Airlines: Why A One-Size-Fits-All Commission Pricing Strategy Will Fail You in 2022
According to The International Air Transport Association (IATA), 2020 was worst year on record for the airline industry due to the COVID-19 crisis. There were 60% fewer passengers last year (1.8 billion) than in 2019 (4.5 billion) and total industry passenger revenues fell by 69% with total net losses of $126.4 billion.
Then the widespread vaccination campaigns of summer 2021 gave airlines hope that leisure air traffic might recover to 2019 levels by year end. And things, especially regional bookings worldwide, looked optimistic.
Airlines scrambled to update their processes to absorb the big changes in travel requirements and consumer behavior—factoring in enhanced hygiene and safety standards, checking of passenger locator forms, vaccine and test certificates, and adding more contactless touchpoints.
But COVID had more up its sleeve. The future of the industry once more quivers with uncertainty, as a new variant of concern, Omicron, forces multiple countries to once again impose travel restrictions and close borders.
In times like these, every single flight matters to the bottom line, and having an incentive plan based solely on the geography, cabin and fare class sold without regard to your agency and NDC strategy is going to impact your market share and revenue growth. Because not only are you giving away a portion of your revenue with every commission deal, but you’re sub-optimizing a large (and growing) segment of your market.
About as passionate about price as one can get, we at Pricefx have some very strong (and knowledgeable) opinions on and solutions to airlines looking to optimize their prices and strategies in order to ensure they’re never leaving money on the table.
Let’s explore how you can be moving away from a one-size-fits-all approach to commissions by optimizing your prices and discounts across your touchpoints and resellers and adapt to the extreme pace of industry change expected in 2022.
Selling Airline Tickets Through Agencies
Online bookings represent one of the largest market shares in the sector. Of the 148 million online travel bookings in 2018, 82% occurred without any human interaction. And even physical travel agencies may see a resurgence thanks to convenience-seeking millennials willing to pay more for more bespoke solutions.
Obviously, you need to be selling flights through agencies like Expedia, Skyscanner and local travel agencies and, obviously, you’re offering commission on those sales. How much commission you pay depends on the class sold; a basic economy ticket might only earn 4% commission, while a first-class ticket might earn 10%.
The problem is most airlines; the Joe Bloggs Travel Agency and every small agency like them are employing the same commission strategy across all agencies and routes. Expedia (who sells 20% of your overall ticket volume) gets the same commission for their sale of a first-class ticket from Paris to Hong Kong as Joe Bloggs Travel Agency (who sells just under 0.1%) gets for his sale of a first-class seat from London to Glasgow.
In fact, with most [leisure travelers] seeking low-cost flights (thank you, Ryanair), you know it won’t be difficult to move basic economy seats yourself, so you decide not to pay any commission to agencies on basic economy sales, just on more expensive seats as an incentive to push those higher-end fares.
There are two big problems with this one-size-fits-all approach.
1. One Size Pricing does not fit all
Price optimization software can help you fine-tune your strategy to ensure you’re maximizing revenue and growing your market share.
Currently, you’re working towards a company limit, let’s say of 5% of revenue, that goes on commissions. Your team works out what % commission you’re going to pay across your offerings so that your total giveaway does not exceed that 5%. And these calculations are then used across the board; for online agencies, retailers, and travel management companies (like AMEX).
But what if you had a different strategy for travel management companies than you have for online travel agents or for retailers?
Could you get to that 5% a little differently? Might you discover that you only need commit 4%? Or that 6% could yield a much better result?
Let’s put ourselves in the shoes of our leisure flyers for a minute. If you’re booking a vacation (flights, hotels, day trips, etc.) via your local travel agent, you don’t want to be blowing your budget on the flights and then having to check in to a campsite. In fact, if you’re going to blow the budget, it would be on your accommodation. You want the getting there to cost as little as possible (including baggage fees and other ancillary charges), so you can enjoy the being there. To this end, you’re more likely to choose cheaper flights, regardless of carrier.
2. The Travel Agency View – Customize Commission and Sales
Now let’s become the travel agent. Your customer wants cheap flights. You’d be getting 4% commission for basic economy bookings from Airline A and 10% from Airline B… which are you likely to push? Easier still, if Airline A is offering 0% and Airline B is offering 10%…? Are you likely to spend the extra energy convincing your customer to upgrade so you can earn an extra couple of per cent through Airline A? Or might you just clap your hands and book with Airline B?
Pricing Optimization Helps Airlines and Travel Agencies Grow Revenue and Market Share
If you’re operating with a one-size-fits-all commissions structure, especially one where you don’t pay anything for basic economy sales, you’re cutting off your nose to spite your face. Because ultra-low-cost carriers know this and they’re swooping in to scoop up the (ever-increasing) market share of economically minded flyers you’ve left behind, winning them in all retail settings hands down by offering 10% commission on those same trips.
It’s Time to Restructure Your Commissions Strategy
In times like these, every single flight matters to your bottom line, and if you’re employing the same commission model across travel agencies, travel management companies and retailers, you’re ignoring a portion of your potential market.
The majority of your leisure customers want low-cost flights, but if most of your incentives are for your higher-end fares, your resellers are being won over by the higher commission that your competitors offer even on lower-cost fares.
If your commissions policy isn’t optimized based on type of reseller, you’re throwing away a portion of your revenue with every deal while also overlooking an entire segment of your market.
It’s time to improve your agencies strategy so that you’re leveraging the latest tools that enable you to simulate then deploy and manage, various payment models with different incentive plans that include NDC and the use of ancillaries per type of agency, geography, cabin and market share.
If you’re interested in learning more about how airlines and other industries can prepare for changes in inflation, this article provides 8 strategies for weathering the storm of price fluctuations.