Northwest Airlines and KLM cut the commissions they pay to online agencies to zero yesterday, a move that other airlines may well follow.
Selling airline tickets had already been a money-losing proposition for online agencies—PhoCusWright estimates that even the major online agencies, which have been able to achieve impressive efficiencies in selling airline tickets online, spend between $40 and $50 every time they sell a ticket (that figure includes all marketing costs).
Yet, the two major online agencies, Travelocity.com and Expedia.com, appeared unfazed. The news was no surprise, as zero commissions was inevitable following steady declines over the past few years. Average online commissions have most recently been in the 5%, or $10 per ticket, range.
Travelocity.com promptly slapped a $10 service fee on all Northwest and KLM tickets it sells; Expedia was in negotiations with Northwest but made it clear it did not intend to sell airline tickets for free.
More importantly, despite the commission cuts, both companies stuck to their current projections for reaching profitability: June 2001 for Travelocity.com; first quarter 2002 for Expedia. The markets were less sanguine; Travelocity’s shares fell 35% by mid-afternoon; Expedia’s fell 18%.
To cope with the inevitable commission cuts, online agencies have been pursuing myriad strategies. First, they are struggling to sell more vacations and cruises—complex products where the suppliers are willing to pay fat commissions—as high as 15% to 20% to travel agencies, online or traditional, that successfully sell these products. Such packages remain a tiny part of online agency business, but the online agencies are seeing double-digit growth in this category and are perfectly willing to provide customer service—right down to a live person on the phone—to sell these products.
Online agencies are also becoming true retailers, negotiating with suppliers and putting together their own packages onto which they can build their own profit margins rather than letting suppliers determine those margins for them. Expedia has been very high profile about its efforts in this department; the result is that just 25% of its revenues came from airline tickets. Even online agencies such as lowestfare.com
, whose main stock in trade has been cheap TWA tickets, has been moving in this direction with the acquisition of tour operators and wholesalers such as Jet Set and Maupintour.
What this latest commission cut does do, however, is herald the elimination of smaller online players who don’t have the even deeper pockets that the online game requires. More consolidation is likely among both online and offline agenices. The result: mega-agencies that are lean, mean and angry—angry at the airlines and prepared for a counterattack. Travelocity.com and Expedia, which currently make up one-third of the online travel market, are in a good position to rely on the deep resources of the companies that spawned them, Sabre and Microsoft, to help carry them through.
In the end, the airlines` offensive moves could well make their biggest targets more powerful than ever. Airlines booked 42% of their Internet sales, or $3.6 billion, through online agencies. Those agencies undoubtedly play an important role in online airline ticket distribution.
So whether or not the airlines regret their forcefulness next year, or three years from now, they are likely to reconsider the important role of leading online travel agencies…particularly the survivors. And the hope that Orbitz fills that role may backfire. Consider that every new distribution channel the airlines spawned they later spurned—the GDS and Travelocity.com come to mind. How long will it take Orbitz to become an even larger online force than the individual airlines are themselves?
And how long will it take Travelocity.com and Expedia, which already own 60% of the online travel agency channel, as well as other leading online agencies, to form a single, powerful force? Such a force may eventually convince the airlines they got carried away—and made a mistake.