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Monday, October 29, 2012

The Online/Brick and Mortar agency gap is widening on domestic ticket sales

As the GDS/Airline battle is being waged in a courtroom in a state district court in Texas, I'd like to take this opportunity to put to rest the discussion about the profitability of airline direct versus the GDS driven agency channel.  

This is the first in a series of blogs this week about the 3Q2012 Airlines Reporting Corporation  statistics.  

And unlike survey data which can be seen as suspect, depending on who is procuring the study and how many are in the sample, this is actual transactional data and it is current through the end of September 2012.  

For a number of years now, I have been providing an assessment of the travel agency channel as it relates to the sale of airline tickets.  The Airlines Reporting Corporation is gracious in providing market segment data for this analysis.  They play a critical role in our industry, settling the bulk of airline tickets sold in this country by the agency community, including both traditional and online agencies.  

And while there are some agencies that bypass the GDS for some portion of their airline business, the bulk of ARC transactions do indeed get sold via one of the three major GDS companies (Amadeus, Sabre or Travelport - with their Apollo, Galileo and Worldspan products).



This graphic tells several stories.  


First, it shows that quarter over quarter, for the first two quarters of the year, the average price of an airline ticket sold through Mega agencies, Online agencies and all other agencies (13,709 agencies all told), was up, but in the third quarter, in all three categories, fares were down.  This is good for consumers, bad for the industry.  

The average value for mega agencies was down 6% from $414.30 to $389.30.  For online agencies it was down 10% from $316.98 to $285.26 and for all other agencies, it was down 7% from $410.19 to 380.91.    

With online having the greatest decline, you can be fairly certain that the airline's own average for sales over their website are following that same trend.   This is born out by a simple search on Kayak for just about any city pair -- the airline price is as low or lower than the online travel agency price.

Second and most important in this analysis is the gap between the Mega agency and online and the gap between all other agencies and online.  This is the critical issue when looking at the value of each channel for the airlines.  

In 3Q2012, the Mega agencies produced an average ticket that was a whopping 36% higher than the online channel.  This $104.04 of course must still cover any commissions/volume overrides and the GDS booking fee.  But on average, the total of these two items on a $389.30 ticket would be no more than $54.93 (assuming a 10% payment to the agency and a $16.00 GDS booking fee).  That leaves $49.11 of profit for the airline on top of the fare that they would have earned by selling on their own website.

In the same quarter, the gap for the other agencies over online was $95.66, a 34% gap.  Using the same calculation methodology, that leaves $41.56 in profit for the airline.  

Someone will have to explain to me why that is not appealing.  I have yet to hear a convincing argument.    

Lastly, look at the trend over the three quarters.  The gap is getting larger, not smaller.  

Now before you get riled up, I want to go on record that I fully support the airlines using newer technologies, such as Farelogix and GDSx, to enable smarter distribution of the airline's full range of products.  But I am once again reaching out and appealing to the airlines not to throw out the baby with the bathwater, because you think that the agency channel, [or more succinctly, the GDSs that currently aggregate this high value demand] is no longer viable.  

Look at the numbers one more time and then take a look at the Pegasus model that has been deployed successfully in the hospitality industry to tap into the existing distribution structure.  I believe this could be the right model for the airline industry moving forward.

Tomorrow we'll look at the same set of data for the international tickets sold by US ARC agencies.

Stay tuned.

Chicke Fitzgerald, strategist and resident iconoclast





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