infrastructure by reduced number of segments through a GDS.

           
  4. Murray Harrold

    Sorry about some of the terrible syntax and spelling in my last post.

     
  5. Murray Harrold

    Well, someone has to pay us, we are certainly not working for nothing. The alternative is that we agents all go away and work somewhere else. It is not really that much of an issue, frankly. Agents do not owe airlines a living. Agents are highly skilled retailers, very good customer service skills and are very accurate. If they employ those retailing and customer service skills to sell travel or widgets is neither here nor their.

    There is an awful lot of travel which airlines neither wish to deal with an much that individual airlines simply cannot deal with. There are many firms who pay their executives to land multi million dollar deals and pay their PA’s to support those executives in that process. They do not pay their executives to work out how to get from Boston to Bangkok and Delhi in a timely and cost effective way. Even on simply routes, firms wish to police their spend… intelligently. Whilst their are many systems that will do this for you, there are none that will evaluate a travel scenario and then take additional factors into account. Any tech policing solution must, by definition, be pretty rigid. There is a lot of upper management who, when the proverbial hits the fan, want to get hold of a person, who knows them well, NOW and fix their problem NOW.

    Customers, as Timothy says above, are fundamentally cheap and lazy. They do not read the rules and view any travel requirement in its simplest form. They do not analyse any travel solution in the light of “will this fit my requirement” purely “how cheap can I make it” Jussy above says that customers will pay if they can see value. Trouble is, customers do not know when they are getting value, most customers would not know how “value” in travel is represented, even if it came and hit them in the face.

    What NDA will look like, I know not. At present, it looks like a severe case of trying to re-invent the wheel. I would suggest IATA et alia stop talking about it, come up with a prototype and give it to some of us hard-core, coal-face agents to play with. We are the people at the sharp end. Who knows? We may even like it.

    But yes. Someone will have to pay us. Failing that, airlines are on their own – and we know they could not cope with that (there are only a few airlines who have good, holistically trained reservation and check-in staff) . Customers are on their own and customers, apart from the very simple point to point stuff – will get ripped off left, right and center. I work in travel because I enjoy it. I enjoy helping others get where they want to be when they want to be there. I make money from another income. If no-one wishes to pay me for my work on the travel side. Fine. It will stop. Personally, I could not give a rancid road-killed rodent.

     
  6. Jussy

    Just because you individually can do something doesn’t mean you’re the best value.

    Just like the music, photography, film, book and travel industries, it is now more accessible to perform activities. For example, just because i can write a song and send it to iTunes doesnt mean i will be listened to. Just because i can write a book on travelling south america doesnt mean it will be read. Just because i can book a RTW flight, doesnt mean i will get the best value.

    The doing got easier but sorting through all the information got harder. What this evolution did do is clearly highlight the companies/people providing no value and the companies/people providing great value. In other words, experienced travel agents who offer their clients real value are making more money now than before. Inexperienced 19 year old’s who arent providing value have been replaced by hipmunk.

    The airlines dont need to change, the agents absolutely do. We, customers, are happy to pay when we can see value.

     
    • Timothy O'Neil-Dunne

      I think I have to disagree – slightly. Customers are not happy to pay. They are cheap and lazy. Given prima facie the same thing they will choose free every time. Just look at the percentage of those who cross from Free to Premium in a FREEMIUM model.

      What I think Alex was saying is that there should be some value in the work done by Agents. The challenge is that at the moment there are several players operating in the space who are not being compensated for their performance. For example with many OTAs not being paid by suppliers and not by consumers – who pays becomes an interesting question.

      Just an opinion

      Cheers

      Timothy

       
      • Jussy

        I don’t entirely disagree with that.

        If customers aren’t happy to pay for your product than there is something wrong with your product or who you think your customers are.

         
  7. Timothy O'Neil-Dunne

    I think this is a fair description of some of the key issues. Rather than the opaque and somewhat oblique cases put forward by some “consumer advocates” – cutting to the core of the issue for the intermediary channels – IE financial compensation i- s a more honest approach.

    In my view there has been a lot of BS spoken about the consumer impact of restriction of choice. This has been manipulated.

    There is a lot of focus to try and get the regulatory bodies (US DoT and the EC DG-MOVE) to regulate via mandating the display of fees in a form that the GDS alone can handle. That is patently incorrect and an unwarranted intrusion by Government into the commercial process of distribution. Doesn’t stop those who would directly benefit from that enforcement from trying.

    It is in everyone’s interest that transparency – warts and all – should be the governing principle in dealing with the issues of NDC and the stakeholders and of course the consumer. This is a sea change event and open debate should be encouraged.

    Cheers

     
 
 

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