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.
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In addition to the added cost issue to businesses, there is also the added hassle when travelers think that they are traveling on a ticket worth more than it actually is. We would have travelers at airports or on the phone with the airlines having to unexpectedly pay hundreds of dollars/pounds/euros in order to rebook flights, airline staff telling them, “Your ticket is worth $400, not the $750 on your agency invoice.”
I used to work for a large Australian travel company with locations in the States and other countries. (One you probably all know.) Marking up is encouraged in order to boost up the lower than average salaries. (They have actually had former agents sued for it.) The belief being that corporate clients are too busy to notice the markups or care as the costs get written off. But we all end up paying for the markups when companies have to raise their product or service costs, don’t we?
Attract the clients with lower than average agency service fees, then make up for it later on the ticket markups. Not a good way to retain clients. Thank you for the insightful article.
Thanks for the comments “Madame X.” I hadn’t even thought of that to be honest; travelers getting caught out by assuming less restrictive fare conditions due to the higher apparent value of the ticket. And maybe also by receiving only part of the expected amount when a ticket is refunded?
Tony, the market is segmenting and there is demand for zero transaction fee products (witness the CTM announcement for its small and medium enterprise segment). This isn’t “free” for the SME; it’s a mark-up product. The SME can do its own very quick fare check/value for money by using a metasearch such as Skyscanner or Kayak to check if the CTM (or other agency mark up product) is competitive.
The larger end of the corporate market negotiates its fees, and some procurement folks think a low fee is a sustainable offer from a TMC. Often it’s subsidized by retained supplier revenue (which continues to diminish), the market is morphing from the theory of transparent contracts back to opaque ones. The airline moves with surcharging GDS content are accelerating this practice and the corporate buyers need advice, strategies and measurement products to enable “like for like”/”total cost of trip” (aka ownership in U.S. parlance) to compare the individual airfare offer (including fees/taxes) on a transaction, pre-purchase basis.
The role of the TMC in providing this service is arguably more valuable than before, but it needs a consistent and not an opportunistic strategy in order to be trustworthy (particularly given the examples of recent major client challenges in the Australian market).
Procurement often creates new problems — when unsustainable transaction fees are negotiated, often they come with a hidden cost. The market determines the model and the fair price the customer is prepared to pay. My forecast is the TMC/intermediary model is in decline, particularly for point-to-point online transactions. It doesn’t add sufficient value for its fees. However, it maintains a valuable role in competitive city pairs and complex itineraries, and the customer needs to decide what it’s prepared to pay as a premium to the intermediary in those transactions it elects to buy from third parties.
Procurement in managed travel needs to ensure they understand the fine print in their TMC contract as it refers or eludes to the practice of markups vs. fees/supplier vs. client revenue. Procurement needs advice on better due diligence and contracting as well as a means to test the reality throughout the life of a TMC contract.
Procurement in SME is undertaken differently, and anyone contracting zero fee models via third parties needs a different process to test the value for money at individual transaction level.
The TMC/intermediary world is changing rapidly, driven by the behavior of airlines and their new/NDC related distribution strategies.
Hi Martin. Great points. Thanks! Regarding low/zero fee “mark-up products,” my position would be that they could only pass muster if (1) the fact of the marking up of fares was clearly made known upfront in the offer (and not just “knowable”) and (2) the quantum was declared or at least capped. Then the buyer can do some comparative sums and it’s a fair deal. But then you still have the issue of monitoring the markups. Detection and measurement have always been the difficulties, and I think are the reasons why the issue has been a “sleeper.” There are other grey areas that I’ve come across, such as in Hong Kong where an airline has dropped commission but instead offered a set “markup” to agents. That’s also kosher, I think, if it’s a set amount and knowable to the client. It’s really just a dollar amount commission. It’s not a case of an agent arbitrarily adding on several hundred dollars when it can. I should have included in my article, by the way, that we’re not saying that hidden fare markups are normal or even common practice in corporate bookings. But we do believe that they occur often enough to warrant travel buyer understanding and attention. Cheers, Tony