Six years ago, airlines began slashing their distribution costs by cutting and capping commissions they paid travel agencies.
Delta was the first to stick its neck out, capping domestic airline commissions in February 1995. Other airlines began to follow almost immediately. In September 1997, United cut domestic commissions to 8%. The other airlines followed. United subsequently capped international commissions in November 1998, then cut domestic commissions to 5% in October 1999. In all instances, other airlines followed within days and sometimes within hours.
Then why haven`t the other airlines leaped to follow Northwest`s move last week? One big reason is that, in the past, they were dealing with a highly fragmented group of small travel agencies, many of which were doing a mere $3 to $5 million worth of business a year. Today, they are dealing with two mega-agencies, online services that within five years have grown to rank among the world`s largest travel agencies. Travelocity.com and Expedia.com`s combined annual gross bookings totaled $4.3 billion in 2000.
Ironically, the airlines created these two mega-agencies by forcing their hand - lowering commissions to such a level that only the strong (and heavily-backed) were able to survive.
Another reason why the airlines have not followed Northwest could be the fact that the Northwest announcement has raised a few Congressional eyebrows. A letter sent by two Congressmen to Attorney General John Ashcroft and Secretary of Transportation Norman Mineta said, “For Northwest to announce - just weeks before Orbitz`s launch - that it is eliminating commissions to its most efficient third-party distributors is powerful evidence of a predatory scheme to eliminate a major source of revenue for independent Internet agencies.”
Congressman Bill Lipinski (D-Ill), who co-signed the letter, added that even though price collusion is prohibited by law, “the major airlines have routinely followed in lockstep when a `competitor` has changed fares, increased service fees or reduced commissions.”
What better way for the airlines to show they are NOT in collusion (especially in light of the planned merger activity) than to let Northwest act alone?
Such offensive moves by the airlines are hardly necessary. The airlines already won the online airline ticket sales game. Their percentage share of airline tickets sold on the Internet is 58%, compared to 42% through online travel agencies,according to The PhoCusWright Report, “Airlines And The Internet: Nonstop Growth and Competition.” Part of that growing percentage reflects the online travel agencies` decreasing dependence on air, because airline tickets yield such small commissions. Increasingly, the online agencies are moving toward selling more vacations and specially negotiated fares (Hotwire and priceline.com, for example, sell nothing but these types of fares).
As more and more agencies rely on selling higher margin, negotiated fares, the airlines also win. The agencies’ increased dependence on negotiated fares puts the airlines at an advantage, because they now control the price - and the inventory.
The airlines know they need intermediaries to sell their tickets, whether commission-based or compensated some other way. In fact, a cautionary tale can be found in a different segment of the travel industry: cruise lines. Certainly, a cruise is a far more complicated product to sell than an airline ticket. But that didn`t stop Renaissance Cruises a few years ago from declaring that it did not need travel agents to sell its cruises; it would sell directly to consumers.
It wasn`t long before Renaissance began discreetly approaching travel agency consortia and franchises with the proven ability to fill cruise ships to renew the relationship. And today, a visit to the cruise line`s Web site, once integral to its efforts to sell directly to consumers, reveals a site that is basically an advertisement for travel agencies. It gives some information to consumers about its products but the main focus of the Web site is to direct consumers to their nearest helpful travel agent.
An airline ticket does not require the same level of customer service as a cruise does. But airlines still need travel agencies - at least those who are more than mere order takers (and those on the corporate/business side). In fact, even as the airlines were initiating their commission cuts in the mid-90s, they were continuing to pay higher commissions to agencies that could sell - agencies that could prove their value as a sales channel.
And so it is with the online agencies today. They still sell more than 40% of the airline tickets that are sold online. And they sell more of the online tickets for the major carriers. The seventh largest airline, Southwest, derives 90% of its Internet revenues from its own Web site (soon to be 100%). But with market leaders such as American and United, the distribution between Web sites and online agencies is more even. Meanwhile, the online agencies are beefing up their customer service, notifying consumers of price wars in their favorite city pairs, and advising consumers of their rights with e-tickets in the event of disruptive events such as strikes or hurricanes. They`re even answering their phones.
Customer service is one arena where the online agencies can beat the airlines, who these days have an uphill public relations battle when it comes to wooing a flying public that has “had it” with cramped seating, massive flight delays, and increasing fares. Online agencies are also a marketplace in which consumers can search for fares offered by multiple airlines in order to find a price and schedule that fits their needs (although many airline sites do offer other airlines’ flight schedules as well, and are also selling other travel products such as vacation packages - morphing into something of an online agency themselves). Finally, airlines are coming off a lengthy period of fairly good times for the industry. As anyone who has been on more than a couple of flights in the past few years can wearily attest, the airlines have had few empty seats. There`s been less of a need to find intermediaries to help fill them. But, once a downturn hits, take another look at commissions and see what the story is. Even today, airlines trying to increase traffic on a particular route pay bonus commissions on those sales in an effort to increase business.
Should the airlines break ranks and not follow Northwest down the no-commission path, it will not be without precedent. Since 1995, airlines have always fallen into step when one of them has initiated a commission cut. But there was one instance, in January 1999, when Delta instituted a $1 segment charge on any tickets not purchased through its Web site. Consumers raised a ruckus, the other airlines balked and Delta quickly rescinded the charge.
One note: as of March 2, Southwest was no longer selling tickets through Travelocity.com”. It thus became the first major U.S. airline to sell online tickets only through its own Web site. The problem lies in the level of connectivity Southwest has with Sabre, which supplies Travelocity.com with its airfares. Southwest has used Sabre`s “Basic Booking Request” system since 1994 - before the Internet was a viable sales channel. When a customer books a ticket on Travelocity.com, the service queries Sabre, which then queries the Southwest res system, a process that normally takes seconds. But, on some occasions, at the level of connectivity that Southwest has with Sabre, that process can take up to 24 hours. For brick-and-mortar agencies, that`s not a problem. But in the instantaneous world of the Internet, it is. In some instances, a customer could get a confirmation from Travelocity.com - and not a confirmation from Southwest. The result: a passenger would arrive at an airport and find they had no seat on the flight. One solution: Southwest could upgrade to a higher level of connectivity with Sabre and eliminate the problem. But, such an upgrade would cost millions of dollars, an investment that the low-cost carrier seems perfectly willing to forgo, since just 1% of its bookings come through Travelocity.com. That compares to 30% that come through its own Web site.