Pankaj Narayan Pandit

AIR-INDIA, as chairman of BAR (Board of Airline Representatives), has announced that travel agents' commissions on international tickets will be reduced from 7 per cent to 5 per cent, effective May 1. Most other European and South-East Asian carriers are also to follow suit.

Travel agents are joining ranks, with the two major trade associations — the Travel Agents Association of India (TAAI) and the Travel Agents Federation of India (TAFI) — announcing a boycott of Air-India. Earlier last year, British Airways and Lufthansa had tried unsuccessfully to cut the travel agents commissions.

Commission cuts, a worldwide phenomenon

Airlines are capping International Air Travel Agents' commissions to reduce distribution costs. For large corporate clients, travel agents already operate on a fixed service fee, based on tickets issued rather than on percentage of published fare. Airline commissions payable to IATA travel agents in India used to be as high as 11 per cent in the 1990s, and 9 per cent till 1997, when they were reduced to 7 per cent.

Airline profitability has been strapped by a series of events starting with a recession in business travel after the dotcom bust, followed by 9/11, the SARS epidemic, the Iraq war, rising ATF (aviation turbine fuel) prices, and the challenge from LCCs (Low-Cost Carriers).

With the advent of the Internet for making bookings, and the options of electronic ticketing, airlines, at last, have an effective travel intermediary in IT.

What, then, is the future of the travel agent? And how much more will technological advances such as e-ticketing transform the travel distribution chain?

Value chain for traditional air travel distribution

Mega airlines are unique in extending their distribution chain through imaginative use of technology. The GDS (Global Distribution Systems) — such as Sabre, Amadeus, Gallileo, and WorldSpan — are technology platforms based on a mainframe real time computer, with a VPN (Virtual Private Network) that connects travel agents with the reservation systems of different airlines. The travel agent and the GDS have shared a symbiotic relationship the last 20 years and have grown profitably, while airlines have been suffering financial losses. Now, with the Internet, they have an alternative medium to distribute their air product.

The new kids on the block — the OTAs

Travelocity.com was the world's first OTA (online travel agency), set up in 1996 by Sabre, a GDS. Expedia was the next OTA, launched by Microsoft, jointly owned by Delta, Northwest, and TWA, and supported by WorldSpan.

The success of these OTAs introduced airlines to the potential of the Internet for selling air tickets. They simplified their fares, and began to attract consumers to their portals. As the airline portals scored over OTAs in terms of transparency of price, better availability of flights, etc, their share of the OTA market grew to 60 per cent.

Wake-up call for traditional airlines from LCCs

Traditional airlines are at last focussing on reducing the distribution costs, which are second only to salaries.

The distribution costs are controllable, if and only if, the traditional airlines attempt to change their business model. This is easier said than done, as can be seen from the boycott by travel agents of airlines which reduce their commissions.

Airlines are also negotiating with GDS to reduce booking fees by declaring a favoured GDS, capping IATA travel agency commissions, moving their reservation offices to cheaper locations by outsourcing.

The distribution costs of airlines are now said to be in range of 15 per cent, down from 19 per cent.

Profitability of travel agents

The industry average of travel agent profitability, PBT/Revenue is 1-2 per cent, whether they are global conglomerates or street-corner travel shops.

The global, multi-location travel agents may not pass on the entire IATA commissions to their corporate clients; they also earn commissions on other value-added services such as sale of foreign exchange, packaged tours, and hotel bookings. Yet such global conglomerates have low operating margins because of the high overhead costs on salaries, administration, communications, etc.

The small travel operator has a much lower cost base, yet is forced to part with most of the IATA commission to meet the expectations of the air travellers. And now travellers are said to check the lowest fare on the Internet, only to buy from their neighbourhood agent.

What future technology holds in travel distribution?

In 1999, at the height of the Internet frenzy, Forrester forecast that the online retail sales in the US will reach $100 billion in 2002. Despite the Internet bust in 2000, the forecast came true , in 2003, when the total online sales in the US touched $120 billion. It is a question of time before the US trends become a global one.

The airlines will simultaneously build technologies of sharing FFP (Frequent Flyers' Programmes), and common airline Web sites with e-ticketing which connects them directly with the customer.

The airline industry in Asia is soon destined to catch up with North America in sales from online channels as well as e-ticketing, as predicted by industry analysts.

Today, few travel agents possess the technological capability or the financial prowess to take on the combined might of the airlines.

The small operators, who cater to the niche market, may survive the onslaught of technology. However, the large travel agents will have to transform themselves using the same Internet technology to offer B2C web-based interfaces for their corporate clients, offer dynamic tour packaging for leisure traveller to outsmart the OTAs.

The offline travel agent neither `owns' the customer nor the technology channels to access the customer.

As airlines and their agents slug it out over the amount of commission, it will be interesting to see who emerges victorious in the first round of battle, as Air India perceivably has a lower "Customer Pull", being a weaker brand than British Airways, and Lufthansa; even these airlines with stronger brands have to rely upon the vital "Agent Push" to sell air tickets in India. Travel agents are advised to turn to cost saving technologies to gain control of the air traveller in a global market place.

(The author is a Senior Consultant, Infosys Technologies. The views are personal. E-mail: Pankaj_Pandit@infosys.com.)

© Copyright 2000 - 2009 The Hindu Business Line