Consultant, auditor and GBTA-Australia & New Zealand director Tony O’Connor discusses how TMCs, online booking tools and travel buyers should work together to make corporate travel economics more sensible.
Many corporate travel buyers would say they are not totally happy with the travel supply chain. It is classically conflicted. The rise of NDC and maturation of online booking tools present an opportunity to finally fix it.
First, here’s a history lesson on how we got into the current situation.
In 1947, the International Air Transport Association held its first worldwide Traffic Conference in Rio de Janeiro where it passed over 400 resolutions. Many of these pertained to airfare construction, pricing and agency appointment procedures. The result was tight governmental regulation and control over airfares. One of IATA’s stated aims was to limit competition between airlines. This quickly gave rise to travel agents; in 1952 the “pattern for airline-agent relations was set with the introduction of the Standard Agency Agreement,” according to IATA. Travel agents, with the customer interface, found themselves able to sell customer preference to airlines (and hotels). The price for their preference was a kickback, also known as a commission.
Agents sensibly consolidated into buying groups so they had ever larger blocks of preference to sell to the airlines and hotels. Commissions got bigger, and the costs of distribution and of travel increased accordingly.
Travel management companies grew out of the retail travel agency model, retaining the basic sales agent structure. Today, as is evidenced by those that are publicly listed, TMCs earn about two-thirds of their revenue through commissions from airlines, hotels and global distribution systems. Commercially, they are still primarily sales agents. This is a serious conflict of interest for TMCs.
Up until the 1990s, TMCs charged no fees and earned all their revenue from supplier commissions. Because a large part of the commissions were confidential, their sum, being the effective fee to the client, was unknowable and therefore high.
Around the turn of the century, buyers began pushing the fee-for-service model, whereby TMCs would be paid a service fee and receive nothing else. But commissions were cemented into the supply chain by settlement systems and contractual arrangements. With the flow of commissions unstoppable, buyers asked to receive them. What followed was a 20-year mug’s game. Commissions were too complicated, confidential and hard to get at. Few buyers ever received much commission income. Most was kept by TMCs. Visible base commissions fell due to more direct retail selling enabled by the internet, but at the same time overrides and marketing funds grew and offset much of the reduction. And TMCs could then also charge fees!
That brings us to today.
We again have an opportunity to wash costly bias and conflict out of the travel supply chain. Two things are happening that combine to present a real window of opportunity, but it won’t stay open for long.
The first is the second stage in the rise of online booking tools. OBTs have always been limited in their capacity to handle complex and international bookings. Forget the chatbots and predictive itineraries. These are just the latest shiny baubles in the shop window. The main game is to be able to manage all bookings by delivering all the necessary inventory and options. When that happens, the OBT replaces the TMCs — except for some support service and maybe a little consulting.
As this eventuality draws nearer, we have the opportunity to influence the commercial model of the newly forming OBT-TMCs. If OBTs just compete for and secure the existing flow of airline, hotel and GDS commissions, the opportunity will have been lost. With OBTs presumably eager to enhance revenues, and with airlines and hotels still keen to buy preference, it would likely take a concerted campaign by buyers to get a different outcome. We tried 20 years ago (even though it failed in the end), and we can try again today.
In one sense, NDC helps because it throws the cards into the air. On paper, NDC removes a large revenue flow to the TMC: its GDS commissions in the form of segment fees. TMC acquiescence almost certainly has meant that new background deals between airlines and TMCs soften this impact. But with distribution power shifting to the airlines, this is likely a temporary salve to TMC revenue loss. The TMC model is under real pressure. This should hasten the rise of OBTs and others that have not grown dependent on GDS commissions.
Incidentally, I don’t think that many current TMCs will disappear. They’ll morph, consolidate and survive, especially the larger ones, as they’ve always done. But their systems/services mix will change. I expect the survivors will combine the best IT with good consulting services. TMCs’ investments for in-house IT are ever-increasing.
Buyers have not been meaningfully included in plans for restructuring. Some surveying sponsored by a GDS or an airline doesn’t amount to much. Unless forced to, why would the airline power brokers of NDC — with some newly agreeable TMCs and GDSs in their contrails — compromise the opportunity for greater revenue realized via NDC by factoring in buyer interests?
Buyers need to push their way into the meeting room, armed with their spending power. It won’t happen by filling in a questionnaire.
NDC and online booking tools combine to present an opportunity to reduce distribution and travel costs by finally taking the commission-for-preference deal out of the supply chain. If it just moves from TMCs to IT providers, the window has shut.
We deserve a better supply chain; 1947 was a long time ago.
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