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Turbulence for travellers

Surajeet Das Gupta | June 12, 2004

Will this be the last summer of cheap international travel for Indians with twitchy feet and a globetrotting bent of mind? That was the great fear as six European airlines battled it out with Indian travel agents on Friday afternoon.

The airlines want to slash the agents' commissions from September 1 and that could lead to higher airfares for travellers.

Even as the airlines held marathon meetings with two different associations of travel agents on Friday it wasn't clear what the outcome would be.

The airlines have agreed to meet again on June 22 with the Travel Agents Association of India. But the meeting with another association, the Travel Agents Federation of India ended acrimoniously with threats of a strike and a legal battle.

TAFI has already indicated that it intends to fight back against the six airlines -- British Airways, Lufthansa, KLM, Air France, Austrian Airways and Alitalia -- which want to slash commissions given to the travel trade. On Friday it called a strike in Mumbai.

The airlines say the meeting with TAFI ended after the travel agents demanded that the airlines withdraw the tariff reductions. "We are partners but now they have left us with no choice but confrontation," says an agitated Yatin Dossa, president, Travel Agents Federation of India.

But this is one battle that could affect the travelling public radically. Around the world the mass-scale globetrotting of the last 20 years has been fuelled by cheap tickets that are made possible mainly by travel agents who, because of competition, sacrifice a part of their commission to offer cheaper discounted tickets.

Now the airlines are clearly trying to hike the price of tickets -- though they are disguising the move. In India the six European airlines have written separate letters to the travel agents warning that they are planning to reduce commissions by a steep 28 per cent -- from 7 per cent to 5 per cent.

Worse still, foreign airline executives, who aren't talking on record at the moment, say the eventual aim is to slash commissions to zero in the coming years.

Foreign airlines say the move is necessary because they face cutthroat competition and must slash costs to stay afloat. They defend their move, saying that around the world travel agents are moving from a commission-based system to one based on a management fee (a percentage of the total travel budget of a corporate) or a transaction based model (you pay for every booking made which in the US ranges from $25 for short haul flights to $50 for long haul flights).

Nevertheless, the struggle between the two sides has only begun and they are ratcheting up the pressure. And there have been battles in other parts of the world too: even in the US travel agents went on strike and protested airline moves to cap commissions in 2002.

Indian travel agents say the airlines have acted unilaterally and that the move could destroy smaller travel shops. Says Balbir Mayal president, TAAI: "If this cut is implemented 70 per cent of the travel agents will have to close shop."

But the international carriers are equally determined. Says the CEO of one leading European airline: "There is no question of pulling it back. Already all the top travel agencies in the country have moved from commission to a fee-based system and they constitute a substantial value of business. However we are ready to listen to their concerns."

So why are travel agents peeved? They point out that business is India is done very differently from Europe and North America, so it isn't right to impose global standards here. Both in Europe and North America would-be travellers have started making their reservations over the Internet and that has changed the way business is done.

Mayal says that travel agents in India offer corporates various services and facilities without charging for them like a 45-day credit, delivery of tickets at home, visa and passport services amongst others. But in the US and Europe where the commissions have been replaced by a fee or a transaction-based model these services do not come free of charge.

In India the cost of these services is met from the commission that they get from international carriers. Travel agents here also bear the risk of bad debts as airlines don't give any credit (in the US 98 per cent of tickets are bought on credit cards where money is secured compared to 2 per cent in India).

That apart, agents also pass on part of their commission as discount on the tickets to the customer. Says Mayal: "We pass on about 5 per cent of our commission to customers and keep 2 per cent. But with the reduction we have nothing left to pass on."

In this situation there are only two options: either customers must pay more or most travel agents will be forced to shut shop.

Even the bigger travel agencies say that while they might not be affected (as they have already shifted to a management fee system) they oppose the way the decision was thrust upon travel agents.

Says Vijay Chaddha, chief operating officer of BTI-Sita (part of the Kuoni group): "While the airlines followed the IATA rules by giving a three-month notice to travel agents for cut in commission it should have been done in a more coherent and transparent manner."

Chaddha also points out that in most countries the national carrier takes the lead on commission cuts. Air-India is keeping a low profile though industry insiders say it supports the move to cut commissions.

There are other concerns too. Dossani says that most of their corporate deals are on an annual basis -- which come up for renewal in April or December. So travel agents cannot re-negotiate terms for the time being.

Travel agents say that they are aware that they have to re-jig their business like agents in other parts of the world -- that means reducing their dependence on airline ticketing and shifting to other businesses like hotel bookings, packages. But they say they need two to five years to move to a zero-based system.

Says Subhash Goyal, chairman, Stic Travels who still earns 70 per cent of his revenue from ticketing: "The Indian market has not matured like in the US and Europe. It is a premature step, we need more time to diversify."

But international carriers say that the attack on them in unfair. Says a senior executive of a foreign airline: "We have had discussions with them for the last 12 months so how they can say the decision was unilateral beats me."

International carriers point out that even profitable carriers don't make 3 per cent net profit on their turnover in a cutthroat competitive market. "So how can agents justify a 7 per cent commission. They have enough leeway to make money and reduce costs."

So is there a solution in sight? The travel agents are, inevitably, pushing the airlines to maintain the status quo for the time being.

Mayal has suggested another formula: airlines could reduce the productivity-linked bonus (a cash incentive), which they offer to travel agents based on their volume of ticket sales -- to reduce their outgo. Some have suggested that airlines close down general sales agents to whom they have to pass off margins.

Alternatively, some are suggesting a five-year timetable for abolishing the commission system. But the airlines are on the runway and they aren't likely to abort the takeoff.

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Number of User Comments: 2

Sub: Turbulence for travellers

Internet has brought about radical changes in business dynamics. All forms of agencies will have to see the writing on the wall. The hefty commissions ...

Posted by Prakash


If the Airlines' reduced commission is applicable to all agencies uniformly, why should they have any grouse,? May be some were really good in provision ...

Posted by J.N. Kini


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