A look at the history - and possible future - of airline commissions

This article originally appeared in the May 2019 edition of PAX magazine. Click here to read the rest of the magazine!

Just as plane tickets were once printed on paper and smoking was still permitted during flights, there was a time when travel agents could turn a significant profit on airfare bookings.

READ MORE: ACTA & CATO: Travel Industry Act changes needed now

Ask any veteran travel agent and they can recall a time when airlines paid a healthy return for putting clients in their seats – as well as when those payouts started to decline.

“It started in the mid-1990s,” recalls Mary Jane Hiebert, manager of Canada One Travel and chair of the board of directors for the Association of Canadian Travel Agencies (ACTA). “I entered the business in 1994 and it was in 1995 when commissions began to be cut. We were making 12 per cent commission on airline tickets and that started dropping, going to eight per cent. That started the process of some travel agencies requesting booking fees to make up the difference.”

The cuts continued in the wake of Sept. 11th, 2001 as the aviation industry weathered a series of economic setbacks, further reducing agents’ commissions from eight to five per cent on the base fare, the current industry average, Hiebert says.

“It varies from class to class,” she says of the commission rate, adding that an agency’s volume of sales with a particular airline can also affect commissions. “The airlines have manufactured their base fares; for example, from Winnipeg to London, one airline may offer a base fare of $800 while another pulls money out of there and says it’s a tax and they’re only going to pay commission on $500.”

Ancillaries take off

In the wake of cuts to commissions, however, airlines began increasing revenues through another channel – the sale of ancillaries, such as checked baggage fees, advance seat selection and cabin upgrades, all sold directly to travellers.

According to IdeaWorksCompany and CarTrawler, profits on these products have grown dramatically: while total ancillary revenue among the aviation industry’s 10 biggest sellers of ancillaries totalled just $2.1 billion USD in 2007, that number ballooned to more than $28 billion among the same airlines in 2016.

The companies’ latest report on ancillaries estimates that such sales will hit $92.9 billion worldwide in 2018.

While such ancillaries can be booked by travel agents – often done as a customer service gesture – no commissions are currently paid on these products. That’s a big piece of the pie that travel agents aren’t currently enjoying.

NDC: a possible solution?

Introduced in 2014, the International Air Transport Association’s (IATA) New Distribution Capability may allow travel agents to share in the ancillary wealth – but that will all depend on whether airlines are open to the idea.

Described as a new industry standard “launched by IATA for the development and market adoption of a new, XML-based data transmission standard,” NDC has been slowly rolling out over the last four years.

With a stated goal of “enhancing the capability of communications between airlines and travel agents,“ the NDC standard is open to any third party, intermediary, IT provider or non-IATA member, to implement and use.

According to Yanik Hoyles, IATA’s director of distribution programs, there are currently 66 airlines worldwide that are NDC certified (including Air Canada and WestJet), representing 60 per cent of IATA passenger capacity.

While the volume of NDC transactions is “very low currently,” IATA is eyeing 2020 as the next milestone in NDC implementation, with a goal of having 20 major airlines (which IATA calls its NDC ‘leader board’) achieve 20 per cent of sales via NDC. Further out, IATA envisions mass adoption of the NDC standard by 2025.

Among the potential benefits of NDC touted by IATA is a transparent shopping experience, as well as access to “full and rich air content” for travel agents, in which airfare and ancillaries can be booked in the same portal, rather than toggling between GDS and individual airline websites.

But if agents will have enhanced access to selling ancillaries via NDC, they also want a cut of the action: in a 2015 IATA report titled NDC: Travel Agencies’ Enabler to Success, a survey of travel agents from around the world (including Canada) found that 70 per cent of retail travel agencies surveyed want airline-paid commission for selling ancillaries via NDC.

Real-world examples

In June 2017, American Airlines announced a new agency incentive program that will compensate travel agencies $2 USD for each AA-marketed flight segment booked using an American-approved NDC connection.

Such an approach is yet to be implemented in Canada. WestJet spokesperson Lauren Stewart tells PAX that currently, “a very small number of bookings are made via NDC,” adding that at the moment, the airline is not considering incentivizing agents to book airfare or ancillaries through the platform.

Similarly, Air Canada spokesperson Peter Fitzpatrick says that while the carrier is one of the 20 airlines on IATA’s NDC leaderboard and is “in the process of onboarding new partners and adding NDC volumes through this channel,” agent incentives are not currently part of its NDC strategy.

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