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Issue 2001-4 - Wednesday, March 7, 2001

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  Serious threats for the future of online and offline agencies  

The sky suddenly grew dark on 28 February 2001, as Northwest Airlines and KLM announced, without prior notice, that they had decided to eliminate commissions they pay to online agencies. What's more, the measure was to come into effect overnight.

Such decision could have far-reaching consequences as it takes place at a time when on line travel agencies play a bigger and bigger role in online airline ticket distribution.

As of today, 42% of all Internet airline tickets, which represents $3.6 billion, are sold through online travel agencies.

Airline companies have been worried for a long time now over the existence of these new Internet intermediaries, which prompts them to launch two competitive projects, that should mainly deal with unsold tickets, and, that should be launched next summer.

In the meantime, many airline actors multiply promotional offers on their own web sites. This is how Alaska airlines and Horizon Airlines just announced that Internet users who make an online booking on their respective web sites would get a 10% discount on the prices displayed.

The aim of all this, which was confirmed by Delta Airlines (see article in our issue 2001/2), is to deal directly with the final customer in order to reduce, or even cut down, commissions.

With the economy slowing, as is expected, airline companies will probably be tempted to try and reduce their costs by all possible means.

The decision to purely and simply eliminate commissions in the US and Canada for tickets booked on line does not come as a real surprise to me. What did surprise me is the date but also the way that were used to carry out such decision.

Not only do I think that Northwest Airlines and KLM launched this attack far too soon, but I also think that they did it in the most unscrupulous way, as they did not given online travel agents any notice.

This is just another example of the classical conflict that exists between distributors and their providers.

If we study the full details of Northwest-KLM decision in that light, we can only start worrying, not only about online agencies but also about the tourism trade as a whole, whether it is offline or online.

With the Internet growing, airline companies are undoubtedly more and more tempted to sell most of their products by themselves, as it means a total control over their distribution network.

The result is clear. Whether travel agencies are online or offline, they will all, sooner or later, be faced with the same threat: will airline companies decide to cut down commissions or not?


It is true that such attitude does not yet affect Europe. But it is also true that the European eTourism market has not yet reached the same proportion as it has in Northern America. What's more, most European online agencies are just an expression of off line travel agencies. All this means that if airline companies decided to attack European online agencies, they would have to fight their current distribution networks straight away.

Let's also notice that, contrarily to the United-States, there are no differences between commission rates in Europe. Whether you are on or off line, the commission rate you get is always around 7 percent.

And yet, I fear the present truce will not last long.

For American distributors, this decision by Northwest Airlines, which is the n° 4 US airline, might well sound the death knell for smaller on and off line actors in the medium term.
Some analysts predict that American traditional travel agencies should see their commissions disappear in the next 18 months, and this would be a hard blow as the sector is already going through great economic difficulties.

But if the decision to suppress commissions is linked with a desire to cut costs because of an economic slowdown, traditional travel agencies will not get away from it.

There is a paradox in the Northwest-KLM decision: the commission they pay to online travel agencies being so low, it is hard to see where the economic interest lays for these two airline companies.

An online travel agency today gets a 5 percent commission, capped at $10, per each ticket sold. At the same time, offline agencies get commissions that might go up to $50. This proves that Northwest and KLM cannot gain much money by fighting the online distribution network only. But it leads us to think that airline companies might well attack the offline distribution network next.

In the meantime, online travel agencies are finding the decision rather hard to swallow and investors well understood it since Travelocity's shares fell 33% in just one day when the Northwest-KLM announcement was made.

Fortunately for Travelocity and Expedia, only 25% of their revenues come from airline tickets.

These companies anticipated this type of scenario a long time ago and, as a result, they started diversifying their activities and now sell hotels, packages or even cruises, sectors in which commissions are bigger (they can go as high as 15% to 20%).

What's more, in order to establish themselves in the other tourism sectors, these online agencies became retailers and now produce their own packages.

And these distributors will be more and more tempted to become producers. This phenomenon can also be seen in Europe with eBookers or even Promovacances in France.

As we can see, the future of the whole trade is at stakes here and it proves that this business is going to be totally restructured.

As a result, we are going to witness changes in the different business-models but also major concentrations.

Indeed, how can an agency expect to stand up to such attack if it is not big enough?

And this when the validity of Northwest-KLM bet comes up.

In order to avoid losing part of their revenues, online travel agencies can pursue different strategies.

This is how Travelocity already imposed a $10 on Northwest and KLM tickets but some alternate routes could prove more destructing for Northwest and KLM.

First of all, some sites might decide to delete purely and simply the flights offered by these two companies from their database. More insidiously, we could also contemplate these flights being displayed at the bottom of the search results.

Finally, and this would prove more efficient, if connection flights are organised in a clever way for all long journeys, it would then be possible to replace Northwest and KLM by other companies for all intermediary segments, without the Internet user even noticing.

All these possible replies will depend on how the other airline companies will react to the Northwest-KLM decision in the coming days or weeks.

Either one of the three biggest companies decide to follow the lead and adopt the same attitude as Northwest and KLM, either these two companies remain on their own which would mean they have lost their bet.

At worst, all companies will follow the Northwest-KLM example, which would cause great damage among the smallest online actors.

On the other hand, all the biggest actors, such as Travelocity or Expedia, should not be in such great danger. At worst, these two actors would reach their break-even point a few months later than expected. And yet, Travelocity being Sabre's subsidiary, and Expedia being Microsoft's subsidiary, we should not get too worried about them.

I do not see how, should such thing happen, online travel agencies could remain impassive? This being the case, I am convinced that Travelocity and Expedia would have no choice but to join forces in order to act jointly against the airline "attacker".

If these two actors were together, airline companies would have no have no choice but to back out.

We already saw a similar case when Procter and Gamble played the same game with the large volume distribution. After a three-month blockade, it is finally Procter and Gamble that cracked up first and nearly begged the large distribution to take its products back…

Should airline companies decide to follow the Northwest-KLM lead, it could very well generate the same kind of attitude from the part of online agencies, but the issue of such confrontation is far too unsure for the stakes to be worth it ($10 per ticket sold).

Indeed, I do think that airline companies will have to wait a few years before they can hope and compete with Travelocity or Expedia through It will be very hard to make up for lost time to that matter.

In my opinion, the best attitude airline companies could adopt would be to use an aggressive price policy and offer good quality eServices in order to customize visitors. This is already what many actors such as Alaska Airlines are doing, which allows them to have very good online reservation rates without having to face up to their distribution networks, whether they are online or offline.

Online and offline agencies are now aware of what to expect as far as their future is concerned and need to find new strategies ASAP if they want to keep on living.

Let's also admit that the added value one gets out of the sale of an airline ticket can only be limited and only more complex products could make the difference.

The real eTourism battle should be based on quality and customer service, since Northwest decision made it even more difficult than ever before to make a profit on the price alone.


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