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. 

Tony O’Connor, Butler Caroye Asia Pacific founder and managing director, and GBTA-Australia & New Zealand director

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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Mary Ellen George On NDC And Why We Need To Focus On The Plumbing
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6 Comments

  1. Thanks for the great article, Tony, and your perspective on how we are evolving towards new business models for intermediates and the supply chain in general. There is a way to go before we have a stronger idea of how the airlines are truly going to differentiate their products beyond a distribution versus product innovation strategy. Airlines are finally catching up and able to meet the promise of yesteryear’s quality service standards. That helps all parties; better service levels work for everyone across the ecosystem of travel. It makes me wonder what is the value-add the TMC provides when technology is empowering tremendously the consumer to self-service via suppliers. I agree TMCs are going to be around for a while but they need to bring their A-game to be a player and invest in automating customer services that delight their customers versus just their operations and margins.

  2. The key challenge here is that very few corporate clients have ever been exposed to the true cost of their TMC supplying travel management services. I agree that the TMC business model is flawed with regards to GDS segment income, but that is about it. It’s naive to think that this is the only industry where a supplier/manufacturer of goods incentivizes its agents. I spent 12 years in the banking industry lending to companies. The majority had this system in place. I get frustrated where this pervasive model is perceived as underhanded, drives fares up for clients or delivers abnormal profits for TMCs. I’ve done some research on the UK TMC P&Ls and the average operating profit is 1.4%. If you strip out GDS segment income, that reduces to about 0.7/0.8%. Does the supplier consultancy community think that’s healthy? Will they accept an increase in fees in return for net fares? Answers on a postcard.

    1. Thanks for your comments David. Here’s my postcard. Let’s address these one by one. Just because other supply chains have a conflicted structure pivoting around influential intermediary sales agents doesn’t mean travel should ideally be like this. You refer to banking. We’ve just had a Royal Commission into the banking industry in this country, so I don’t think that is a supply chain to emulate. Indeed, it was found that a lack of transparency (customer naivety perhaps?) enabled low-integrity conduct. Many reforms were recommended. Regarding profit levels, please forgive me if I refer to your figures as “that old trick.” I’ve heard some TMC salespeople saying this for years; citing very low % profit margins because they use the value of the travel booked as the base. If you calculate profit as it is normally done such as in annual reports, TMC profits are typically well into double figures. (I was an equity analyst for 11 years.) What was found in the banking inquiry was that the distribution structure, where heavily commissioned agents also directed clients with “independent” advice, generated widespread conflicted practice and some that was bad. An example of the former in our case could be booking agents being attracted to commissionable fares and rates away from cheaper net fares and rates. I hope this isn’t widespread. The main example of the latter is hidden arbitrary mark-ups to fares and rates.

      1. Ok, here we go. The challenge around changing models such as travel is that the client will end up paying more for the travel management service. As for TMC profit margin, here’s my bona fides on why this is true. 1) I was FD for five years for a TMC and signed off accounts and 2) In my current role I’m part of a team who has bought four companies in 11 months and 3) Deep analysis of TMC accounts which are publicly available. If profit margins were higher, then we would see more PE investment. They are not, so you don’t. You’re right in that if you assess profit against gross turnover then the percentage number is higher. That said, in absolute terms, the number is still low given historically low gross margins achieved by TMCs. I’m all for having a fresh model, but the reality when I look at all the commentary is this will never happen. The market is too fragmented. However, for a modern TMC to thrive they need to adopt a retailing mentality around the products and services they offer. If they can offer more to a corporate of the products they are consuming anyway, but making a better shopping experience, then surely this is a good thing? This is where the next-gen TMCs are going to positively impact on the bricks-and-mortar TMCs…as long as they can invest…which is predicated on them being profitable. Would love to debate this in more detail with you Tony in a different format to this.

        1. Thanks John. I agree. Thanks David. I’m afraid I mostly disagree. Yes. Let’s take this private and return to the CD discussion with a fresh post after we trade points. Constructive public argument is a healthy thing.

  3. While suppliers offer net airfares and hotel rates and allow them to be marked up in the channel. Or, continue to pay sales commissions, overrides and incentives. The channel will continue to steer and bias sales to where it can make most money. The problem is that most intermediaries don’t disclose this activity to their clients…Having claimed historically to have lost the ability to make money from travel sales. (When commission cuts turned the sales model into a fee model, etc.) The problem has been compounded by client procurement. Clients have negotiated fees below a level that sustains channel profitability. They have also been susceptible to short term gain (think signing bonus or retention bonus etc.). So, round-and-round it goes. Honesty, integrity and trust — probably being compromised on all three fronts. No one area to blame – I think we should view it as a “community problem.” Incredibly difficult to work out a solution. Although some of us are having a go! …and thanks to Tony O’Conner for his expertise as always.

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