Air Canada Moves To Blunt Rising Commissions

By | April 6, 2017

Air Canada reduced travel agency compensation on certain fares, effective April 1. The change followed increases in the airline’s sales and distribution costs as a percentage of passenger revenue in each of the past three years.

A spokesperson confirmed that the carrier reduced commissions paid on some international airfare types, including interline and business-class fares. The moves, which impact only “Canadian” agencies, came despite an international expansion plan that includes more intercontinental flying and a bunch of new U.S. transborder routes.

Air Canada also bumped up agency compensation on certain fare types, the official said. “In some cases other changes will increase overall compensation for agents,” according to a written statement.

It’s not unusual for airlines to modify the methods or amounts of agency compensation. Industry consolidation offers leverage to reduce payouts. Air Canada dominates its home market, though rival WestJet has made significant gains over the years.

In 2009, WestJet and Air Canada went back and forth in announcing new or revised commission levels for certain fare types. After a few weeks of activity, both settled on 7 percent for affected fares. For Air Canada, these were its lowest, or Tango, rates. In 2015, Air Canada reversed this decision.

One agency source speaking on the condition of anonymity said Air Canada replaced that 7 percent program with a “monthly guarantee on Tango. This way the payment is ‘hidden’ from the other carriers.” Now, the source said, the airline is “foolishly” going to zero.

The Air Canada official confirmed the change for North America Tango fares as well as a commission reduction on international Tango fares.

Air-Canada-commissions

Image: Air Canada

Another TMC executive said that regarding the commission change on Tango fares, Air Canada tells agencies they should instead sell higher-priced Flex or Latitude fares. “The view in the market is that if you don’t want us to sell these fares, then don’t put them out there, and understand you are not competitive,” the source said.

For travel agencies, commission cuts on premium-class international fares hurt the most. When the front-end commission is knocked down by four or five percentage points, that can mean hundreds of dollars for a single booking.

“Air Canada says they have very aggressive global expansion plans and they need the travel agency community to support them,” said one TMC leader. “Then they cut back our commissions on high-yield international travel. There is a lot of mistrust in the travel agency community.”

The executive noted that back-end override programs also took a hit. This source indicated that all the changes, on balance, mean lower overall compensation.

Competition has been pushing commission expenses northward, according to the airline’s financial reports.

Air Canada in 2016 incurred CA$845 million in sales and distribution costs (including regional operations). That was up 15 percent from 2015. The airline’s annual report indicated the increase reflected “higher commission expenses” partly due to more tickets sold and “new and enhanced competitive incentive programs.” Air Canada also sold a higher proportion of tickets outside Canada, driving up “transaction costs.”

As it had in years past, Air Canada noted that its competitors “continue to pursue commissions/incentive actions and, in many cases, increase these payments.” A decision to match “competitive actions,” it added, could “have a material adverse effect.” At the same time, also according to the 2016 annual report, Air Canada continued “to undertake sales and distribution initiatives in an effort to increase revenues and reduce overall costs of sales.”

Asked why Air Canada made the latest changes, the spokesperson wrote:

Air Canada continually refines its agency compensation structure for a variety of reasons, including market conditions, for competitive reasons and due to strategic considerations. The overall aim is provide a structure that balances the ever changing interests of our agency partners and those of the airline and our customers. We expect this evolution to continue, but that agencies will remain a valued partner for our company long into the future.

Within Canada, WestJet is Air Canada’s only sizable competitor. In December it announced updates to fares and change fees but kept base commissions unchanged. The lowest fares generate no commissions with the rest ranging from 4 percent to 8 percent. WestJet in March also announced a renewed travel agent portal, including a booking tool.

According to its 2016 annual report, WestJet’s sales and marketing costs increased nearly 10 percent from 2015. This increase outpaced revenue, which grew 2.3 percent. The carrier cited higher ancillary revenue partially offset by downward pressure on fares resulting from the depressed energy sector. Revenue from “managed corporate business,” though, jumped 15 percent.

Canada’s No. 2 airline last year began seasonal service from six Canadian airports to London Gatwick. Air Canada’s leisure-oriented Rouge brand competes on a few of those routes. Mainline Air Canada serves London Heathrow from six cities in Canada.

More Costs Of Sales

According to its annual reports, Air Canada’s sales and distribution costs — including commissions, GDS fees and credit card fees — amounted to 6.4 percent of its total 2016 passenger revenue. That was up from 5.9 percent in 2015, 5.7 percent in 2014 and 5.6 percent in the two previous years.

For the year 2015, the carrier noted those costs increased partly due to “a higher volume of ticket sales generated through global distribution system providers.” But some of that was “offset by the impact of more favorable distribution rates negotiated in 2015.”

The airline had announced new deals with Amadeus (in 2015) and Travelport (in 2014, renewed in February 2017).

Air Canada’s relationship with Sabre is complicated. Last fall, the companies marked progress in selling the carrier’s paid seats. At that time, a Sabre announcement said the development “solidifies both companies’ collaboration” on personalizing offers. A Sabre official said the company “is distributing Air Canada’s full content to its subscribers.”

However, collaboration was not a theme in Air Canada’s February 2017 court filing related to the US Airways v. Sabre antitrust case. It said the parties were no longer using a “full content” agreement. Air Canada claimed to have “endured substantial year-over-year price increases imposed by Sabre, making Sabre’s booking fees almost twice what Air Canada pays to other GDSs.” Its current Sabre deal, Air Canada added, prohibits expanded work with “other, lower-cost GDSs.”

In both 2013 and 2012, Air Canada reported lower commission expenses, offset somewhat by “higher transaction fees paid to global distribution service providers.”

Additional info: Air Canada in 2016 began 12 new transborder and 15 other international routes. This year it started or announced eight more to the United States. “On routes between Canada and the U.S., [Air Canada] now accounts for 45 percent of seat capacity with WestJet its nearest rival [at] 19 percent,” according to Airline Network News & Analysis. “Both Delta Air Lines and United Airlines have just over 9 percent of capacity.”

Related

Airline Consolidation, Other Factors Further Squeeze Travel Agency Commissions

Amadeus, Air Canada Reconcile

New AA Travel Agency Incentive Favors Higher Fares Over More Passengers

Airline-GDS Negotiations Heat Up As Parties Try To Sway Lawsuit’s Outcome

Sabre Sees An ‘Inflection Point’ On Ancillaries Via Travel Management Companies

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