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Consumers Benefit from Struggling Airline Industry

There has been a very significant shift in the airline industry during the past 5 years, which has contributed towards lower costs for consumers. Rising operating costs and fierce competition have caused major airlines to explore numerous ways in which to cut costs and increase their profit margin. One such shift has been in the way in which seats are sold.

Twelve years ago, travel agencies were responsible for 85% of all airline ticket sales. This was a direct result of the boom following the deregulation of the industry in 1978, when airlines looked to travel agencies in order to cope with the exploding market demand of the 80s. During this profitable time, airlines competed for travel agency sales by increasing their commissions, which then became their fourth largest expense behind labor, aircraft, and fuel, at almost 11% of their total operating costs.

Rising fuel costs in the 90s caused airlines to begin cutting distribution costs by reducing the commissions being paid to travel agents, who then instituted service fees to consumers to make up the difference. However, there was still a hidden cost involved that was independent of commissions; that of the booking fees charged by Global Distribution Systems (GDSes). Before 1960, airlines did all of their booking manually using rotating card files. Obviously this would not scale, so IBM and American Airlines developed the first Computer Reservations System (CRS), jointly called SABRE. Other airlines saw this need and followed suit, creating other GDSes such as Amadeus, Galileo, and Worldspan. These systems were designed to act as the interface between the consumer, represented by travel agents, and the inventory of available seats, which changes constantly. For each of the millions of bookings per day that these companies facilitate, they charge the airlines $15 or more. When combined with an average commission paid to the travel agency, the distribution cost to the airline can be over $25 per booking.

Some airlines have found ways around the need for such GDSes by only supporting direct sales and managing seat inventory control themselves. This is one way in which low fare airlines such as Southwest and Jetblue have lowered their costs. Clearly these companies are doing things right. Whereas the major airlines have each lost between 1 and 7% of the market share in the last decade, these underdogs of the travel industry have grown between 2 and 4%. At the same time, by reducing their operating costs, they have been able to remain profitable through the downturn in consumer travel since 9/11.

Looking for ways to shrink distribution costs even further, many airlines have looked to the Internet as a way to bring more bookings through direct channels, such as offering discounted fares only available through their own websites, or offloading extra capacity via online consolidators such as Hotwire or Priceline. Furthermore, online services such as Orbitz and Travelocity that can interface directly with airlines can cost as much as 75% less than a travel agent going through a GDS.

These industry trends will continue as the major airlines try to increase their profit margins and avoid bankruptcy. Fierce competition and multiple ways in which to purchase tickets give consumers more power than ever before to balance cost and convenience for their travel needs.

Ted Beatie