Most businesses would be very excited at the prospect of creating a global sales network at an investment of 10% of  revenue. Not the airline industry. They have turned their backs on this golden opportunity by decimating  their global network of corporate agents, leisure agents and other travel resellers by reducing commissions effectively to zero.

I can well understand their logic. Looking at their total cost of sales & marketing it must be very tempting to see commissions as an unnecessary cost of sales, especially when there are opportunities to leverage the internet to sell directly to the end customer. But I am not sure that they really understand the consequence of their actions. It will be interesting to see which will be the first airline to re-introduce commissions in a few years time – once they see the negative effect on their business.

Who gets the commission?
One of the factors that led them to their decision was that travel management companies were rebating  commissions to their corporate customers and then charging service fees, which were often less than the rebate. The airline view was that they themselves were funding the corporates travel management service rather than rewarding the agent  – something that they found hard to accept.

Commission cutting parallels their other major strategy of increasing direct distribution – a recent Forrester survey showed that they will reach 50% direct sales by 2006. Today 70% of sales still go through third party channels. The interesting question is whether this change will be driven by the airlines proactive approach to direct distribution or whether it will be a consequence of third parties not selling their products. Whatever the case, it will be interpreted by the airlines as their successful strategy.

At the end of the day, if you don’t incentivise third parties for promoting or selling your products then you should not be surprised when they don’t!

The dynamics of going direct
The problem with an internet driven direct sales strategy is that it can end up being very  expensive,  your competition can do it just as well (or badly) as you, and at the end of the day, price becomes the only real differentiator.

It’s worth considering this in the context of the major market segments. Roughly 60% of airline revenues come from the business segment and 40% from leisure. The business segment is split

evenly between large corporates who use travel management companies and the SME market who either use local agents or already buy directly on-line or via web intermediaries/portals.

I think that we can all appreciate that the leisure and SME business segments are very price sensitive, but the same technology which has allowed airlines to sell directly on the internet is also responsible for driving prices down.

The development of flight search engines which scan multiple airline and intermediary web sites (ours scans 77 web sites!) allow a traveller to find the best fare for any route on any day. Typically the range of fares available for a European route can vary from £70 to £500 – guess what the traveller goes for! The question of the reputation of the airline or the flexibility of the ticket does not really enter the decision – perhaps with a 10% difference you may take other factors into account – but with this diversity in pricing it’s doubtful.

As a consequence, there is now little incentive for the travel reseller to promote any specific airline as they make no money from the transaction other than standard service fees. Indeed, an agent will probably make more margin selling airport parking rather than the flight itself! Their only real option is therefore to push the lowest fares via one of the new search engines as an added value service to their customers. The problem for the airlines is how do you build loyalty with a search engine focused on price!

Even in the  corporate  market things are no better. The travel policy for most corporates now is: get the lowest inflexible fare – if you miss the flight or need to change then just throw the ticket away!

Although these web based flight search engines are currently mainly used in travel agencies or large corporates, it won’t be long before they are on every travel web-site. Each week I am sent details of a new product which will be launching shortly.

Email marketing Costs
In parallel with direct internet distribution is the whole question of email marketing – a simple concept but one which is hard to implement effectively. The main issues are: where do we get the email addresses from, what is the quality of the email address (i.e. are they a buyer), what information do we know about the person regarding their travel patterns and needs, are they a current customer.

Unfortunately, there are very few email marketing databases that can answer these questions. As a consequence email marketing campaigns typically have less than a 0.5% success rate. At a typical cost of 15p to 25p an email, the cost of sale can be around £30 to £50 – which is typically more than commission.

Without being able to send very targeted emails to those customers who are in a ‘buying process’ for your specific product then the volume of emails you need to send on a daily basis becomes unsustainable and you are in danger of increasing the ‘opt-out’ rate significantly. This inability to segment customers is one of the key reasons for the increasing customer dissatisfaction regarding unsolicited emails.

One of the consequences of this is that airlines undertake significant email marketing to their existing customers and delight in the response it brings. Unfortunately, this often results in them discounting the price to existing customers (who would have bought anyway) and does not create any swing from the competition.

Conclusion
Intermediaries (agents/websites) will always need to provide airline tickets as part of their overall service offering. Without any incentives to promote specific airlines’ products they will end up offering airline products on a lowest cost basis to the customer. Airlines will have lost control of the intermediaries and as a consequence will need to reduce prices to ensure that they get any representation at all.

Airlines will be forced to increase their direct marketing activity significantly and unless they can have access to real quality email marketing databases costs will increase beyond the level they paid in commissions. As end customers will have access to internet tools to scan all airlines for the lowest cost, they will be forced to lower prices to compete.

Many airlines will find this unsustainable and either go out of business or re-instate commissions to resellers in an attempt to get away from price reductions.

The alternative would be to extend their range of services to that of a full web travel intermediary and make money from other products rather than their own, treating the flight as a loss leader!

Mike Fill
item consulting