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Service Fees and Commission Cuts



The reduction or removal of airline commission continues to challenge travel agencies’ profitability. It is crucial to understand what trends travel agencies need to be aware of to ensure that they stay ahead of the game and one step ahead of their competitors. This paper will focus on how to optimise profitability and increase travel agencies’ revenues with servicefee models.

Service fees help travel agencies increase their revenue

Service fees are not only a way to compensate for the loss of airline commission but also a way to generate new revenue sources for travel agencies that guarantee their long-term profitability. Indeed research conducted in 2006 by Hermes Consulting reports that 73% of the total revenue of Scandinavian business travel agencies comes from service fees.

Successful travel agencies apply effective service-fee schemes

Many travel agencies are expanding their service-fee models, both in terms of the amounts charged and the number of services for which they charge fees. As service fees are a valuable source of revenue, they have become much stricter when applying fees and now avoid waiving fees wherever possible.

Airline related fees are still top of the list

Travel agents apply fees most often for airline related services. They charge differentiated fees depending on the destination, type of reservation (e.g. frequent flyer), number of tickets sold or type of airline (e.g. full service versus “no frills”).

Service fees increase customer loyalty and satisfaction

Despite common perception, charging service fees does not result in a loss in clients. In the US, travel agencies apply the highest number of service fees. Nevertheless, in 2005, they reported a 90% customer retention rate.

Besides, fees can be tailored to suit individual customers. This helps travel agencies target their customers with tailored services based on their past purchasing patterns and identify services for which customers’ willingness to pay is greater, such as trip planning, hotel only or special promotions.

The revenue mix for travel agencies is increasingly shifting to service fees as airlines have lowered or cut commissions. With markets such as the US or Scandinavia which are far ahead in this trend, successful travel agencies in many European countries are fast adopting, and constantly upgrading, their service fee schemes.

Introduction

The following three pages summarise the key findings of the Amadeus white paper, “Service Fees and Commission Cuts”.

Airline commissions are now a thing of the past in the US. In Europe too, commissions have dropped significantly in recent years. This continues to give travel agencies sleepless nights.

Thirty-four per cent of travel agencies surveyed by Amadeus said reduced revenue from commissions was the number one challenge facing their business. In Western Europe, lost commission revenue is the number-one worry for half of all travel agents.

To reduce their reliance on airline commission payments, travel agencies are applying one or more of the following strategic options:

a. streamlining their operations, controlling staff costs whilst ensuring the customer feels as little impact as possible;

b. expanding or moving into the leisure business where commissions on non-air products remain high (cruise, hotel, etc);

c. specialising in geographic areas or becoming niche players for specific leisure products (e.g. destination weddings, student travel, group travel, cruises only, etc.);

d. establishing a service fee driven business model.

This paper intends to help travel agencies understand how they can optimise their business and improve their profitability after airlines have reduced or eliminated travel agency commission.

Some useful definitions

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 (hotel booking, air ticket, etc.). In this instance, the full commission (when it exists) is passed back to the customer.

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. A transaction fee is designed to cover a travel agency’s operational costs and includes a profit margin.

A management fee represents 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. For example, it can be the agreed amount of money charged by the travel agency for a specific period (per month, per year, etc.).

Successful travel agencies apply effective service-feeschemes

In Europe, Scandinavia is probably farthest ahead in terms of implementing a service fee model. Research conducted in 2006 by Hermes Consulting reports that in 2005 the Scandinavian travel agency market achieved the highest net margin (revenue/sales of 10.7%) compared to other European countries. The main reason is the successful shift from commission to service fees, with 73% of the business travel agencies’ total revenue coming from service fees, and only 18% coming from commission. Core reservation activities (assessing customer needs; searching for, proposing and negotiating a solution; and making the booking) represent the most significant expenses in both business and leisure travel agencies, accounting for more than 40% of their total costs. It was therefore considered better to charge for these services, especially for leisure travel agencies which handle the least experienced customers and have the most complex set of products and packages.

Scandinavian countries have thus developed a very successful service-fee model and travel agents are now becoming true consultants: they apply “do-it-yourself” transactions and are destination specialists. Service-based pricing schemes are gaining notoriety and sooner or later may become universal. In the case of business travel agencies, service fee calculations vary according to the sales channel, the type of product sold and the destination. They work with transparent service fees. As for leisure travel agencies, they include their service fees in the package price without detailing their services. They also often negotiate net fares with their suppliers and generate more revenue through mark- on these fares.

Serving the customer in a changed environment

Some travel agents still do not charge service fees. The main reasons are: customer resistance to pay (why pay for a service which used to be free?), difficulty in processing and collecting service fees (a lot of travel agencies do not have the appropriate calculation tools and often calculate fees manually), staff resistance or simply the fact that travel agents are not sure how to implement service fees.

To overcome these difficulties it is important that travel agents structure their service-fee models efficiently and define how they communicate fees to their customers. The calculation and collection of service fees are two critical processes; travel agents should avoid doing it manually and invest in service-fee management solutions to automate these processes as much as possible. Finally, charging service fees does not necessarily result in a loss of clientele: a survey by KPMG/TNS Sofres shows that in France, for example, 41% of customers are ready to pay more to benefit from their travel agencies’ services.

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