(Sum's take on reduction in agency commission to zero by international and domestic airlines in India)
TAAI invites its delegates and members to London, UK to discuss, evaluate and formulate policies for the zero agency commission era confronting the travel industry this November in their annual convention. There are over 2000 IATA agents and about 14000 non-IATA agents in India. A sector which till last year was booming being part of the sunrise sector of the economy is under a direct threat of being washed away or being ruined by a Tsunami of zero commission structure being implemented by the airlines. It employs a large chuck of people requiring medium to low levels of entry level education standards and promotes entrepreneurship by means of its 14000 non IATA agent network, bulk of which are small and medium enterprises managed and run by individuals in every nook and corner of the country. The employment potential of the industry is unmatched in terms of providing solutions for disguised unemployment, self employment and proves as a catalyst for generating employment in other sectors like transport, tour operators, hotel industry, tourism industry etc.
Of late the industry is under a threat (at least a perceived threat) of being subdued by the zero commission structure being implemented by the airlines. The succession to zero % commission is a part of structured reduction in commission by international and domestic airlines over a period of last 8 year from 9 % to 7 % and then to the current commission structure of 5 %. The commission was reduced to 5 % a couple of years back and an understanding was reached by the airlines with the trade associations to reduce it to zero by 2009. Bulk of the travel agents at the time of reduction in commission to 5 % failed to realize the threat of a future 0 % commission regime and failed to change their business models. The worst affected are the ones who are now searching for an alternate business plan when they are almost amidst the storm. I perceive it as an opportunity and not as a threat and I strongly believe that some sound planning renewed business plans and cost effective professional service travel agents will continue to rule the roost.
Let’s conduct a SWOT of the Travel Industry at the crucial juncture of this commission alteration:
Strengths
1. The main strength of travel trade is that even today the online travel market and online airline websites accounts for less than 5-8 % of the total ticket sales in India.
2. The Indian passengers continuance to depend on traditional travel agents is a big plus for this industry
3. The credit sales of airline products still holds good with the traditional travel agents (by traditional travel agents I mean the one’s with indigenous ownership and office based offline sale of products/ services)
4. Passengers in India depend on a travel agent to get his expert advice for arranging his travel.
5. India is a country where visa services and other ancillary services is a big market. Normally a passenger depends on a travel agent to arrange a visa besides tickets and other formalities. India is unlike western countries where visa is not required for most of the countries.
6. Credit card and Internet density is still low in semi urban and rural areas and areas like Punjab, which account for 40 % of traffic at Delhi airport holds the key for travel trade.
7. The travel agent’s bargaining power with the airlines still remains strong as bulk of the business is still generated through travel agents.
Weaknesses
1. The trade bodies like TAAI, TAFI and IAAI and not integrated and not very strong at the national level. They are divided amidst politics and often fail to present a united front for key and common issues. Some trade bodies are also accused of playing at the hands of the airlines. Most of these bodies are centralized with low levels of decentralization.
2. The industry is still in an unorganized stage which poses problems of faulty business models and low levels of professionalism
3. Failure of the industry to keep pace with the times and develop alternate business plans
4. Most of the IATA agents in India are ticketing agents and their failure to serve a range of other services is posing a risk to their survival
5. The non-IATA agent base of 14000 agents is totally unorganized and not regulated and their role in the entire industry is still unknown. They threaten the survival of the registered agents.
6. Low levels of trained professionals and lack of professionalism is hurting the industry
7. High degree of competition in the absence of any entry or regulatory barriers is creating excess capacity in the industry. Margins too have shrunk due to competition.
8. Mushrooming of unscrupulous and fraudulent people who are cheating people on the pretext of illegal immigration and human trafficking are giving a bad name to the industry and hurting the overall confidence level of people on traditional travel agents.
Opportunities
1. The opportunities lie in getting organized and creating core competencies by economies of scale and reducing costs.
2. With the advent of E-Ticketing there is an opportunity to rework staff requirements and reduce costs in staffing.
3. Reduction of commission to zero will introduce the concept of transaction fees which will find favor among the corporate clients
4. There is an opportunity in creating an effective and successful business model based on transparency in earnings and reduced costs of operation.
5. There is plenty of scope for consolidation in the market. In the event of zero commission structure airlines may introduce bulk buying of seats wherein big consolidators and consortiums will benefit. Also overriding commissions like PLB and Boarding Incentives will be increasingly used by airlines to market their products.
6. There is a big opportunity in promoting, selling and functioning as a travel agent by introducing all other ancillary services like hotel reservations, cruises, insurance, visa, destination counseling, event management, MICE etc in the product portfolio.
7. Reduction in commission will serve as a deterrent for new entrants in the market and may even clean up the market with withdrawal of some players. This will check unscrupulous competition in the market and bring some order.
Threats
1. The biggest threat is from within the industry. The small and medium sized travel agencies face threat from online travel agencies and consolidators (both B2C and B2B) which are backed by venture capitalists and corporate houses and can go the extra mile by giving hefty discounts and undercutting fares to bring their brand value. They consider undercutting cost as a part of their investment.
2. The other big threat is from low margins by means of transaction fee, which will be implemented to replace the commission structure.
3. The real threat in zero commission eras comes from a situation wherein airline starts marketing the fares directly to the customer through their websites. In such a situation a ticket which cost “x” amount to the passenger on the airline website, will also cost the travel agent “X” amount. The travel agent will resultantly sell that ticket at x+ transaction fee, which will certainly be more than what the airline sells directly to the passenger. In such a situation there may be a temporary or permanent shift of passengers from the travel agents to the airlines.
4. With a global slowdown, high inflation and high interest rates the disposable income of people is low and this is adversely affecting the industry. Prolonged period of slow down might trigger panic in this industry which is witnessing a paradigm shift in terms if its revenue model.
Conclusion
The travel industry has hit an air pocket with global economic slow down and proposed reduction of agency commission to zero. From the airlines perspective, they need to work more closely with the agents than ever before and explain to them the rationale behind the reduction of commission; besides giving them confidence that travel agents remain the biggest distributions channel for the airline products. Travel agents need to reinvent their business models and besides looking at ancillary services they need to shun the image of being a ticketing agent. They need to take up the role of travel consultants and counselors. Using the technology to their advantage, agents need to reduce cost and develop an effective and cost effective model of doing business.
The actual impact of the reduction in commission on the travel industry will not be felt before the end of next fiscal during which the risk bearing capacity and patience of the travel industry will be put to test. Lets hope the churning of this industry brings out some “Amrit”.
TAAI invites its delegates and members to London, UK to discuss, evaluate and formulate policies for the zero agency commission era confronting the travel industry this November in their annual convention. There are over 2000 IATA agents and about 14000 non-IATA agents in India. A sector which till last year was booming being part of the sunrise sector of the economy is under a direct threat of being washed away or being ruined by a Tsunami of zero commission structure being implemented by the airlines. It employs a large chuck of people requiring medium to low levels of entry level education standards and promotes entrepreneurship by means of its 14000 non IATA agent network, bulk of which are small and medium enterprises managed and run by individuals in every nook and corner of the country. The employment potential of the industry is unmatched in terms of providing solutions for disguised unemployment, self employment and proves as a catalyst for generating employment in other sectors like transport, tour operators, hotel industry, tourism industry etc.
Of late the industry is under a threat (at least a perceived threat) of being subdued by the zero commission structure being implemented by the airlines. The succession to zero % commission is a part of structured reduction in commission by international and domestic airlines over a period of last 8 year from 9 % to 7 % and then to the current commission structure of 5 %. The commission was reduced to 5 % a couple of years back and an understanding was reached by the airlines with the trade associations to reduce it to zero by 2009. Bulk of the travel agents at the time of reduction in commission to 5 % failed to realize the threat of a future 0 % commission regime and failed to change their business models. The worst affected are the ones who are now searching for an alternate business plan when they are almost amidst the storm. I perceive it as an opportunity and not as a threat and I strongly believe that some sound planning renewed business plans and cost effective professional service travel agents will continue to rule the roost.
Let’s conduct a SWOT of the Travel Industry at the crucial juncture of this commission alteration:
Strengths
1. The main strength of travel trade is that even today the online travel market and online airline websites accounts for less than 5-8 % of the total ticket sales in India.
2. The Indian passengers continuance to depend on traditional travel agents is a big plus for this industry
3. The credit sales of airline products still holds good with the traditional travel agents (by traditional travel agents I mean the one’s with indigenous ownership and office based offline sale of products/ services)
4. Passengers in India depend on a travel agent to get his expert advice for arranging his travel.
5. India is a country where visa services and other ancillary services is a big market. Normally a passenger depends on a travel agent to arrange a visa besides tickets and other formalities. India is unlike western countries where visa is not required for most of the countries.
6. Credit card and Internet density is still low in semi urban and rural areas and areas like Punjab, which account for 40 % of traffic at Delhi airport holds the key for travel trade.
7. The travel agent’s bargaining power with the airlines still remains strong as bulk of the business is still generated through travel agents.
Weaknesses
1. The trade bodies like TAAI, TAFI and IAAI and not integrated and not very strong at the national level. They are divided amidst politics and often fail to present a united front for key and common issues. Some trade bodies are also accused of playing at the hands of the airlines. Most of these bodies are centralized with low levels of decentralization.
2. The industry is still in an unorganized stage which poses problems of faulty business models and low levels of professionalism
3. Failure of the industry to keep pace with the times and develop alternate business plans
4. Most of the IATA agents in India are ticketing agents and their failure to serve a range of other services is posing a risk to their survival
5. The non-IATA agent base of 14000 agents is totally unorganized and not regulated and their role in the entire industry is still unknown. They threaten the survival of the registered agents.
6. Low levels of trained professionals and lack of professionalism is hurting the industry
7. High degree of competition in the absence of any entry or regulatory barriers is creating excess capacity in the industry. Margins too have shrunk due to competition.
8. Mushrooming of unscrupulous and fraudulent people who are cheating people on the pretext of illegal immigration and human trafficking are giving a bad name to the industry and hurting the overall confidence level of people on traditional travel agents.
Opportunities
1. The opportunities lie in getting organized and creating core competencies by economies of scale and reducing costs.
2. With the advent of E-Ticketing there is an opportunity to rework staff requirements and reduce costs in staffing.
3. Reduction of commission to zero will introduce the concept of transaction fees which will find favor among the corporate clients
4. There is an opportunity in creating an effective and successful business model based on transparency in earnings and reduced costs of operation.
5. There is plenty of scope for consolidation in the market. In the event of zero commission structure airlines may introduce bulk buying of seats wherein big consolidators and consortiums will benefit. Also overriding commissions like PLB and Boarding Incentives will be increasingly used by airlines to market their products.
6. There is a big opportunity in promoting, selling and functioning as a travel agent by introducing all other ancillary services like hotel reservations, cruises, insurance, visa, destination counseling, event management, MICE etc in the product portfolio.
7. Reduction in commission will serve as a deterrent for new entrants in the market and may even clean up the market with withdrawal of some players. This will check unscrupulous competition in the market and bring some order.
Threats
1. The biggest threat is from within the industry. The small and medium sized travel agencies face threat from online travel agencies and consolidators (both B2C and B2B) which are backed by venture capitalists and corporate houses and can go the extra mile by giving hefty discounts and undercutting fares to bring their brand value. They consider undercutting cost as a part of their investment.
2. The other big threat is from low margins by means of transaction fee, which will be implemented to replace the commission structure.
3. The real threat in zero commission eras comes from a situation wherein airline starts marketing the fares directly to the customer through their websites. In such a situation a ticket which cost “x” amount to the passenger on the airline website, will also cost the travel agent “X” amount. The travel agent will resultantly sell that ticket at x+ transaction fee, which will certainly be more than what the airline sells directly to the passenger. In such a situation there may be a temporary or permanent shift of passengers from the travel agents to the airlines.
4. With a global slowdown, high inflation and high interest rates the disposable income of people is low and this is adversely affecting the industry. Prolonged period of slow down might trigger panic in this industry which is witnessing a paradigm shift in terms if its revenue model.
Conclusion
The travel industry has hit an air pocket with global economic slow down and proposed reduction of agency commission to zero. From the airlines perspective, they need to work more closely with the agents than ever before and explain to them the rationale behind the reduction of commission; besides giving them confidence that travel agents remain the biggest distributions channel for the airline products. Travel agents need to reinvent their business models and besides looking at ancillary services they need to shun the image of being a ticketing agent. They need to take up the role of travel consultants and counselors. Using the technology to their advantage, agents need to reduce cost and develop an effective and cost effective model of doing business.
The actual impact of the reduction in commission on the travel industry will not be felt before the end of next fiscal during which the risk bearing capacity and patience of the travel industry will be put to test. Lets hope the churning of this industry brings out some “Amrit”.
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