Service Fees & Commission Cuts Opportunities and Best Practices for Travel Agencies Amadeus Research Paper TOPS Marketing June 2007 1
Index 1. Some definitions 2. Disappearance of commission across markets 3. Consequences of commission cuts 4. Industry Best Practices 5. Key findings 6. Zero commission market trend 7. Recommendations 8. Main conclusions 2
Some definitions Service Fee A service fee is the amount of money charged by the travel agency to the travel buyer (consumer or corporation) for services provided in addition to the actual product purchased (e.g. air ticket). In this instance, the full commission (when it exists) is passed back to the customer. Transaction Fee A transaction fee is the agreed amount of money charged by the travel agency for each transaction; that is for every single action or operation which is performed to achieve the booking. Management Fee A management fee is a fixed amount of money (percentage or flat fee) added on top of the invoice based on different criteria, regardless of either transaction or volume. This fee is totally independent from the relationships between the travel agency and its suppliers. E.g.: it can be the agreed amount of money charged by the travel agency for a specific period (per month, per year, etc.). 3
Disappearance of commission across markets United States 0% - 2002 American, Delta, US, Trans World, United, Northwest and Continental Airlines Germany, Russia 0% - 2004 LH, Aeroflot Finland, Netherlands, Scandinavia 0% - 2003 Finnair, KLM, SAS Belgium, France, United Kingdom 0% - 2005 SNB, AF, BA 4
Consequences of commission cuts (1/2) Amadeus Research 2006 What is the biggest challenge facing your business today? > Reduced revenue from commission - 34%: Global - 50%: Western Europe What is the main strategy for your agency? > Revenue Growth - 49%: Global - 47%: Western Europe 5
Consequences of commission cuts (1/2) How to reduce reliance on commission? Streamlining operations and controlling staff costs Expanding or moving into the leisure business where commissions on non-air products remain high (cruise, hotels ) Specialising in geographic areas or becoming niche players for specific leisure products (destination weddings, group travel ) Establishing a service-fee driven business model 6
Industry Best Practices Everything you need to know about service fees Commission cut Level of fees charged Top 3 charged services 1. Issuing airline tickets United States 0% - 2002 5$ - 250$ 2. Changing airline tickets 3. Special coupons & promotions 1. Issuing airline tickets Scandinavia 0% - 2003 20-100 2. Ticket refunds 3. Rail tickets 1. Distance fees for airline tickets France 0% - 2005 5-150 2. Rail tickets 3. Administrative fees United Kingdom Spain 0% - 2005 0.4% - 2007 N/A 20-200 1. Fees on no-frills airlines 2. Credit card payments 3. Fees on scheduled air fares 1. Issuing airline tickets 2. Changing airline tickets 3. Ticket refunds Sources: ABTA (UK), ASTA (US), Dr. Fried & Partner (FR, SCA) 7
Key findings (1/4) Successful travel agencies apply effective service-fee schemes Many TAs are expanding their service-fee models, both in terms of the amounts charged and the number of services for which they charge fees 96.8% of ASTA travel agencies (2005) charge fees for at least some client services, and among them, rates continue to rise Travel Agencies charge the most for trip-planning and research Service fees help travel agencies increase their revenues 73% of the total revenue of Scandinavian business travel agencies comes from service fees Increase revenue coming from service fees to reduce the risks resulting from commission cuts 8
Key findings (2/4) Revenue Sources mix for business travel agencies 33% 27% 25% 18% Commissions (air if applied, cars, hotels, etc ) 81% 28% 22% 21% 9% 73% 9 Override/SLA includes GDS incentives Fees Revenue/sales 12% 7% 39% 51% 54% Latin America Italy Poland UK Scandinavia 9.0% 9.5% 8.6% 10.7% 10.7% Source: Hermes Management Consulting Understanding travel agencies cost drivers and ways to optimise business in the Scandinavian countries, November 2006
Key findings (3/4) Airline related fees are still top of the list Travel agencies apply fees most often for airline related services based on: the destination (domestic / regional / international), the ticket, type of airline Airline related fees range from 10 to 120 Ticket related fees: issuing ticket, ticket price, cancellation, lost ticket, number of tickets sold, refund, class US - TOP 5 charged services 1. Issuing airline tickets 2. Airline ticket exchanges Min 8$ 10$ Max 50$ 100$ 3. Special coupons and promotions 10$ 150$ 4. Rail tickets 5$ 50$ 5. Frequent flyer reservations 5$ 250$ Source: ASTA 2006, Agency Service Fees and Benchmarking Report 10
Key findings (4/4) Service fees increase customer loyalty and satisfaction Use CRM tools to customise service fees. It will help travel agencies to target customers with tailored services based on their past purchasing patters Increase cross-selling and up-selling of services Communicate on the savings customers have realised by booking through a travel agency Identify the services for which customers see the highest value: trip planning, hotel only, special coupons, cruises, frequent flyer reservations Different behaviour according to the type of customer: loyal customers, expensive package, emergency travel Sell the ticket the customer really want! 11
Zero commission market trend Service fees versus commissions Latin America United States AMOUNT Eastern & Central Europe Western Europe Service Fees Commissions TIME 12
Recommendations Challenges and success of the Service-Fee model Challenges to Service-Fee models Customer resistance to pay for services Staff uncertainty on how to charge fees Staff resistance to charging fees Difficulty in processing fees at the point of sale Amadeus Recommendations Communicate to customers up-front Educate on service fee schemes and solutions Increase transparency Automate processes & customise fees Expected Results Increased customer acceptance Increased knowledge of travel agents and staff Increased staff confidence Increased revenues Customer loyalty and satisfaction Travel Agents value 13
Main conclusions Educate Educate staff and travel agents thanks to formal training programs on service-fee schemes and high margin products Communicate Communicate to customers up-front and inform them of the new service fee business model Identify Identify the services for which customers see the highest value and are willing to pay for Automate Automate processes for charging fees to avoid errors and increase travel agents efficiency and productivity 14
Sources Reports from: ABTA, ASTA, Dr. Fried & Partners, F.A.Z. Institute, Gfk, Hermès Management Consulting, Forrester Research, Mintel, Ministère du Tourisme France, PhocusWright, Roland Berger Strategy Consultants, SNAV, SCTMC, Travel Insider, Travel Weekly, Business Travel News Press articles from: La Cross Tribune, Réseau de veille en tourisme, the Daily Times, EyeForTravel, Journal du net, Tourmag Professional Interviews: ECTAA Congress, FVW Kongress & Fachmess Travel Expo, AAA 15
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