Indian OTAs on Airline’s decision to launch their Agency (Rang7)

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We earlier covered the launch of Rang7, OTA created by Kingfisher/Spicejet and Indigo airlines that will enable users to buy tickets directly from the site (and help airlines reduce agency/distribution cost).

Though there are few concerns we had regarding domain name etc, but assuming that the news is true (it’s also published in all the leading newspapers, like ET), we did ask OTAs to share their thought on airlines creating their own agency, citing distribution cost as the sole reason to do so.

Hrush Bhatt (Co-founder, Cleartrip)

First, I’d like to challenge this concept of “biased” search results. Cleartrip’s search results have always been sorted by price—cheapest to highest—and the prices are set by the airlines, not by Cleartrip. Our arrangements with an airline have exactly zero influence on our search results.
Over and above that, Cleartrip has made extensive sorting and filtering options available to customers since our launch. We’ve never believed that the order in which search results are presented is a sustainable way to influence demand—customers want what they want and no amount of “biasing” is going to impact their behaviour.
Second, I think continually blaming “high distribution costs” is either a fad or a diversion for airlines to ignore their single largest business concern: unsustainable pricing due to over-capacity. And this is true for airlines the world over. They cannot tell shareholders that the glut in capacity is the reason for their oversupply of red ink, so they’ve created a red herring called distribution cost.
In a nutshell, the domestic airlines collectively lost Rs. 4,270 crore last year, so saving Rs. 200 crores of “distribution costs” isn’t going to fix anything. For some absurd reason, the airlines are hell bent on fighting the wrong battle.
I don’t know who it was that said “Those who cannot learn from history are doomed to repeat it.” Whoever it was, they were obviously a lot smarter than the people at the airlines. Let’s take a brief look at history from the perspective of major US airlines. Major US airlines began reducing the amount of commission they paid in 1995; by early 2002, these airlines reduced their commissions to zero. Today, each major US airline is awash in red ink, is seeking taxpayer bailouts, and some of them have even gone through Chapter 11 bankruptcy filings.
So, what happened? How come removing this burdensome cost didn’t send airline profits soaring? There are many unique things about Southwest, but in this context, two of them stand out. Southwest is the only US airline to:

  • Have 36 consecutive years of profitable operations
  • Never reduce the commissions paid out to travel agents

There’s a lesson in there somewhere for any airline smart enough to learn.

Third, the cartel-owned OTA model is no business innovation—Rang7 has precedents in the US (Orbitz), Europe (Opodo) and Asia (Zuji). The airlines should take a good look at the state of those businesses today as well as the current nature of the relationship between the founding airlines and the portal—none of these businesses was ever a market leader and none of them have cosy airline relationships any more.
It doesn’t matter who owns an OTA, the economics of building and operating an OTA stay the same for everyone. Unless, of course, the airlines plan to run the site purely as a “cost centre.” That is a scenario in which the site can afford to sell airline tickets while making operational losses as the airlines will keep subsidising the costs.
Airlines would do well to consider that direct distribution is not free distribution—it costs British Airways £30 million annually to operate ba.com (something they are now looking to outsource). There are GDS costs, marketing costs, payment processing costs and the hundreds of other costs that go into operating any business.

Aloke Bajpai (Co-Founder, iXiGo)

The premise that an “Orbitz” can be built in India is fundamentally flawed. If the airlines see it as a way of reducing distribution cost, the question I will ask them is who will support the cost of the technology infrastructure, call centres, customer support, distribution (after all there is still a GDS) and marketing/branding of rang7? Hopefully not the airlines. There is a simple reason why travel agents either need a commission or a service fee from customers (and increasingly both), and it’s because of their inherent business model
Also, with 3-4 OTAs well-entrenched in the market, it is difficult for a newcomer to gain market share without either

  • a differentiated product or technology (which Orbitz had) -Orbitz built the first “direct connects” to airlines bypassing GDS and innovated the famous Orbitz matrix way od displaying the results. Now both of these are commodity.
  • Huge sums of VC investment (which many OTAs in India had).

While we welcome more players in our ecosystem, we continue to believe that growing direct sales on their own website, with the help of meta-search is the only efficient long-term solution to reduction in airline distribution costs, in conjunction with building an airline’s own brand saliency

Also – When Orbitz had launched Airlines paid 5-8% commissions and 13-15$ per booking to GDSs. In India, on average commissions are around 3% and 6-8$ per booking to GDS is more like it (no GDS fee for LCCs). The saving doesnt look too exciting any more.
What would be interesting to see is how much transaction-fee Rang7 will add to customers to sustain its business model, given that it will charge no commissions. Today OTAs add on average 200 Rs. per ticket AND get some commissions.

This article will be updated as and when we receive replies from the other players.

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