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Monday, January 03, 2011

Is it time to "make nice" with the offline travel agency distribution channel?

Sharpening conflict online between OTAs and Airlines renews discussion about the value of the offline distribution channels - namely the mega agencies that focus largely on the corporate traveler and the other, nearly 16,000 brick and mortar agencies still in business in this country.

As we listen to the media talk about the Expedia and Orbitz battle with American Airlines, I thought it would be useful once again to talk about the value of the various distribution channels from a NET profit basis basis from the airline perspective (as compared to the cost basis, which is what they generally talk about).   And by the way, have you noticed that Henry Harteveldt of Forrester is EVERYWHERE in the media these days?!

Here are some stats and assumptions.
  • The OTAs are responsible for 33.4% of all tickets sold in the US (and processed via the Airline Reporting Corporation) and 32.7% of all sales.  This is as of the end of the 2nd quarter of 2010.
  • As we have seen in the use of metasearch tools like Kayak, Bing Travel and Mobissimo, airline supplier direct site ticket prices are generally on par with online travel agency sales of those same airlines
  • The airlines pay to distribute through the OTAs, which includes paying the OTA a 10% commission on average and paying a $4 per segment GDS fee (assuming 4 legs per ticket)
  • With this assumption and based on the ARC numbers (outlined below), for the ticket sold through the OTA, the net loss/cost for the airline would be $42.80 for a domestic ticket and $66.18 for an international ticket.
So you can see American's point in being willing to take the chance of pulling out of this particular channel.  You generally can't make up losses in volume, unless you have a total handle on your cost structure.  And with fuel prices targeted to soar in 2011 and 2012 and labor contracts still being an issue to the major airlines, which are still unionized, it may just be better for them to take out some seats, give the passengers more legroom (can I get an amen to that?) and make a profit on the seats that they sell themselves and those sold by their offline travel agent partners. 

However, I fear that if American feels that they have scored a win on this particular battlefield, they will then proceed emboldened to continue their distribution shift away from the traditional travel agencies, who they alienated at the beginning of the last decade, first with commission caps, then cuts, then out and out elimination of commissions as a birthright.

For the reasons outlined below, I believe this would be a very bad move.
  • Offline travel agencies represent 66.6% of all tickets issued through the Airline Reporting Corporation (as of the 1H2010).
  • Offline agencies produce 67.3% of all sales.
  • Mega agencies product a net profit over supplier direct (ticket sold through agency, less commission, less GDS fees, as compared to that same ticket sold through the airline's web site) of $28.13 domestically and $771.38 internationally.  
  • Other brick and mortar agencies net the airline $42.82 more per domestic ticket and $66.30 more per international ticket.













First, let me talk about the source of this data.  The Airline Reporting Corporation keeps track of all tickets issued by the distribution community.
This includes the mega agencies, which are mostly corporate  (Amex, Carlson Wagonlit, BCD, HRG, Maritz, Omega, CWT/SATO and SATO), the online agencies (Expedia, Travelocity, Orbitz, etc.) and "all other agencies", which at this time is made up of just under 16,000 agencies.  The numbers in the chart are for the first half of 2010.

Second, let me talk about my assumptions in creating this chart.
  • Domestic Average Ticket Price (Sales) includes taxes and fees and is the total sales for all tickets issued by the channel/category, divided by the number of tickets.  The mega agency category issues 24.6% of all tickets, and also represent 24.7% of all ticket sales.  Online agencies produce 33.4% of all tickets and 32.7% of all revenues.  The other agencies produce 42.0% of all tickets and 42.6% of all revenues.  
  • The Domestic Average Ticket Price (Fare) is less taxes and fees.  
  • International Average Ticket Price (Sales) includes taxes and fees and is the total sales for all tickets issued by the channel/category, divided by the number of tickets.  The mega agency category issues 12.3% of all tickets, and due to the higher average ticket price internationally, also represent s 22.6% of all ticket sales.  Online agencies produce 24.0% of all international tickets and just 18.1% of all revenues.  The other agencies produce 63.7% of all international  tickets and 59.3% of all revenues.  
  • The International Average Ticket Price (Fare) is less taxes and fees.  
  • The Agency Commissions are all calculated at 10%.  The fact of the matter is that the average commission domestically for all but the megas may actually be less than the 10%, but we felt this was a conservative assumption.  Internationally, the average commission may actually be higher than 10% for some agencies, but it is still likely a good average for this exercise.
  • For the Global Distribution System (GDS) fees, we have used an average of $4.00 per segment and an average of 4 legs/segments per ticket.  Again, some of the GDS fees may be slightly higher than that on a per segment basis, but the average number of segments generally sits below 3, so this after is once again conservative.
  • The GAP that is calculated is the GROSS ticket price, less the Commission, less the GDS fee, less the average estimated ticket price for supplier direct (which for this exercise is identical to the online agency ticket price for the reasons outlined above).  So without allocation of any other costs, this is the net profit or loss from the channel as compared to if the airline sold just via its own consumer direct channel.
Now those of us in the industry know that consumer direct from a supplier direct is by no means a FREE channel.  They have call center costs, branding/marketing costs, web development and infrastructure costs.

So before they try to go after this "high cost" channel, it would behoove the leadership at American and the others to take a look at this analysis with their own figures.

We know from experience that the use of broad industry averages can be misleading when looking at your own situation as a supplier.  For instance, if you put your head in the oven and your feet in the freezer, the average temperature of your body is not really relevant, is it?

So go do your own homework. 

It is 2011 and business fundamentals still work.  You have to make more than you spend, and still have to service what you owe. Don't make the mistake of assuming that your own channels are "cost free". 

Bottom line: 

Make friends of those that sell your product at the highest possible price and cost you less than your own channel.   And if you choose to say goodbye to those who sell a large quantity of your product at a true loss, then so be it.
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