Now you are going to need to bear with me on this. Blogs are supposed to be brief and incisive but this one won’t. I just think that perhaps too many people assume that everyone knows about air distribution history and, by extension, fully understands the dynamics in play. I am not sure this is the case (why should they) so here is my understanding of how we got to where we are now.
It would take a book not a blog to go into the full detail and rationale so I will content myself and your patience by picking out the key players and change milestones in what will be a summary of what has happened and who are the movers and shakers. I think the customer needs to know the basics especially as they are ultimately paying unless they can do without at least one of the current cogs in the distribution mechanism.
Initially there was not much of an issue. The airlines worked in concert with each other and their supply chain and basically paid for everything required to distribute their product. They paid merchant fees to card companies, commission to agents (no such things as TMCs then) and fees to the GDS. Having picked up all these tabs they then sold their tickets with these costs built in to their fares. All of them did it so there was no problem Simple and reasonably effective in a well regulated, stable and growing travel market where little true competition existed.
As an example (and it varies hugely by area) airlines paid agents 10% commision and between 3 to 30% override, 1.5-3% card fees and 4% to 6% GDS charges.All of that bundled into the end ticket price.
Then things changed. Airlines expanded their route structures and became far more competitive with each other. The first sign of change was when ticket prices started to diversifyfrom airline to airline. In order to attract increasingly fickle travellers a fare differentiation was required. Carriers moved away from simply discounting their standardised global gross fare pricing and introduced corporate nets, yield managed specials and additional one-off deals.In one class alone you could end up with over a dozen fares each with their own restrictions and availability allocations.
The result was twofold. Firstly the ability to interchange tickets between airlines disappeared and secondly the need to mitigate pricing concessions made them look harder at their costs. Their distribution costs to be precise.
They found themselves in a real dilemma. The need to compete and discount was obviously threatening their profits (what there were) and simultaneously two other things happened. Low cost carriers with a totally different price model arrived who had to worry far less about convenience, timetables, airport locations and service which in turn encouraged corporations to view travel in a far more commoditised way. So, on one side they had to compete with carriers with a considerably lower cost base/tariff and on the other, a customer with a much harder stance towards price.
What became clear was that they could not continue paying the full cost of distributing their products whilst competing with new entrant pricing combined with more savvy buyers.Something had to give and what ‘gave’ was the air distribution model. After all, if you cannot beat the no frills airlines and professional buyers then the only option was to join them and challenge elsewhere in the travel merry-go- round.
I think their objectives were a mixture between the sound and the inevitable. The markets had clearly changed and if the end customer really wanted transparency and a lower cost model then give it to them. Whether they really wanted or needed it in the first place is a discussion for another day. Many of the arguments today are revolving around the desire for commoditisation coming head to head with the necessity for flexibility and uniformity of information and access.
There is another key influencing factor which is technology. Part of the reason why the main airlines feel both desirous and capable of change is that, for the first time there are other potential technology solutions out there. That is to say they are there if, and only if, the end users really do expect them to act individually rather than collectively with other provider’s inventory. Hence the current pressures on the GDS who provide all encompassing booking services and charge a high price for doing so. There is no way any individual airline can provide the diversity and product span that a GDS does.
The airlines (individually and at varying speeds) have called time on paying full distribution costs for all services to all customers. Unfortunately I do not see their goal as eradicating such costs. Their objective is to find what they see is the right home for these costs and then try to ensure the savings are not taken away by having to reduce prices to compensate the travellers, who will undoubtedly have to pay. Unless as I mentioned earlier a cog taken out of the distribution wheel. but which one?
So are there any expendable cogs? In some sectors of the market then probably yes. However, only if people recognise what they want and are prepared to accept the consequences and constraints of such. I think the line will be drawn between those corporations that want a controlled, managed and reported programme and others that choose a more deregulated approach where cheapest flights and few management ‘frills’ are acceptable.
If you want travel management you need knowledge and control. In order to do this you need someone to consolidate travel in all forms and package it into controllable chunks from as few sources as possible. At present this is best done through a GDS booking system, a travel management company and a mandated card programme. You take overall control of your travel, accept the price of doing so and form the right balance between value and all the other broader elements that complement your company ethos. Does anybody with a travel programme really want to run around numerous individual online airline sites and compare them when a GDS already does that in a one-stop environment?
On the other side if you want to maximise trip by trip savings there is no reason why approaching the cheapest distribution source and exploiting it until another one comes along is not the right way. To be frank the cheapest booking cost would be by going to an airline direct either independantly or through a TMC which is why carriers like American Airlines, Lufthansa etc are differentiating pricing and availability dependant on where the booking comes from. It does not by any means guarantee that overall trip price will be lower but the reservations element may be.
What I am begining to see happening is that airlines are finally differentiating between varying corporate needs and handling them individually. This part I applaud even though it has taken a long time and has a way to go. They are beginning to see the contrast between travel management and the very different service provided through Online Booking Agencies (OTAs) which, despite all the hype, focus on a different and smaller market that has a different list of demmands. It is this SME market and the OTAs that service them that are taking the brunt of current airline initiatives. The rest will follow.
Before I conclude let me set out the distribution milestones again as I see them:
1) Airlines have mainly eradicated standard agency commission payments but have failed to stop override and incentive payments. Whilst not totally successful it has enabled them to target better those they want to reward to a greater and more productive effect.
2) Agents responded by passing their new costs to the corporations by changing their contracts to management/transaction fees. End result? Most agencies protected their income and some grew it by ensuring remaining income from the airlines stayed with them and not passed on within their client deals. Airlines were forced to reduce prices to compensate customers.
3) GDS/Airline negotiations became far more aggressive. When you look at what airlines have to pay them, even for passenger cancellations and suchlike it is hardly surprising. Some airlines started charging TMCs for certain bookings to gain compensation. TMCs passed these costs on to the corporations but are still incentivised by GDSs which make airlines pretty mad as it is their fees that are funding them.
4) Various airlines changed some of the remaining IATA regulations regarding payment to shorten credit terms with TMCs and escalate penalties for perceived non compliance. A very much hidden cost that again the customer ended up collecting.I find it quite alarming how much cost comes into the chain via IATA and its interpretation of their own rules.
5) Credit/charge card usage has increased because of 4) as individual countries cut agency credit by 50% or more meaning TMC passed on the casflow deterioration to customers resulting in this migration to plastic . Ironic really as this area is very much a top target for airline cost reduction. Cards, like GDS charge wide and varying merchant fees to suppliers and these will be attacked robustly and very soon.
Where will this evolution take us? Airlines will continue fighting distribution costs. Instead of taking them all and then charging travellers through price they will try to dump them and leave the customer to pay separately. Meanwhile they will compensate by offering lower cost alternatives to those prepared to book direct. The battlefronts will be GDS fees, credit card merchant fees, cost of credit, TMC incentives and service deliverables. The customer will get what they say they want which is transparency and a unit price for everything. Currently I do not believe actual cost will go down. It will simply be realigned and will probably go up. If prices go down any further then there will be less suppliers, less choice and devolution not evolution.
It does not make sense that suppliers should pay for everything and then charge a correspondingly high price. Equally it does not make sense that the traveller gets all the bills and tries to negotiate their way out of them. I expect it is the way of the world and will provide yet newer business opportunities but regrettably the same old regurgitating costs.
Showing posts with label overrides. Show all posts
Showing posts with label overrides. Show all posts
Just how much would you disclose?
For some time various corporations have been asking their intermediaries exactly how they make their money and what positive impact their company’s business has on their income. This interest has expanded further and bodies like the Institute of Travel and Meetings (ITM) have been calling for Travel Management Companies (TMC) to provide a ‘register of interests’. The request is made within its report on ‘Remuneration and Transparency’, the second part of which has recently been published.
The chairman of the ITM said “Our goal at ITM is to create better relationships to further professionalise this industry for the benefit of all” Baloney! How would disclosure of confidential business agreements do that? I would suggest perhaps it is more about checking that their intermediaries are not making extra money out of their client’s business and not trying to influence client behaviour in the process for their own gain. Let’s not be coy about this.
Some of you may have read my blogs on how TMCs still make money from the suppliers. This can be viewed in two main ways. Either ‘Why not, they do a lot of work for the supplier and should be rewarded for it’ or ‘If my expenditure is earning extra money from the supplier then that belongs to me’. There are strong arguments for both points of view but first lets look closer at the mechanics and principle involved.
Let’s say Platt Inc has a considerable air spend and much of it is with Air Limey. He suspects that his TMC not only has a commercial agreement of some sort with Air Limey but also a better one with Yank Air who is Limey’s biggest competitor. Platt Inc has a fee relationship with his TMC where any direct income should be credited to him and it is also in his interest to ensure that Yank Air is not going to be offered to his travellers even though it might earn extra money for the TMC. Shame about the mistrust but ‘I demand Disclosure’ he screams.
First there is a principle to be addressed. Any such agreements are usually made under strict letters of confidentiality. They are often agreed only on the basis that any benefits remain with the recipient as suppliers clearly wish to delineate who is being rewarded and for what. Their view is that they already incentivise the end corporation so why do so again. Also there is one big question which is, apart from the confidentiality issue, what right does any commercial company have to demand their suppliers and intermediaries provide company sensitive and strategic contracts that encompass their whole business and not just that one organisation.
From a more practical perspective what would such disclosures reveal? There are as many different deals out there as grains of sand but here are a few of the more prevalent features.. Most are built around a Service Level Agreement (SLA). These were introduced at the time of commission removal as a more targeted way of ensuring suppliers still got what they needed now that particular payment had gone. The core of such agreements are about paying for all the things they used to get like access to staff, account managers, basic client information etc. A payment is fixed for this section and followed by others that can sometimes be linked to performance in overall volume and share. Within this the supplier may include benefits such as special competitive fares, sponsorship and partnership opportunities.
So, in many cases volume and share do come into it so some corporations still might say they deserve a slice of that even though the contracts clearly do not allow it. But, for the sake of argument let us look closer at this because it might not all be one way traffic. For example Platt Inc discovers that its TMC has a deal with both Air Limey (AL) and Yank Air (YA) and both of them involve incentives around growth (AL) and share (YA). They sit around the table to discuss it.
From Platt Inc’s point of view it is simple. According to the data they flew 500 sectors on AL last year and they want the incentive. The same applies for YA where they know they must have sent at least 80 travellers but only have booked revenue (not actual flown) to measure the exact details.
Ah says TMC. Firstly Mr Platt Inc you may not know it but you have been ‘red ringed’ by AL. this means our contract says your volume can be used for measuring performance but not for payment. Not only did we not earn money on you but your year on year performance was down so in fact you cost us on what rewards we did get for other customers. By the way similar will apply to YA. We cannot track your true flown revenue but even if we did it will do no good as we signed another corporation who pulled our share higher than your likely achievement.
I hope you are still all bearing with me but I wanted to demonstrate exactly how big a can of worms such disclosures can be and what lack of earning potential there is. For every ‘winner’ there will be ‘losers’ and if I was a TMC I would simply devise a system to negate such nonsense that would ultimately offset any losses by gains.
So the questions are do you really want to dig and delve into other people’s business. Do you trust your business partners so little? Is it really worth the pain? Does anyone honestly think such activity ‘will create better business relationships’? Well certainly the chairman of ITM purports to think so. I can but disagree. What about you?
The chairman of the ITM said “Our goal at ITM is to create better relationships to further professionalise this industry for the benefit of all” Baloney! How would disclosure of confidential business agreements do that? I would suggest perhaps it is more about checking that their intermediaries are not making extra money out of their client’s business and not trying to influence client behaviour in the process for their own gain. Let’s not be coy about this.
Some of you may have read my blogs on how TMCs still make money from the suppliers. This can be viewed in two main ways. Either ‘Why not, they do a lot of work for the supplier and should be rewarded for it’ or ‘If my expenditure is earning extra money from the supplier then that belongs to me’. There are strong arguments for both points of view but first lets look closer at the mechanics and principle involved.
Let’s say Platt Inc has a considerable air spend and much of it is with Air Limey. He suspects that his TMC not only has a commercial agreement of some sort with Air Limey but also a better one with Yank Air who is Limey’s biggest competitor. Platt Inc has a fee relationship with his TMC where any direct income should be credited to him and it is also in his interest to ensure that Yank Air is not going to be offered to his travellers even though it might earn extra money for the TMC. Shame about the mistrust but ‘I demand Disclosure’ he screams.
First there is a principle to be addressed. Any such agreements are usually made under strict letters of confidentiality. They are often agreed only on the basis that any benefits remain with the recipient as suppliers clearly wish to delineate who is being rewarded and for what. Their view is that they already incentivise the end corporation so why do so again. Also there is one big question which is, apart from the confidentiality issue, what right does any commercial company have to demand their suppliers and intermediaries provide company sensitive and strategic contracts that encompass their whole business and not just that one organisation.
From a more practical perspective what would such disclosures reveal? There are as many different deals out there as grains of sand but here are a few of the more prevalent features.. Most are built around a Service Level Agreement (SLA). These were introduced at the time of commission removal as a more targeted way of ensuring suppliers still got what they needed now that particular payment had gone. The core of such agreements are about paying for all the things they used to get like access to staff, account managers, basic client information etc. A payment is fixed for this section and followed by others that can sometimes be linked to performance in overall volume and share. Within this the supplier may include benefits such as special competitive fares, sponsorship and partnership opportunities.
So, in many cases volume and share do come into it so some corporations still might say they deserve a slice of that even though the contracts clearly do not allow it. But, for the sake of argument let us look closer at this because it might not all be one way traffic. For example Platt Inc discovers that its TMC has a deal with both Air Limey (AL) and Yank Air (YA) and both of them involve incentives around growth (AL) and share (YA). They sit around the table to discuss it.
From Platt Inc’s point of view it is simple. According to the data they flew 500 sectors on AL last year and they want the incentive. The same applies for YA where they know they must have sent at least 80 travellers but only have booked revenue (not actual flown) to measure the exact details.
Ah says TMC. Firstly Mr Platt Inc you may not know it but you have been ‘red ringed’ by AL. this means our contract says your volume can be used for measuring performance but not for payment. Not only did we not earn money on you but your year on year performance was down so in fact you cost us on what rewards we did get for other customers. By the way similar will apply to YA. We cannot track your true flown revenue but even if we did it will do no good as we signed another corporation who pulled our share higher than your likely achievement.
I hope you are still all bearing with me but I wanted to demonstrate exactly how big a can of worms such disclosures can be and what lack of earning potential there is. For every ‘winner’ there will be ‘losers’ and if I was a TMC I would simply devise a system to negate such nonsense that would ultimately offset any losses by gains.
So the questions are do you really want to dig and delve into other people’s business. Do you trust your business partners so little? Is it really worth the pain? Does anyone honestly think such activity ‘will create better business relationships’? Well certainly the chairman of ITM purports to think so. I can but disagree. What about you?
Can TMCs Really Influence Business?-Switch selling
,
In my last two pieces on this subject I explained that airline suppliers still incentivise TMCs in the belief that this will bring them greater volume and share despite the inroads they themselves have made direct with the corporate sector. Also because some fear what they may lose if they don’t as they get denied access to TMC bookers and account managers if they are not ‘in the programme’. I also explained how the shape of these deals has changed in order to react to the removal of commissions and subsequent new style management fee and transaction fee contracts.
But the real cruncher is can TMCs really move their business around between airlines and if so what impact could this have on their clients. Over the next few paragraphs I will give my honest opinion on this vexing subject and hopefully come up with a few things for you to consider along the way. Like all responses to difficult questions the answer can be ambiguous as there are so many different TMCs with varying degrees of ability and strategy so I will focus on what I see as the more professional of the grouping.
Obviously the choice of supplier is by no means only dependant on the whims of the TMC. The corporations have deals themselves that they expect their TMC to support and then we have the traveller who sometimes ignore both. In fact the travellers also have their own ‘deals’ with airlines known as frequent flyer points, upgrades, and lounge access to name a few. However the power to influence travel choices by the TMCs is growing as the market changes and they become more of an outsourced arm of their customers. Ironically many of the actions taken by airlines to remove some of the ‘rewards’ they paid to TMCs (commissions etc) is creating an increase in their ability to influence airline choice.
Getting down to basics here are just some of the ways TMCs can and are moving business.
a) The SME market mainly buys on price and has few direct deals of their own therefore the TMC can choose which suppliers and fares to put towards them.
b) The arrival of online booking tools is giving TMCs a greater ability to select what to promote and exclude those they do not.
c) There are still surprisingly many people out there that seek advice and recommendation about airlines and their services and the TMCs can control what their people say far better than they used to. If a supplier is denied access to bookers then what chance do they have?
d) TMC account managers play a far bigger (sometimes unique) part in what supplier goes into their client’s programme. By working closely with a partner airline they can ensure that they offer the best package of benefits. This should end up in a win/win situation except the supplier ends up having to dig deeper in their pockets to reward all parties.
e) Corporations tend to pick two suppliers on their main routes. For example on the UK/USA sector it is most unusual not to have a two carrier policy to keep both sides of the Atlantic happy. This gives the TMC a superb opportunity to switch sell playing one airline off against the other if they choose to do so. And all this within policy.
f) Another growing area for flexing and switching is unbundling of fares. This creates an opportunity for a savvy TMC to translate true costs of journey in a proactive and rewarding way. The more airlines complicate things the more opportunities arise for the middle man.
g) As mentioned in my previous piece the top TMCs are developing their own platforms so they can choose what fares and services find their way to staff, booking screens and self booking tools. This kind of dynamic pricing will create such a sea change in TMC control and selling ability that airlines may have to think again about their distribution strategies.
h) The decision by many corporations to allow their travellers to ignore set policy and choose best fare on the day provides a further opportunity.
In conclusion I am certain that TMCs can influence business and more than ever before. I would however add that I do not think this should be too worrying for corporations. Yes, TMCs do get incentivised by airlines but hey, if they weren’t you would be paying more so I suggest that ‘sleeping dog’ should be left to lie. After all you still hold the ace card in that the principal way to move business is to offer the best price and product and no TMC would be daft enough to forget that. In the past one could move like for like business but now it has to be cost justified and done with the knowledge of the corporation who still calls the shots.
I hope you found this interesting or at least thought provoking. I plan to write a further summary on where I think all this is going. I think you will be surprised by some of it!
In my last two pieces on this subject I explained that airline suppliers still incentivise TMCs in the belief that this will bring them greater volume and share despite the inroads they themselves have made direct with the corporate sector. Also because some fear what they may lose if they don’t as they get denied access to TMC bookers and account managers if they are not ‘in the programme’. I also explained how the shape of these deals has changed in order to react to the removal of commissions and subsequent new style management fee and transaction fee contracts.
But the real cruncher is can TMCs really move their business around between airlines and if so what impact could this have on their clients. Over the next few paragraphs I will give my honest opinion on this vexing subject and hopefully come up with a few things for you to consider along the way. Like all responses to difficult questions the answer can be ambiguous as there are so many different TMCs with varying degrees of ability and strategy so I will focus on what I see as the more professional of the grouping.
Obviously the choice of supplier is by no means only dependant on the whims of the TMC. The corporations have deals themselves that they expect their TMC to support and then we have the traveller who sometimes ignore both. In fact the travellers also have their own ‘deals’ with airlines known as frequent flyer points, upgrades, and lounge access to name a few. However the power to influence travel choices by the TMCs is growing as the market changes and they become more of an outsourced arm of their customers. Ironically many of the actions taken by airlines to remove some of the ‘rewards’ they paid to TMCs (commissions etc) is creating an increase in their ability to influence airline choice.
Getting down to basics here are just some of the ways TMCs can and are moving business.
a) The SME market mainly buys on price and has few direct deals of their own therefore the TMC can choose which suppliers and fares to put towards them.
b) The arrival of online booking tools is giving TMCs a greater ability to select what to promote and exclude those they do not.
c) There are still surprisingly many people out there that seek advice and recommendation about airlines and their services and the TMCs can control what their people say far better than they used to. If a supplier is denied access to bookers then what chance do they have?
d) TMC account managers play a far bigger (sometimes unique) part in what supplier goes into their client’s programme. By working closely with a partner airline they can ensure that they offer the best package of benefits. This should end up in a win/win situation except the supplier ends up having to dig deeper in their pockets to reward all parties.
e) Corporations tend to pick two suppliers on their main routes. For example on the UK/USA sector it is most unusual not to have a two carrier policy to keep both sides of the Atlantic happy. This gives the TMC a superb opportunity to switch sell playing one airline off against the other if they choose to do so. And all this within policy.
f) Another growing area for flexing and switching is unbundling of fares. This creates an opportunity for a savvy TMC to translate true costs of journey in a proactive and rewarding way. The more airlines complicate things the more opportunities arise for the middle man.
g) As mentioned in my previous piece the top TMCs are developing their own platforms so they can choose what fares and services find their way to staff, booking screens and self booking tools. This kind of dynamic pricing will create such a sea change in TMC control and selling ability that airlines may have to think again about their distribution strategies.
h) The decision by many corporations to allow their travellers to ignore set policy and choose best fare on the day provides a further opportunity.
In conclusion I am certain that TMCs can influence business and more than ever before. I would however add that I do not think this should be too worrying for corporations. Yes, TMCs do get incentivised by airlines but hey, if they weren’t you would be paying more so I suggest that ‘sleeping dog’ should be left to lie. After all you still hold the ace card in that the principal way to move business is to offer the best price and product and no TMC would be daft enough to forget that. In the past one could move like for like business but now it has to be cost justified and done with the knowledge of the corporation who still calls the shots.
I hope you found this interesting or at least thought provoking. I plan to write a further summary on where I think all this is going. I think you will be surprised by some of it!
Can TMCs Really Influence Business? - Deals
OK, so we got to the point where we ascertained that TMC/agents still get incentives from suppliers, albeit presented in a different shape. I also mentioned that, in my opinion, this need not necessarily be a bad thing for corporate customers if managed right. What I did not go into in any detail was a) what these deals are b) how TMCs do (or do not) shift business and c) how such deals could benefit all. So let me address at least one of these points now and deal with the others another time.
What kind of deals?
There are three main types which are growth percentage rewards, net fares that can be marked up and increase share payments.
Payments for growth are usually a percentage of net ticket value sometimes paid back to zero and sometimes just for the growth element compared with previous year. Percentages paid vary enormously depending on supplier size, their importance/share of the local market and their strategic need to buy a way into the region. I have heard of deals ranging around 2% from a big volume airline to 50% from someone trying to make inroads into a market. Such deals are pretty unfashionable now in most primary markets but do still happen in numerous places around the globe especially from suppliers who have no effective systems to measure performance.
As time passed some of the more major airlines started to get concerned that TMCs might simply start doing growth deals with all their competitors as, in a growing market, the prospects of growing volume with everyone was high. Also volume could vary greatly simply by the losing or winning of a major volume corporate account. This ultimately got addressed by airlines ‘red ringing’ the biggest clients which meant their volumes were taken out for volume and payment purposes.
There have always been a few net fare deals about. This is where an airline offers a fixed net price to specific agents who can mark it up by as much as they think they can get away with. These net fares were targeted towards specialist agencies who were involved in markets such as ethnic or tourist travel. In the main the plan was to gain this business but not dilute their yields by exposing such discounts to the corporate market. Nevertheless there has been growing overlap which usually manifests itself by corporate travellers that gets hold of the fare and demands to know why his TMC cannot match it. This has been going on for many years but in recent times some USA airlines have dallied in this area too by offering net business prices to TMCs instead of overrides.
In an attempt to make future deals work airlines started introducing rewards based on share increase. This is infinitely more difficult to measure and depended on the airline itself to produce the results with no way for the TMCs to verify them. Some of these deals became so very complex that it was almost impossible for anyone to predict what would be paid. .Another issue was that, for some dominant airlines such deals were considered by the authorities as anti-competitive and thereby illegal. However these deals are still widespread today.
Most modern deals are far more sophisticated and linked to ‘service level agreements’ (SLAs) although this term is a misnomer in my view. What they effectively do is reward TMCs for performing (or allowing) certain activities. These activities vary from allowing access to their staff, account managers and senior management to shifting share, providing key MI on their clients, promoting the airline’s campaigns and supporting a particular strategy. All such activities are measured and rewarded accordingly. These ‘incentives’ seem to work reasonably well for both parties as the airline usually sees more volume and the TMC gets it’s money in a way that negates them having to pay it straight on to the corporation as extra client income/overrides.
Originally TMCs used to negotiate SMAs with individual airlines but even that has moved on. Now the suppliers are trying to do deals by Alliances rather than individual members. These usually manifest themselves as umbrella incentives paid only if the TMC performs with a certain minimum number of their partners. This way the dominant airline in any alliance group can demand TMC preferred status for their smaller partners that would not otherwise register on their radar screen. Such deals are highly unpopular with most eligible TMCs for obvious reasons and particularly because many airline partners are either unable to provide accurate data or simply not a product they want in their portfolio especially if they clash with another preferred supplier.
Consolidation by alliances is one thing but the ability/desire to agree a global incentive agreement is even harder and suppliers have, in the main, been reticent to do this either with TMCs or corporations. Don’t get me wrong, there are some prototype deals out there but I am highly sceptical of their current value to anyone. After all the airlines still work on a system where they cannot tell their overseas offices what to do as they are cost centres in their own right and have the authority to say no.
Finally I expect to see a new type of deal arriving and it is not a million miles away from the net concept. Well actually it is here now but only in it’s formative state. The arrival of TMC specific fares is here and expanding. In the past, probably as a result of past legacies, airlines have stuck to treating all TMCs the same as each other as far as fares are concerned. This is changing with the arrival of new generation TMC technology platforms that can be very specific about who sees what fare where and when.. This will enable them to drive business to (and from) airlines at the press off a button. Airlines will be able to flex the fares they offer depending on need and thereby have a tighter grip on their yields in a similar way to what they do on their own dot com sites…if the TMC is incentivised enough to support them. As I say, it is early days but worth watching.
This subject is vast and worthy of a day seminar rather than a brief blog entry however I hope it gives some a basic grasp of what is going on in this somewhat secretive area. More on how such deals are supported and how I think all could benefit next time.
What kind of deals?
There are three main types which are growth percentage rewards, net fares that can be marked up and increase share payments.
Payments for growth are usually a percentage of net ticket value sometimes paid back to zero and sometimes just for the growth element compared with previous year. Percentages paid vary enormously depending on supplier size, their importance/share of the local market and their strategic need to buy a way into the region. I have heard of deals ranging around 2% from a big volume airline to 50% from someone trying to make inroads into a market. Such deals are pretty unfashionable now in most primary markets but do still happen in numerous places around the globe especially from suppliers who have no effective systems to measure performance.
As time passed some of the more major airlines started to get concerned that TMCs might simply start doing growth deals with all their competitors as, in a growing market, the prospects of growing volume with everyone was high. Also volume could vary greatly simply by the losing or winning of a major volume corporate account. This ultimately got addressed by airlines ‘red ringing’ the biggest clients which meant their volumes were taken out for volume and payment purposes.
There have always been a few net fare deals about. This is where an airline offers a fixed net price to specific agents who can mark it up by as much as they think they can get away with. These net fares were targeted towards specialist agencies who were involved in markets such as ethnic or tourist travel. In the main the plan was to gain this business but not dilute their yields by exposing such discounts to the corporate market. Nevertheless there has been growing overlap which usually manifests itself by corporate travellers that gets hold of the fare and demands to know why his TMC cannot match it. This has been going on for many years but in recent times some USA airlines have dallied in this area too by offering net business prices to TMCs instead of overrides.
In an attempt to make future deals work airlines started introducing rewards based on share increase. This is infinitely more difficult to measure and depended on the airline itself to produce the results with no way for the TMCs to verify them. Some of these deals became so very complex that it was almost impossible for anyone to predict what would be paid. .Another issue was that, for some dominant airlines such deals were considered by the authorities as anti-competitive and thereby illegal. However these deals are still widespread today.
Most modern deals are far more sophisticated and linked to ‘service level agreements’ (SLAs) although this term is a misnomer in my view. What they effectively do is reward TMCs for performing (or allowing) certain activities. These activities vary from allowing access to their staff, account managers and senior management to shifting share, providing key MI on their clients, promoting the airline’s campaigns and supporting a particular strategy. All such activities are measured and rewarded accordingly. These ‘incentives’ seem to work reasonably well for both parties as the airline usually sees more volume and the TMC gets it’s money in a way that negates them having to pay it straight on to the corporation as extra client income/overrides.
Originally TMCs used to negotiate SMAs with individual airlines but even that has moved on. Now the suppliers are trying to do deals by Alliances rather than individual members. These usually manifest themselves as umbrella incentives paid only if the TMC performs with a certain minimum number of their partners. This way the dominant airline in any alliance group can demand TMC preferred status for their smaller partners that would not otherwise register on their radar screen. Such deals are highly unpopular with most eligible TMCs for obvious reasons and particularly because many airline partners are either unable to provide accurate data or simply not a product they want in their portfolio especially if they clash with another preferred supplier.
Consolidation by alliances is one thing but the ability/desire to agree a global incentive agreement is even harder and suppliers have, in the main, been reticent to do this either with TMCs or corporations. Don’t get me wrong, there are some prototype deals out there but I am highly sceptical of their current value to anyone. After all the airlines still work on a system where they cannot tell their overseas offices what to do as they are cost centres in their own right and have the authority to say no.
Finally I expect to see a new type of deal arriving and it is not a million miles away from the net concept. Well actually it is here now but only in it’s formative state. The arrival of TMC specific fares is here and expanding. In the past, probably as a result of past legacies, airlines have stuck to treating all TMCs the same as each other as far as fares are concerned. This is changing with the arrival of new generation TMC technology platforms that can be very specific about who sees what fare where and when.. This will enable them to drive business to (and from) airlines at the press off a button. Airlines will be able to flex the fares they offer depending on need and thereby have a tighter grip on their yields in a similar way to what they do on their own dot com sites…if the TMC is incentivised enough to support them. As I say, it is early days but worth watching.
This subject is vast and worthy of a day seminar rather than a brief blog entry however I hope it gives some a basic grasp of what is going on in this somewhat secretive area. More on how such deals are supported and how I think all could benefit next time.
Can TMCs really influence business?
Ever since travel agencies were created by airlines as the most efficient way of consolidating and distributing their product they have had to incentivize them. Somewhat ironic really that in many ways they created their own Frankenstein’s monster which, despite their best efforts, they cannot kill.
They desperately needed to find a way to deal with the then need to seamlessly interline their services with other airlines using one fare on one ticket and the travel agent, ultimately to become travel management company (TMC), fitted the bill perfectly. They could do all the messy bits for the customer at a fraction of the cost that an airline would have to incur in order to do it themselves. In those days there was minimal technology and very little direct competition unlike modern times.
As time passed the airlines expanded and serious competition arrived on all the main air routes. Instead of being able to assume they would get all, or at least a fair share, of passengers on their services they now had to fight it out with a whole bunch of others. The big snag however was that they had created this TMC middle man who had all the access, relationship and knowledge with the end customer. They were also very firmly entrenched as they offered a ‘free’ service to the traveller and, in many cases, actually paid their company to use them.
So it was that ‘incentive overrides’ were born. This is where airlines not only paid TMCs a standard commission but also gave extra percentages on top in payment for extra passengers and/or higher share. The TMCs used this money to increase their profits, win business and subsidise other services they had to offer their clients that were not otherwise cost effective. They also used these deals co create new ones by playing one supplier off against another. Airlines hated it but always had a nagging doubt about how much business they might lose if the climbed off the incentive roundabout.
Finally things started to change as suppliers decided they could not afford these distribution costs, especially in this new technological world. They really did not like the lack of contact with their end customers and their doubts got greater about whether these incentives delivered a return on investment. After all the TMCs ended up doing deals with practically all the suppliers so who were they going to move business from? And, with the arrival of corporate procurement managers, could they influence business anyway? The main national airlines decided enough was enough, pulled the plug on commissions and, searched for other ways to incentivise that would yield better returns. Airlines can be a little like sheep in that whatever the national carrier does in their own market the others follow.
This brings us to today. A today that is supposed to mean that TMCs work for, and get paid by, their clients and the suppliers give all their incentives to the end user through lower pricing. Oh, if only life and business could be that easy. In actuality various types of incentives are alive and well albeit a little more covert and targeted than they used to be. In fact I believe most TMCs would have to shut down overnight if they ceased earning income from suppliers. Many of the incentives are relatively customer friendly and shaped in the guise of service level agreements (SLAs) but, be under no illusion, their purpose is to build an individual airline’s share whichever way you look at it. I leave it to you to decide if this is a good or bad thing.
So, back to the main question. Can TMCs direct business? My view is a qualified yes if they go about it the right way. By right way I mean with their customer’s knowledge and agreement and using the right methodology. There is a win/win possibility here with improved services, value adds and efficiencies being the end goal. Does it happen now? I have been out of ‘hands on’ touch for a while but I think the answer is probably not. I believe the relationship (financial and otherwise) between supplier, TMC and customer still has a way to evolve and will become one of the next big issues. I predict tomorrow’s ‘incentive’ battleground will revolve around dynamic pricing where TMCs will control what fares and preferences will be in their databases and distribute them in a way that brings them greater return. A key factor of which TMC a corporation uses will be the ability of these databases to deliver best value.Let’s see if I am right!
They desperately needed to find a way to deal with the then need to seamlessly interline their services with other airlines using one fare on one ticket and the travel agent, ultimately to become travel management company (TMC), fitted the bill perfectly. They could do all the messy bits for the customer at a fraction of the cost that an airline would have to incur in order to do it themselves. In those days there was minimal technology and very little direct competition unlike modern times.
As time passed the airlines expanded and serious competition arrived on all the main air routes. Instead of being able to assume they would get all, or at least a fair share, of passengers on their services they now had to fight it out with a whole bunch of others. The big snag however was that they had created this TMC middle man who had all the access, relationship and knowledge with the end customer. They were also very firmly entrenched as they offered a ‘free’ service to the traveller and, in many cases, actually paid their company to use them.
So it was that ‘incentive overrides’ were born. This is where airlines not only paid TMCs a standard commission but also gave extra percentages on top in payment for extra passengers and/or higher share. The TMCs used this money to increase their profits, win business and subsidise other services they had to offer their clients that were not otherwise cost effective. They also used these deals co create new ones by playing one supplier off against another. Airlines hated it but always had a nagging doubt about how much business they might lose if the climbed off the incentive roundabout.
Finally things started to change as suppliers decided they could not afford these distribution costs, especially in this new technological world. They really did not like the lack of contact with their end customers and their doubts got greater about whether these incentives delivered a return on investment. After all the TMCs ended up doing deals with practically all the suppliers so who were they going to move business from? And, with the arrival of corporate procurement managers, could they influence business anyway? The main national airlines decided enough was enough, pulled the plug on commissions and, searched for other ways to incentivise that would yield better returns. Airlines can be a little like sheep in that whatever the national carrier does in their own market the others follow.
This brings us to today. A today that is supposed to mean that TMCs work for, and get paid by, their clients and the suppliers give all their incentives to the end user through lower pricing. Oh, if only life and business could be that easy. In actuality various types of incentives are alive and well albeit a little more covert and targeted than they used to be. In fact I believe most TMCs would have to shut down overnight if they ceased earning income from suppliers. Many of the incentives are relatively customer friendly and shaped in the guise of service level agreements (SLAs) but, be under no illusion, their purpose is to build an individual airline’s share whichever way you look at it. I leave it to you to decide if this is a good or bad thing.
So, back to the main question. Can TMCs direct business? My view is a qualified yes if they go about it the right way. By right way I mean with their customer’s knowledge and agreement and using the right methodology. There is a win/win possibility here with improved services, value adds and efficiencies being the end goal. Does it happen now? I have been out of ‘hands on’ touch for a while but I think the answer is probably not. I believe the relationship (financial and otherwise) between supplier, TMC and customer still has a way to evolve and will become one of the next big issues. I predict tomorrow’s ‘incentive’ battleground will revolve around dynamic pricing where TMCs will control what fares and preferences will be in their databases and distribute them in a way that brings them greater return. A key factor of which TMC a corporation uses will be the ability of these databases to deliver best value.Let’s see if I am right!
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