NEWS TRAVEL WEEKLY BUSINESS CONTINUED FROM THE BACK
Lowden, author of the ‘Airline Distribution Costs’ report, said: “Airlines seeking to justify a move to ‘direct’ distribution schemes omit important and unavoidable costs. Taking [these] into account, the costs of ‘direct’ bookings and those made through online and offline travel agencies are equivalent.” The report identifies five
areas that airlines routinely leave out of calculations of direct-sales costs: the cost of online customer acquisition, customer service, technology development, payment processing and web search. It notes: “Airlines have to
replicate the advertising and reach of OTAs and metasearch companies [to compete online] and this is expensive. “TMCs and OTAs provide substantial back-office support for businesses and customers [and] this cost will fall upon airlines. GDSs and OTAs have invested massively in consumer-facing and back- office technology. This cost will fall upon the airlines if not provided by these companies. “Costs [of] credit cards and other processing costs are [also] paid by OTAs and agents. These costs will fall on airlines if they move [more] traffic direct.” Ettsa secretary-general
Christoph Klenner said: “Some airlines claim sales made via agents cost them several times more than direct sales. Yet the evidence shows there is no reduction in costs when airlines push for more direct sales, and costs actually increase for some categories of airline. We can only conclude airlines must have other motives to push direct sales.”
Klenner suggested: “One clear motive seems to be avoiding the transparency, convenience and choice that travel agents and neutral travel platforms offer consumers.”
Airlines ‘underestimate costs of direct bookings’
Ian Taylor
ian.taylor@travelweekly.co.uk
Airline claims that increased direct distribution will slash their cost of sales are pulled apart by a report published this week.
The ‘Airline Distribution Costs’
report by aviation consultancy Infrata notes: “Airlines claim direct distribution can be up to four times cheaper than indirect …[and use this claim] that direct distribution is ‘cheaper’ to support their position to competition authorities and the public. However, no rigorous testing of this assertion is available.” The study addresses this by
offering an assessment of the costs of direct sales by a network carrier, such as British Airways. It suggests airlines claim a typical cost of €2.56 per booking segment. Infrata’s estimate of the ‘true cost’ of direct distribution by the same carrier is €12.56 per segment, much closer to the cost of sale through a GDS (€14.21). It argues: “The total cost to
the airline involves numerous non-accounted-for categories – [in particular] airlines ignore how
TICKET: Report suggests airlines fail to count cost of customer service
much it costs to acquire customers.” They also ignore payment
and credit card costs, the costs of customer service, online and offline advertising and marketing, and the costs of technology. The study concludes: “When costs
are properly accounted for, overall channel costs are very similar.” Despite direct sales enabling carriers to cut GDS costs and agents’ commission, incentive and override payments, the report says: “The cost differential is much smaller than airlines contend.” Indeed, Infrata suggests
the greater an airline’s direct distribution, the higher its costs owing to “a substantial increase in
advertising costs to pull customers from current channels, increased costs of customer service that agents provide, credit costs, fraud costs and the cost of managing customer changes”. It concludes: “Going direct does
not reduce costs; in fact, in several cases it increases costs.” The report suggests airlines pursue direct distribution less to cut costs than for “the avoidance of neutral price comparison”. Christoph Klenner, secretary-
general of the European Travel & Technology Services Association, suggested reduced price comparison would leave consumers “vulnerable to increased prices”.
IS IT REALLY CHEAPER FOR AIRLINES TO GO DIRECT?
Infrata’s ‘Airline Distribution Costs’ report claims to model “objectively and accurately the impact of moving sales from indirect to direct channels”. It concludes that:
l A large network airline with a big home market, such as British Airways, could expect “negligible potential cost savings” of €0.11 per booking segment, or “less than 1% of distribution costs”, from driving more sales direct.
l A large network carrier with a small home market, such as one of the Gulf carriers, could expect to “add 11% to the cost of each booking”, or €1.14, from driving sales direct.
l A regional airline, such as Flybe, could see an increase in booking costs of €0.52, or 4%, per segment by shifting more distribution direct.
lThis is because “the cost of customer acquisition, online marketing, technology development and customer service increase considerably”.
lThe report concludes “promoting direct distribution [is a way to] deliberately try to avoid neutral and transparent price comparison”.
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travelweekly.co.uk 26 October 2017
PICTURE: ISTOCK
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