Making Sense of Airline Distribution Noise - International Transaction Volume

Over the last two days we took a look at US travel agency sales of domestic airline tickets.

Today, we are going to look at the international air transaction volume by agency channel.

Thanks to the Airlines Reporting Corporation (known as ARC) for providing the data for today's post.  As a reminder, ARC settles transactions for the Mega Travel Management Companies (Amex, CWT, BCD, HRG, Maritz, Omega, CWT/SATO, SATO), the Online Travel Agencies (OTAs) and the other brick and mortar agencies.   All told, as of April 2012, there are 13,896 ARC approved travel agencies in the US.

International air ticket sales by the agency community is an interesting study.

As we talked about on both Tuesday and Wednesday's blog, the airfares for international air tickets issued by the Mega agencies is nearly three times the fare issued by an OTA (and by default, by the airline itself).  To be clear, this is NOT because they charge more for the exact same ticket, but because their client base tends to be corporate travelers that fly business and first class more frequently and even for the coach fares, elapsed time and number of stops tends to be more important than price. 

And even with the brick and mortar (non-Mega) agencies, the ticket price is nearly double that of their OTA counterparts.  Again, not because they charge more, but because the dialogue at the point of sale does not begin with the lowest price.  Agencies are trained to cater to the overall needs of the traveler (who they are traveling with, why they are traveling, when they need to arrive, how they will get to their destination and yes, how much).

In 2011, the OTAs lost 1 point of share to their brick and mortar counterparts for international ticket sales, with the Megas picking up 1% share and the other agencies remaining static.  In the 1st Quarter of 2012, the share held by the Megas actually decreased by 2 points, with the other brick and mortar agencies picking up 1% share, and the OTAs also gaining by 1 point.   

All in all, on a net net basis, distribution hasn't changed at all in the 2+ year timeframe, with 72% of international tickets coming from Mega and other brick and mortar agencies and just 28% from the OTAs.  

As always, the story is not complete until you look at the revenue mix. 

Stay tuned tomorrow to see what this picture looks like when we look at the revenue split for international air transactions.

Making Sense of the Airline Distribution Noise - Domestic Airline Revenue Segmentation

On Wednesday, we began a series of looking at the noise in the press, the courts and even on Capitol Hill regarding airline ticket distribution.  The GDS companies are at the center of the debate.  Global Distribution Systems are the tool that is used by most agencies to access airline inventory and to manage the sale and reporting of those transactions for their customers.  

Today's post will focus on the difference in revenues generated from the sale of domestic airline tickets for the travel agency channels.  The data is provided by the Airlines Reporting Corporation (known as ARC).

As background, ARC settles transactions for the Mega Travel Management Companies (Amex, CWT, BCD, HRG, Maritz, Omega, CWT/SATO, SATO), the Online Travel Agencies (OTAs) and the other brick and mortar agencies.   All told, as of April 2012, there are 13,896 ARC approved travel agencies in the US.

It is no secret that the airlines have been making a move to shift distribution from what they perceive to be the high cost, GDS powered travel agency channel to their own direct distribution (aka websites or direct connections to the agency community).  

As we have shown in the previous posts in this series, the brick and mortar agencies issue tickets that are on average significantly higher in average fares than their  online counterparts.  The unspoken statistic here is that the airline's own website nearly always matches or beats the OTA prices, so the conclusion is that the Mega agency and the other brick and mortar agencies in the US produce a higher yield than even the airline's own consumer direct distribution, even taking into consideration commissions, overrides and GDS booking fees).  It is tough for the airline to make this up in volume.

Over the past 2+ years, the airlines have been successful in shifting agency distribution away from the OTA channel.  The OTA not only produces a lower yield, but the airlines in many cases still pay incentives to those agencies, thus lowering further the net profit on those tickets.  The share shift since 2010 has been 4 points.  The beneficiaries of that shift are the "Other Agencies", which have picked up 3 share points and the Mega Agencies have come up one share point.

As the brick and mortar share goes up, so should the airline profits.

Hmmmm.... so why don't we hear more airline announcements on board urging the passengers to support their local travel agency??

If you are working over the weekend (and who doesn't...), we'll wrap up this series, looking at the international side of the debate.

Stay tuned.

Making Sense of the Airline Distribution Noise - Domestic Air Transaction Volume by Channel

Yesterday we took a look at the average airfares per channel, but viewed in isolation, those numbers are not as meaningful.

Today, we are going to look at the domestic air transaction volume by agency channel. 

I would like to thank the Airlines Reporting Corporation (known as ARC) for providing the data for today's post.

ARC settles transactions for the Mega Travel Management Companies (Amex, CWT, BCD, HRG, Maritz, Omega, CWT/SATO, SATO), the Online Travel Agencies (OTAs) and the other brick and mortar agencies.   All told, as of April 2012, there are 13,896 ARC approved travel agencies in the US.

From all the noise that we hear in the press, if you would close your eyes and try to create this chart progression, from 2010 to the 1Q of 2012, I think most of you would say that online has gained on the traditional travel agency channels (Mega plus the other Agencies).  This is not the case.

Open your eyes. 

In 2011, the OTAs lost 3 points of share to their brick and mortar counterparts, with the Megas picking up 1% share and the other agencies picking up 2 points of share.  In the 1st Quarter of 2012, the share held by the Megas remained the same, with the other brick and mortar agencies picking up 1% share over the OTAs. 

So, with the higher yields from both Mega and All Other Agency categories, the overall picture from agencies distribution (even with commissions, overrides and GDS fees) is still a positive one for the airlines, with 59% of their distribution coming from the higher yield channels and just 41% from the OTAs. 

And now, you know the rest of the story. 

Stay tuned tomorrow to see what this picture looks like when we look at the revenue split for domestic air transactions.

Making Sense of the Airline Distribution Noise - Airfares by Agency Channel

With all the noise over airline distribution, how has it really changed since 2010?

I'm glad you asked.

For well more than a decade, I've been analyzing the changes taking place in airline ticket distribution here in the US.  There is a lot of noise over this issue, particularly as the airlines continue to invest in direct distribution and their online presence. 

Nothing quiets noise quite like the facts.    Today's post will focus on the difference in airfares for the travel agency channels.  The data is provided by the Airlines Reporting Corporation (known as ARC).

ARC settles transactions for the Mega Travel Management Companies (Amex, CWT, BCD, HRG, Maritz, Omega, CWT/SATO, SATO), the Online Travel Agencies (OTAs) and the other brick and mortar agencies.   All told, as of April 2012, there are 13,896 ARC approved travel agencies in the US.

Average Fares per Channel 2010 - 1Q2012

Let's start with the average airfare for each channel.  Yesterday I wrote about this for the most recent quarter in 2012.   Here is a picture of how this has changed since 2010.

In 2011, domestic airfares increased 7% each for the Mega TMCs  and 8% for all other brick and mortar agencies.  In the 1Q of 2012, domestic airfares increased 3% over full year 2011 each for Mega TMCs and all other brick and mortar agencies.   Online domestic airfares went up 5% for the same period. 

In measuring their effectiveness as a distribution channel, the Mega and brick and mortar agencies consistently produce higher average ticket prices (and as a result, a much higher yield) for the airlines than their online travel agency counterparts.

In 2011, international airfares increased 5%, 4% and 3% respectively for Mega, Online and all other brick and mortar agencies over 2010.  In the 1Q of 2012, international airfares increased 4% over full year 2011 each for brick and mortar agencies.   Mega agency average fares remained basically the same.  Online agencies were the only ones that saw a decrease at 7%. 


In measuring their effectiveness as a distribution channel for international tickets, the Mega agencies consistently produce highest average ticket prices (and as a result, a much higher yield) for the airlines than their online travel agency counterparts.  Brick and mortar agencies produce higher average ticket prices (and as a result a higher yield) than online travel agencies.

 

Tomorrow's post will focus on the changes in Domestic Air Transaction Volume.

Stay tuned.

Anti-disintermediation - The airlines should be leading the charge!

NOTE: Corrected Version

In commerce, anti-disintermediation is a term used to describe the preservation of intermediary positions.

Today's consumer can access goods or information on the Internet that traditionally required the assistance of an intermediary such as a retailer, travel agent, or banker. By cutting out the middleman (disintermediation), e-businesses are able to sell goods and services more quickly and efficiently, and for lower prices.

The question remains - does the middle man (or the technology that the middle man uses to connect buyers and sellers) play a valuable enough role that it should not be disintermediated.

If we look at this hotly debated topic in the travel industry from the consumer perspective, we can come to one set of conclusions and if we put on our supplier hat, we come up with an entirely different answer.

Let's look carefully at the latest Airlines Reporting Corporation numbers.   ARC reports tickets sold by the travel agency community, including Mega Agencies (TMCs), Online Agencies (OTAs) and all other agencies.  

First, domestic tickets sold by the agency community (both sold and wholly flown within the US).



In the first quarter of 2012, 25% of all domestic airline tickets sold by the agency community and 28% of all revenues from the sale of domestic airline tickets by agencies were attributable to the top MEGA agencies (Amex, CWT, BCD, HRG, Maritz, Omega and SATO).  The average ticket price (based on fares versus taxes/fees) was $395.76.  This is $84.50 and 27% higher than the average online ticket.  The assumption here is that the average online ticket price is very similar for OTAs and for airline/supplier direct.  This can be demonstrated easily by searching on any of the metasearch tools, such as Kayak. 

Translated through the supplier lens, the large TMC channel is a great way to sell tickets, even if it requires paying a commission and a GDS booking fee. 

Now, lets look at the balance of the 13,000+ agencies in the agency community (non-MEGAs).  The story is actually not so different.  The average ticket price is $393.58, which is $82.32 higher than the average online ticket, or 26% more than an airline gets when selling through their own site (or via an OTA).  These agencies issue 34% of all domestic tickets sold by agencies in the US and produce 37% of all revenues from the sale of domestic airline tickets sold by agencies.

Again, through the supplier lens, they should be pushing as much business through the agency channel as possible.

From the consumer perspective, it is important to understand that the airline ticket does not COST more through the agency channel.  It is that the dialogue is simply different.  Online typically presents the lowest cost first, even if price is not the consumer's criteria.  An agency asks lots of questions - who are you traveling with, when do you need to be there, do you want a non-stop.  Each of these helps refine the process to produce what the customer actually wants for a given trip.

Now, lets shift to International.


For international, a much smaller percentage of transactions (13%) sold by the agency community comes through the MEGA channel, but the average fare is more than twice that yielded by their brick and mortar agency counterparts and three times that of their online counterparts.   

The story here is that the MEGA agencies are by and large handling a more complex itinerary and these large TMCs sell more first and business class travel internationally than their brick and mortar counterparts.  The online international transaction is a simpler one and more focused on finding great deals, which may in fact drive the destination choice.

There should be no doubt in the minds of an airline executive that selling a ticket that is $1,020.39 higher than the average online transaction through a MEGA agency is a good thing and even an international ticket that yields on average $262.31 more than an online transaction is also good.  Both amounts are more than sufficient to cover a commission and a GDS booking fee AND still produce a higher profit than online.

It is clear from all these statistics that consumers will still advocate for disintermediation and the right to choose and that there is a time and a place for booking online or supplier direct and a time to put yourself in the hands of a professional to guide you through your options.

It is equally clear from these statistics that the airlines should actually be the ones leading the anti-disintermediation charge.   

Stay tuned.

Why are Gas Prices so high? This says it all (and more)

As I have always said, there is a direct correlation between the price of gas and the travel industry.  Not just because 85% of all travel is done by car, but because of the price of jet fuel and its relationship to the capacity and frequency of air service into each city.

Here is a clever portrayal of the issue of gas prices from the Online Bachelor Degree Programs:

What would US Air acquisition of AA mean to GDS disputes?

This is the multi-million dollar question. 

The US GDS companies might hope that an acquisition of this size and scope would remove the focus of one or both carriers on the GDS dispute. 

This might be true if US Airways had not gotten into the fray on what I will call "GDS Market Domination", aka antitrust.

American's attack on GDS distribution has been very high profile.

What some may not know is that in April of 2011, US Airways also filed suit against Sabre, alleging that Sabre has "engaged in a pattern of exclusionary conduct to shut out competition, protect its monopoly pricing power and maintain its technologically-obsolete business model."

US Air on its website says:

US Airways and travelers would see enormous benefits if Sabre were forced to compete on both price and innovation. US Airways is committed to trying to ensure that Sabre can no longer continue its anti-competitive conduct at the expense of consumers and US Airways. 

US Air has done a short term settlement with Travelport, as reported by Travel Weekly writer Johanna Jainchill. 

Travelport said that its existing content agreement with US Airways will continue “well into 2012.”

“All US Airways published fares and inventory, including Web fares available on its own website and through third parties, will be available to all customers in the U.S. and Caribbean who participate in Travelport’s GDS systems,” Travelport said.

Dan Westbrook, Travelport’s vice president of supplier development, further stated that the fares will be offered by US Airways “without any change to the terms for our subscribers.” 
 
The thing that I still find so very interesting about this whole fray is that both American and US Airways host their inventory on the Sabre Airline Services platform and there has been so much noise about "direct connect" technology.  There is no more direct connection than being hosted in the same platform as your distribution partner's system.

I realize that there is a risk of sounding like I don't understand the issues.  Trust me, I do understand what the airlines are complaining about, I just do not agree with their conclusion. 

GDS powered brick and mortar travel agency bookings on average yield $91.42 more per domestic booking and $197.29 more per international booking, with the Mega agency numbers coming in at $109.67 more per domestic booking and a whopping $1079.55 more per international booking.  These stats are directly from the Airline Reporting Corporation for the 3rd quarter of 2011. 

In any other industry, the board room discussion would sound something like this:

"How can we drive more business through this high-yield channel, where our costs are more than covered by the increase in average revenues?"

I do understand that there are better, newer technologies that have emerged for distribution of airline inventory online and via the traditional agency channel, and I would like to go on the record as being supportive of introducing innovation into the equation.

I believe there is a truce that can be called in this war.  My proposal?

Let's allow the airlines to put the distribution technology in place that makes sense for them and handles their merchandising and online distribution needs. 

For the GDSs, rather than connecting directly to the inventory system of the airline, you would then be connecting to the distribution platform of choice.  As long as you continue to bring in high yield business to the airlines that more than covers your distribution costs, this should be a win-win for everyone.

I'll soon be posting the 4th quarter ARC numbers by channel, which I guarantee will continue to support my proposal.     Stay tuned.

Travelport reinstates bonus program for employee - profits suffer

Travelport reported its 2011 results.  Net revenues were up for the full year at 2% over 2010, but operating income was down 27%.   In an interview with CEO Gordon Wilson, Travelport attributed the loss to the reinstatement of bonus programs for its employees.

Travelport's GDS transactions during the December quarter grew by 2 percent overall and 4 percent in the Americas versus prior-year levels, the company announced. 

The regional mix for Travelport in 2011 for the Americas was up from 49% of total, to 50% of total.  The other regions each declined less than 1% each, but if you look at 4th quarter numbers, the declines were in Europe and Asia/Pacific with MEA growing 1% of total.

Full-year 2011 global transactions reached 355 million, 2 percent higher than in 2010.

	2010				2011
In Millions	4Q		Full Year		4Q	Growth	Full Year	Growth
Net Revenue	$452		$1,996		$465	3%	$2,035	2%
Operating Income	$45		$274		$4	-91%	$200	-27%
Adjusted EBITDA	$115		$545		$106	-8%	$507	-7%
BY SEGMENT	4Q	% of Total	Full Year	% of Total	4Q	% of Total	Full Year	% of Total
Americas	37	48%	172	49%	39	49%	176	50%
Europe	19	25%	84	24%	19	24%	85	24%
MEA	8	10%	38	11%	9	11%	38	11%
Asia Pacific	13	17%	55	16%	13	16%	56	16%
TOTAL	77	100%	349	100%	80	100%	355	100%

Gordon Wilson also reported:

“2011 financial results were in line with expectations. Total transaction value for air travel and hotel sales was 6% higher at $83 billion, and we launched and deployed four significant, innovative new products designed around our new technology platform.
“We are making excellent progress on our strategic plan, delivering the broadest possible travel content for suppliers and travel agency customers to buy, sell and promote.”