In-Depth: TAAI’s point of view on commission structure in India

Published: 30 Jul 2009

In-Depth: TAAI’s point of view on commission structure in India

Over the past few months, some of the established long-haul airlines in the Asia Pacific region have faced strong resistance from travel agencies regarding their move to reduce commissions or even establish zero commission practice in a phased manner.

A market like India, too, has witnessed quite a few acrimonious situations.

For instance, in February this year, Travel Agents Association of India (TAAI) had warned that it mightstop sales of tickets of all the 11 major international airlines if they do not resume paying commission.

“Pay commission (in) India where you are getting revenues, or quit India,” Rajji Rai, president of TAAI, had reportedly said.

Recently, it emerged that the TAAI might severe links with foreign airlines and promote only national air carriers, following its ongoing skirmish with Singapore Airlines over payment of commission.

While airlines in India are paying three percent commission on basic fare plus fuel surcharge, the relationship between airlines and agents can change considering the current business environment and the pressure on airlines to reduce their operating costs.

In order to know more, EyeforTravel.com’s Ritesh Gupta recently spoke to TAAI’s president Rajji Rai, who is scheduled to speak at EyeforTravel’s Travel Distribution Summit India 2009 to be held in Mumbai (October 6 -7) this year.

Excerpts:

Last year in December, post agents’ decision to stop selling tickets of Jet Airways, Jet Airways agreed to pay three percent commission on gross fare (defined as basic fare plus fuel surcharge) of domestic and international tickets sold in India. The commission scheme replaced the transaction fee model. Can you provide an insight into the current commission structure for both domestic and international flights?

Currently, the agents are getting three percent commission on basic fare plus fuel surcharge on domestic and three percent on international also.

How do you assess the economic scenario in India as far as the travel and tourism sector is concerned?

Once again in June 2009, airline traffic has fallen hinting perhaps that most carriers are likely to report large financial losses for the second quarter. Of course, a downturn in business travel has robbed the airlines of customers. So they try to reduce the fares to attract travellers but this doesn't always work.

There is weaker demand for business travel because of the global economic recession, setting off a particular trend - for example- according to some analysts traffic declined slowly in April (in comparison with March), which raised hopes that a travel recovery was under way. Those hopes were dashed in May and June.

In fact, the International Air Transport Association (IATA) announced recently in Geneva that we need a revised outlook for the global air transport industry because of losses to the tune of US$4.7 billion in 2009. This is significantly worse than IATA’s December forecast for a US$2.5 billion loss in 2009, reflecting the rapid deterioration of the global economic conditions.

Definitely, the state of the airline industry today is grim. Demand has deteriorated much more rapidly with the economic slowdown. On the other hand, falling fuel prices are helping to curb even larger losses. But the relief of lower fuel prices is overshadowed by falling demand and plummeting revenues. On the whole it will be a grim 2009 for all in the trade. Some analysts say that prospects may improve towards the end of the year, but it would be beneficial to all concerned to keep expectations low.

What we need is more access to global capital, the desire to consolidate resources and find effective solutions to enable our industry to regain some resemblance of normalcy and make it more profitable.

Considering the pressure on airlines to keep their costs down, to what extent would you justify the ongoing discussions to reduce commissions?

The distribution costs must be built into the fare structure. The reason being the travel agents act on behalf of the airlines and therefore the customer comes to a travel agent to transact a business. And under the IATA regulation 8101, the travel agent is authorised by airlines to act on their behalf.

It recently emerged that airlines in India are gearing up to launch a portal to “save on agent commission and service charge”. These airlines are making this move under the banner of Federation of Indian Airlines (FIA). How do you assess such moves where traditional partners aren't going to play any role?

There already exists portals with many private operators. And if airlines start a similar portal it is not going to change as the customer goes to an agent because he gets value-added services.

Even in markets like Indonesia and Hong Kong, international carriers like Air France have been in news for reducing commissions from five to three percent later this year and then moving on to zero by April next year. But agencies says there is no room for them to negotiate. How do you assess the readiness of such moves in India?

The market scenario in India is different from the countries mentioned. Because Indian market is larger and bigger in volumes and (handles)has a high percentage of corporate and individual customers. Therefore, to make a comparison between the two is a fallacy. Although airlines justify paying 3% commission on gross fares, showing agents would now earn more, they should take into view the current scenario in the Indian market and also give due weightage to requirements and sentiments of the Indian consumers and the Indian travel agent, and not base their decisions on international trends.

Is there an argument to follow the lead of Emirates and continue with the 5% commissions, or will their loyalty be short lived? How do you expect this market to shape in the next couple of years or so?

Commission will remain at 5% in the next two years or so because airlines have instituted a system of issuing productivity linked bonus on volume based sales.

Travel Distribution Summit India 2009

TAAI president Rajji Rai is scheduled to speak at EyeforTravel’s Travel Distribution Summit India 2009 to be held in Mumbai (October 6 -7) this year.

For more information, click here:
http://events.eyefortravel.com/tdindia/agenda.asp

or contact:
Reece Gladstone
Regional Director, Asia-Pacific & Middle East
Email: reece@eyefortravel.com
Telephone: +61 (0)3 9938 1201