Airline Consolidation, Other Factors Further Squeeze Travel Agency Commissions

By | January 6, 2017

Once in a while, some in the buyer community are excited by the dollar signs associated with global distribution system incentives paid to travel management companies. Disclosures from the US Airways v. Sabre trial recently offered such an occasion. Testimony indicated this money is significantly smaller than commission revenue from airlines, but a new examination of U.S. government data shows the latter income source is down dramatically — and not just historically.

No one familiar with industry history should be unaware of the cliff on commissions between 1995 and 2000, though the visual is striking. In the peak year of 1993, United Airlines alone paid more than $2 billion in sales commissions to third parties including travel agencies. And that was a far smaller United than we have today. In 1993, U.S.-based airlines as a whole paid more than $8 billion globally, or 12.6 percent of passenger revenue. By contrast, in 2015 they paid about $1.27 billion in commissions, representing 1 percent of passenger revenue. That ratio held during the first nine months of last year.

This wasn’t news to Executive Travel president and founder Steve Glenn, but he was “pretty shocked” by the scale.

Of course, airlines cutting and eventually eliminating the standard 10 percent U.S. point-of-sale commission that existed before 1995 was the primary driver. But the squeeze was not only long ago. From 2011 to 2015 — a period featuring what may be one last round of legacy airline consolidation — commissions paid by U.S. airlines dwindled further. Despite carrying 9 percent more passengers and generating 11 percent more in passenger revenue during the timeframe, U.S. airlines paid 17 percent less in commissions ($1.27 billion in 2015 versus $1.53 billion in 2011).

During the five-year period, commissions paid on domestic travel increased by a little under 1 percent to $804 million. That’s the highest level for domestic payments since 2004. So the real impact was on international travel. Commissions paid for DOT’s three main international reporting regions (Atlantic, Pacific, Latin America) dropped 35 percent from 2011 to 2015.

International reductions were particularly steep from 2014 to 2015, when commissions in the three regions fell by 36 percent after having risen in prior years. Economic troubles in South America helped cut commissions paid on travel to the region by more than half to $135.5 million. Airlines flew more passengers but at lower yields. Including US Airways, commissions paid by American Airlines for Latin America travel plummeted by two-thirds from 2014 to 2015 (to about $78 million from $233 million). AA’s Latin America revenues fell by about $1.4 billion (20 percent) in that time, according to its annual report. United cut commissions by about the same rate as AA, to $13 million.

Atlas Travel & Technology Group CEO Elaine Osgood said her TMC felt that Latin impact. In general, she said, “although we recognize the reduction in commissions paid from 2011 to 2015, we have been working hard to increase our margins, which continues to allow us to sustain and scale our business.”

Commissions paid by U.S. carriers for transatlantic travel fell by 24 percent from 2011 to $170.3 million in 2015. United’s payments in that region halved between 2014 and 2015, to $28.7 million. Over the Pacific, the five-year industry decline was 21 percent to $142 million. From 2014 to 2015, United was down there by 26 percent and Delta cut by 35 percent.

Airline consolidation certainly played a role. Industry pundit and former Tzell Travel executive Jerry Behrens said the same of consolidation on the agency side, shifts in booking channels away from agencies and downward changes in the yield and class-of-service mix. For example, he said, airlines over the last couple years moved a lot of the transatlantic business class fares into lower fare buckets, generating less in commissions.

As Glenn noted, the best commission opportunities are on international travel. However, the share of commissions for domestic travel relative to the total for U.S. carriers grew to 63 percent last year. It was about half in each year going back a decade. Share-shifting agencies earn the most commissions, noted airline analyst Robert Mann. Domestically, sources said, this tends to be a factor mainly for transcontinental and premium business.

International commission reductions continued during the first nine months of 2016. The total fell 11 percent compared with the same period in 2015. Mann suggested one cause of the outsized impact on international could be the practice of not paying commissions on fees, notably fuel surcharges. As fees levied by airlines account for a growing proportion of what passengers pay, the remaining commissionable portion (the base fare) shrinks.

The data showed other carrier-specific trends. Two years after its merger with Northwest Airlines and as the post-recession economy picked up, Delta in 2011 paid $634.4 million in commissions. The pair had not paid more than $600 million combined since 2002. From 2011 to 2015, though, Delta’s total fell by 16 percent to $536 million.

Still, Delta remained far more generous than its primary rivals. Including Continental’s numbers, United’s total in 2015 had fallen by 13 percent and wasn’t half Delta’s.

Behrens said airline management teams have taken divergent points of view. After the Continental-United merger, the company made a conscious decision to pay agencies less. But leaders at Delta were “philosophically the opposite” after the Northwest deal, viewing the higher payments as an investment in the highest-yielding channel, Behrens said.

Combined, American and US Airways came in at $366.3 million for 2015. Under the leadership of Scott Kirby and Doug Parker, US Airways was not known as an especially lucrative source for agencies. That became more apparent during 2014, the first full year of operation after the airlines announced their merger but before it was final. US Airways commissions that year returned to recessionary levels after four years of stability. AA’s commissions topped out in 2014 before dropping back again a year later.

Southwest Airlines’ M&A activity also ate into agency revenue. In 2011, Southwest recorded $8.5 million in commissions — its lowest number during the quarter-century of DOT data. That jumped to $34.4 million the following year with the acquisition of AirTran. The total fell back down again each year since then, to a piddly $2.8 million in 2015.

“Southwest absorbed AirTran’s more traditional agency commission deals in the merger, then extinguished them as they rolled off,” noted Mann. “Poof, no more commissions!”

Alaska Airlines commissions between 2011 and 2015 were up marginally and JetBlue’s commission line rose 33 percent. JetBlue’s payments have been on the upswing since the airline rejoined GDS channels a decade ago. Before that, JetBlue paid agencies next to nothing during its first few years. “Going back into GDSs and adopting the Sabre host exposed JetBlue to more commercial agency desktops and commissions, against the increased revenue that commercial agencies deliver — a considered strategy,” according to Mann.

The overall downward trend continued into 2016. Available data covers the first nine months of that year, and total commissions paid were $952.5 million, down from $974.7 million in the prior-year period.

Like GDS incentives and other supplier revenue, airline commissions help support travel management services. TMC executives routinely say that as any supplier revenues come down, client fees must go up.

Additional info: Unless otherwise noted, all data are derived from the U.S. Department of Transportation’s Bureau of Transportation Statistics. They do not include commission payments by non-U.S. airlines. A DOT press official indicated that airlines do not identify for regulators the entities to which they pay the reported commissions. Sources cautioned that the information is not perfect and may not offer precise comparisons between carriers. There is no common formula for reporting, and the data are not audited. Relative differences in historic usage of regional airline partners — and variations on how commission expenses were allocated between mainline and regional operations — could influence comparisons. An Alaska Airlines official pointed out that some of the money is not paid to agencies but rather to other airlines for interline service changes. A Delta official indicated the reported figures represent worldwide agency commissions but also monies paid to general sales agents and charter operators. 

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