Europe's Airlines Choose between Two Ticket Distribution Strategies
Bouvard, Francois, Somosi, Andrew, The McKinsey Quarterly
The comfortable, protected world of the European flag carrier has been finally prised open. This April sees the start of a fully liberalized European air transport market, an event for which most airlines have been preparing for several years. Organizations are being restructured, costs cut, networks and schedules rearranged around the hub concept, investment made in yield-management systems to capture the most profitable traffic, and frequent-flyer programs developed to foster passenger loyalty.
Now the focus is shifting toward securing competitive advantage in ticket distribution, typically an airline's third-largest cost after personnel and fuel. The traditional distribution strategy that relies mainly on external channels is out of date. To withstand the combined onslaught of competition, consolidation in the travel agency industry, and new technologies, airlines need something different.
The old world
In the old, regulated environment, European airlines relied on external channels (travel agents, consolidators, tour operators) to distribute up to 90 percent of tickets [ILLUSTRATION FOR EXHIBIT 1 OMITTED]. Distribution via these channels typically cost an airline 17 to 20 percent of the ticket price, accounted for by travel agency commissions (including bonus "overrides"), computer reservation company booking fees, credit card fees, and the airline's own costs (such as its salesforce). Distribution via the airline's own channels (telephone reservation centers and ticket offices), was cheaper - 10 to 15 percent of the ticket value - if it was managed well.
But as long as restrictions on market access, capacity, pricing, and competition meant national airlines enjoyed up to a 60 percent share of their home markets there was little incentive for them to improve their internal distribution channels, or to manage their relationships with external distributors more efficiently. They could charge customers high tariffs and undertake minimal marketing, while keeping ticket commissions to domestic distributors (including overrides) below IATP's suggested 9 percent rate [ILLUSTRATION FOR EXHIBIT 2 OMITTED].
The winds of change
Four factors have now made change imperative. The first is deregulation. A single European air transport market will permit any EU airline to fly a domestic route in any other EU country and allow it full access to all inter-EU and other international routes. The result will be not only increased rivalry among airlines, but greater bargaining power for travel agents, who will be able to shift market share among competing airlines. In a fully deregulated environment, an airline's success will depend increasingly on mastering sales, marketing, and distribution. Better control of distributors is therefore critical.
The second factor is consolidation among travel agents and new strategic initiatives in the travel agency business. Travel agents realize that deregulation will change their value and role in the external ticket distribution chain. They will have to contend with falling ticket prices, increasing customer demands, and penny-pinching airlines and clients. A still bigger potential threat lies in airlines' efforts to redefine travel agents' role and, in some customer segments, to bypass them. In a competitive market, airlines cannot afford to be at the mercy of distributors to sell their products. To protect their position, they will need a firmer grip on sales, which means developing their own, direct relationships with customers. Inevitably, that will weaken the travel agents' link in the distribution chain.
The agents are responding by integrating to realize economies of scale nationally, while international chains are broadening their geographical coverage through acquisitions and joint ventures. Both moves increase agents' bargaining power with airlines. In addition, they are teaming up with IT-focused companies to try to secure their position as the key point of contact for business and leisure travelers. …