Making Sense of the Airline Distribution Noise – Domestic Airline Revenue Segmentation

On Wednesday, we began a series of looking at the noise in the press, the courts and even on Capitol Hill regarding airline ticket distribution.  The GDS companies are at the center of the debate.  Global Distribution Systems are the tool that is used by most agencies to access airline inventory and to manage the sale and reporting of those transactions for their customers.  
Today’s post will focus on the difference in revenues generated from the sale of domestic airline tickets for the travel agency channels.  The data is provided by the Airlines Reporting Corporation (known as ARC).

As background, ARC settles transactions for the Mega Travel Management Companies (Amex, CWT, BCD, HRG, Maritz, Omega, CWT/SATO, SATO), the Online Travel Agencies (OTAs) and the other brick and mortar agencies.   All told, as of April 2012, there are 13,896 ARC approved travel agencies in the US.
It is no secret that the airlines have been making a move to shift
distribution from what they perceive to be the high cost, GDS powered
travel agency channel to their own direct distribution (aka websites or
direct connections to the agency community).  

As we have shown in the previous posts in this series, the brick and mortar agencies issue tickets that are on average significantly higher in average fares than their  online counterparts.  The unspoken statistic here is that the airline’s own website nearly always matches or beats the OTA prices, so the conclusion is that the Mega agency and the other brick and mortar agencies in the US produce a higher yield than even the airline’s own consumer direct distribution, even taking into consideration commissions, overrides and GDS booking fees).  It is tough for the airline to make this up in volume.

Over the past 2+ years, the airlines have been successful in shifting agency distribution away from the OTA channel.  The OTA not only produces a lower yield, but the airlines in many cases still pay incentives to those agencies, thus lowering further the net profit on those tickets.  The share shift since 2010 has been 4 points.  The beneficiaries of that shift are the “Other Agencies”, which have picked up 3 share points and the Mega Agencies have come up one share point.

As the brick and mortar share goes up, so should the airline profits.

Hmmmm…. so why don’t we hear more airline announcements on board urging the
passengers to support their local travel agency??

If you are working over the weekend (and who doesn’t…), we’ll wrap up this series, looking at the international side of the debate.

Stay tuned.

1 thought on “Making Sense of the Airline Distribution Noise – Domestic Airline Revenue Segmentation”

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