Air travel in India: The road ahead

For those of you who have kept abreast with the recent spat between the airlines and travel agents, the latest twist in the tale would have been highly amusing. However, we @ iXiGO always knew this was bound to happen sooner or later – why? Because it made eminent economic sense for the airlines. Here we recount the turn of events for the benefit of those readers who are still not clear about the zero commission model.

Jul 20 – Airlines float a circular that they would be moving to a zero commission model from Nov 08

Nov 1 – Travel agents decide to boycott the airlines that want to stop the commissions (notably Air India, Jet Airways and Kingfisher).

Nov 9 – Airlines and Travel Agents meet and decide to levy a transaction fee for every ticket sold by the travel agent. It is decided that the fee would be Rs. 350 for domestic economy class), Rs. 500 for the domestic business class and would vary between Rs. 1200 and Rs. 10,000 for various classes in the international segment. It is also decided that the airlines would maintain price parity between their own (offices and website) and the travel agency channels. [Note: This did not make any economic sense for the airline as this also increased the overall fare, even on their own websites]. While Air India and Jet implement this after some hesitation, Kingfisher refuses to play ball and does not introduce the transaction fee on its website, thus making its website fare the best alternative for the end customer to purchase from. Agents threaten to boycott Kingfisher but it refuses to budge.

Nov 21 – Travel agents meet and ask the airlines to roll-back the transaction fee and move to commission model once again. Airlines oblige but refuse to move back to commissions.

Now, let’s analyze why this model failed to work. Well, primarily there are six reasons:

1. Airlines wish to eliminate the commission based agency model: Airlines used to pay commissions to travel agents for each ticket sold by them. This led to differentiated prices for the same ticket from different travel agencies. This also added a distribution cost for the airlines which was ultimately borne by the customers. Airlines developed their own websites to reduce this burn and attract direct customers, but still the customers ended up buying from travel agencies due to their ignorance and the ease with which one could purchase tickets from an agent.

2. Airlines decided to have price parity on their own selling channel: In Game Theory parlance, this was unstable equilibrium, any one player not playing ball would have stood to gain a lot from following a policy of differentiated pricing, both against the agents (because more customers of that airline would purchase directly from the airline) as well as against their competitors who maintained price parity (because they would either be forced out of their market share because of higher prices, or if they decided to match the prices of the airline going solo, would have to settle for lower margins!)

3. System of “Pay Transaction Fee Now, Get Paid Later” followed by airlines: The transaction fee went to the airline and was settled with the respective agents after a month. This system robbed the agents of the valuable ‘float’, essentially hiking their working capital and increasing their cost of operations.

4. Airline action – Pro customers: This has already happened in the West and is now penetrating the Indian skies. Since airlines own the inventory, they would like to offer the "best buy" option on their direct sales channels (airline website being more close to the customers). Ideally airlines wish to have direct contact with their end customers and agents- if you take its literal definition, they should earn on the service they provide to their customers and term it ‘Service fee’ or ‘management fee’. In case customers wish to buy their air tickets from travel agents, they would pay this service fee / management fee; else customers can avoid this service fee by transacting directly on airline website. In order to make the purchase among different airlines, searching for the best available fares across multiple airline websites would be cumbersome. This is where Travel Search engine (TSE), iXiGO.com plays a vital role, in searching and comparing website fares of respective airlines. Once the customer fine tunes his search on iXiGO.com and decides to book, he is redirected to the chosen airline website results / check out page for transacting with the airline. This not only helps airlines boost their online sales but also provides an added value to end traveler who would otherwise have spent hours searching before finding the best fare / most convenient timings across all airlines. It would happen sometimes that by the time the customer decides which seat to book for, the seat would be lost.

5. Opposition from Regulatory Bodies and Government: Airlines, especially the foreign ones are afraid of being accused of “acting in concert” against consumer interest (as jacked up prices would hurt consumers). There is pressure from the Indian government as well to lower prices and spur demand to counter recessionary pressures.

6. Last, but not the least, there is opposition from consumers who would like to make use of more efficient channels to purchase air tickets.