“Cutting commission does not mean less revenue for agents”
Published: 07 Aug 2009
In-Depth: Air France KLM’s point of view on commission structure in India
Airlines have been negotiating and re-working on their distribution strategies to optimise reach offered by indirect channels.
If indirect channels can deliver higher margin business and save travel suppliers from the burden of high fixed costs vis-a-vis direct channels, then it would be hard for airlines to ignore this proposition.
At the same time, airlines maintain that service fees is not only a way to compensate for the loss of commissions but also generate new revenue streams. And airlines like Air France KLM have been trying to assert this in more and more markets including India.
In order to assess the relationship between airlines and traditional intermediaries in India, EyeforTravel.com’s Ritesh Gupta spoke to Marnix Fruitema, SVP Asia Pacific, Air France KLM.
Fruitema, who is scheduled to speak at EyeforTravel’s Travel Distribution Summit India 2009 to be held in Mumbai (October 6 -7) this year, had this to say:
Can you provide an insight into the current commission structure for international flights?
Air France KLM and Northwest have successfully introduced “zero” percent commission in India as of 1 November, 2008. Other airlines have done the same. Today, most airlines in all parts of the world apply zero percent commission. The process started 14 years ago in the US when 7 airlines capped the commissions, followed by Europe in the beginning of 2000. Not only Asia Pacific, but Africa is also currently following the same path.
Service fees are not only a way to compensate for the loss of commissions but also generate new revenue streams that guarantee long term profitability. Many agents have expanded their service fee model in terms of amount charged and the number of services for which they charge fees. Fees have increased customer loyalty and satisfaction, as has been demonstrated in other parts of the world.
How do you assess the economic scenario in India as far as the travel and tourism sector is concerned? How has this affected travel distribution business?
Both leisure and corporate flows are impacted by the recession.
Leisure traffic to Europe and the US is suffering but is rather benefiting shorter and cheaper destination within Asia. Corporate traffic is the most impacted as corporates are freezing their travel or downgrading their class of travel in order to save cost. Indian market (BSP International ) is down roughly 30%, like many other markets in Asia. Of course, this also affects the distribution side. At the same time, Air France KLM are well positioned in Asia, including India and are gaining market share.
Considering the pressure on airlines to keep their costs down, to what extent would you justify the ongoing discussions to reduce commissions? How do you think travel agents, be it offline or online, are acting as true partners in today’s scenario?
For travel agents, cutting commission does not mean less revenue as the fee from the consumer can bring new revenue according to the quality of the service provided by the travel agents. In other words, it is the consumer determining the remuneration for the service rendered. The main travel agents were already working with a transaction fee, so it was not an issue; a model which is being used worldwide. Air France KLM will always “incentivise” the agents for selling their products, which is different than a standard 9% or 3% IATA commission.
It recently emerged that airlines in India are gearing up to launch a portal to “save on agent commission and service charge”. These airlines are making this move under the banner of Federation of Indian Airlines (FIA). How do you assess such move?
We are not aware of this development in India. Air France KLM are working closely together with trade partners and will always continue to do so.
Even in markets like Indonesia and Hong Kong, international carriers like Air France have been in news for reducing commissions from five to three percent later this year and then moving on to zero by April next year. But agencies say there is no room for them to negotiate. How do you assess the readiness of such moves in India considering that discussions have been around for a while now?
It’s imperative that there is a constructive dialogue between trade and airline. Its vital that this communication takes place as early as possible, to discuss the new model , including a transition period. We have done so in all countries and keep on doing so.
Those who feel that the market is not ready for service fees, say that it is better for airlines to build the fee into the ticket price rather than seek extra money on top of the ticket value. What are the concerns in this context?
It’s the agent who should and can build a fee in the ticket price. Then we go to a totally transparent system, where the airlines have a price tag for the ticket and the travel agent has a fee for its service.
Is there an argument to follow the lead of Emirates and continue with the five percent commissions, or will their loyalty be short lived? How do you expect this market to shape in the next couple of years or so?
Commissions have and are disappearing worldwide. Agents will generate new revenue streams by introducing service charges that will guarantee long term profitability. Practice in Europe and the US have proven that agents who add value to the transaction earn more money than before. Travel agents are and will always remain crucial in the distribution of the airline products. At the same time, it’s the consumer who wants to have a choice, more choices today than 25 years ago. He or she wants to chose how to book and where. Airlines will provide them with choices, agents likewise. After the worldwide crisis, the Indian travel market will continue to grow, and grow faster than many other market, with plenty of benefits for consumers, airlines and travel agents alike.
Travel Distribution Summit India 2009
Marnix Fruitema, SVP Asia Pacific, Air France KLM is scheduled to speak at EyeforTravel’s Travel Distribution Summit India 2009 to be held in Mumbai (October 6 -7) this year.
For more information, click here:
http://events.eyefortravel.com/tdindia/agenda.asp
or contact:
Reece Gladstone
Regional Director, Asia-Pacific & Middle East
Email: reece@eyefortravel.com
Telephone: +61 (0)3 9938 1201
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