Longtime travel management consultant Tony O’Connor is founder and CEO of Airocheck, a firm specializing in auditing travel agency airfare markups. Naturally he has words of caution for travel buyers when it comes to the fares their travelers buy. But he also argues that markups don’t help the sellers, either.
Fare markups are arbitrary price increases to airfares by the booking agent in the fare creation process. They bring extra revenue to the agent and an extra cost to the travel buyer. Markups often run well into double-digit percentages. How common are they? The practice isn’t rife; it’s patchy but not uncommon.
Markups are obviously bad for travel buyers. They are a direct added cost and a conflict of interest. But the fact is, they also have a negative impact on the larger strategic interests of both airlines and travel management companies. This should help us in our efforts to lessen the practice.
Firstly to airlines, a fare markup by the intermediary is just like a trade tariff, except that the “tax” goes to the TMC instead of the government. It increases the price of the air service and so the demand goes down. The airline sells fewer seats. But the airline’s revenue is not restored by getting more money per unit sold. That stays the same. The same price times fewer units sold equals revenue shrinkage. Airlines employ large, expensive and sophisticated yield management systems to set and fine-tune their airfares, almost in real time. I don’t understand why they allow the results of such meticulous price-setting to be played around with to their competitive disadvantage.
And for TMCs, they have two accepted revenue sources: fees and commissions. (Commissions are still substantial and, in fact, often generate more revenue than fees.) They differ in a basic and important way. Fee revenue is quite predictable and low-risk. The TMC can estimate what it will be quite accurately. Not so for commission income. This will vary depending on inputs that are much less constant and knowable. Factors include the client’s actual mix of commissionable and non-commissionable airfares and hotel rates; its mix of airlines; each airline’s mix of routes; and each route’s mix of classes and fare types. It’s all a big “guesstimate.” Commission income is usually quite uncertain.
For the TMC, fare markups are the latter, more risky type of revenue. Marking up, even in cases where it is done systematically, is usually opportunistic. The frequency and amount of potential markups are hard for the TMC to predict.
A very attractive attribute of markups for a TMC is that they subsidize and enable artificially low fees to win client business. So, here’s the point: markups essentially shift a chunk of the TMC’s revenue away from low-risk fees to a high-risk form of income. It’s a white-knuckle strategy that you’d expect them to actively resist.
It also greatly reduces the likelihood of account retention, since even if the travel buyer doesn’t know the hows and whys of fare markups, they will probably eventually notice the higher fare levels. For the TMC, winning an account costs several times more than retaining it.
The interests of buyers, TMCs and airlines are therefore actually quite aligned in the area of fare setting.
Additional info: O’Connor will lead a discussion on the topic of markups next month at the Global Business Travel Association conference in San Diego.