A customer goes to a shop and
asks for a can of baked beans. The shopkeeper thinks for a bit and says, “To
you, a pound.” You have a niggling
feeling that you didn’t pay that much when you went to the shop around the
corner a few weeks ago but still buy it anyway. On your journey home, you pass
the shop around the corner and see the beans are just 65 pence there and you
feel annoyed.
Welcome to the world of
mark-ups.
Mark-ups are alive and well in
the world of business travel and they are just as annoying there. Agencies get
discounted airline fares, add a sometimes hefty mark-up and then pass it on to
the travel buyer.
Travel buyers are often unaware.
Sometimes it gets found out and the corporate is far from happy.
The most famous example is
probably when in 2018 Australia’s
Sydney Morning Herald reported National
Australia Bank had ended its contract with FCM.
The newspaper reported: “It is understood that fees NAB
incurred were in excess of what it felt was agreed under the contract between
the big four bank and FCM.”
The thing is, the practice is
not illegal and it is widespread.
However, as Tony O'Connor of independent travel procurement
consultants Butler Caroye Asia Pacific and founder of fare audit company Airocheck.com
, says, “Marking up is not illegal. It is not even prohibited in most
client contracts. But it is a financial slap to the client’s face.”
He says, “TMCs can apply
hidden arbitrary mark-ups to wholesale and other discounted airfares when there
is little or no risk of the original fare amount being discoverable. The
practice is an accepted form of making money in retail travel because there is
downward, competitive pressure on every fare quote. This limits the extent of
marking up. However, in corporate travel, the [traveller] must use the
designated TMC to access their negotiated discounts, and so there is no
downward pressure.”
O’Connor says that mark-ups
are actually a form of tariff. “They increase the cost to the customer and
therefore lower demand but without increasing the per unit price received by
the airline, thereby reducing airline revenue.”
It seems some are now taking
action.
Business Travel iQ understands
that some airlines, including Virgin Atlantic, are now taking action to
restrict TMCs’ access to the discounted leisure fares that are often used in
the practice of marking up.
A Virgin Atlantic spokesperson
told us, “Virgin Atlantic has a wide variety of fare types to meet the
different needs of our customers and ensure they have the best trip every time.
Our approach, which is commonplace in the industry and shared by many other
major airlines, is to restrict certain types of fares to TMCs, including
Inclusive Tour (IT) fares. This is appropriate given that the vast majority of
trips booked by TMCs are completed for business purposes. In March 2018 we
updated our distribution policy for leisure fares to reflect this.”
Yet cutting TMCs’ access to
certain leisure fares is not going to stop the practice.
“All manner of wholesale
airfares can get the treatment,” says O’Connor. “Any fare that is
undiscoverable and far enough below the retail level to support a handsome mark-up
is a candidate. Preventing mark-ups on cheap leisure fares is only a
beginning. Much of the action happens with other fare types, especially business
class fares.”
This brings us to so-called
CAT35 fares, private net fares which are uploaded by airlines to GDSs which can
be marked up.
Talking about such fares,
Virgin Atlantic says, “Virgin Atlantic follows the same distribution practice
as other airlines, by making some of our products available to wholesalers for
redistribution to sub-agents. The functionality of the GDS means that these
wholesalers have the freedom to distribute to their customers, but we do have
strict rules with our agents around how they can use our content to ensure high
standards are maintained.”
One way that TMCs can access
CAT35 fares is by being part of an agency consortium that has negotiated access
to them. In the UK, one such group is the Focus Travel Partnership, which has
60 TMC members and a combined buying power of £1 billion.
Focus, which at the end of
2019 broke away from its parent group Advantage to become an independent
entity, has used its combined spend to offer CAT35 fares to members as Focus
Fares.
Focus Fares have always been
one of the main attractions of being part of Focus—which is by invitation only—and
the airlines’ recent crack-down could see more TMCs become interested in
joining.
The organisation’s newly
appointed managing director Abby Penston says, “Focus Travel Partnership
has always had and will continue to maintain close relationships with a wide
range of airline partners and this makes our members very competitive in the
business travel arena. That privileged position may well result in further
TMCs looking to join Focus Travel Partnership as it gives independent TMCs
access to fares they wouldn’t ordinarily have access to in their own right.”
It looks then as though
mark-ups will continue.
Should buyers be worried?
Virgin Atlantic says, “Customers
should always pay a fair price, and we would encourage TMCs to price according
to product. It is right that TMCs have the independence to set fares and we are
not legally permitted to intervene on how TMCs price their product to their
customers.”
Focus’ Abby Penston says, “Airline
pricing models can be intricate and very complex. TMCs demonstrate their
benefit to their clients by offering a specialist skillset where fare
management is concerned to ensure that corporate buyers receive the best fares
available to them. Focus Partners are supported by technology tools such as the
Focus Farefinder tool that analyses all fares before offered for sale and a
fares desk equipped to … circumnavigate around what at times can be construed
as a minefield. Corporate travel buyers therefore may not be fully aware of what
great value TMCs are delivering for them and what is—and what isn’t—marked up.
We need to be clear to our customers how much money we save them.”
The arrival of NDC on the
scene may provide some clarity in this area because if the airline is in
control of the relationship with the end-user then marking-up may well become
more difficult, if not impossible.
Virgin says, “The advances in
distribution present significant opportunities for the airline industry and
Virgin Atlantic. We’ll have more control over our content and the methods of
getting the right product to the right customer, which is so important for the
TMC community, corporate buyers and ultimately, our travelling customers.”
Tony O’Connor says, “TMC
mark-ups effectively corrupt the fare levels carefully set by the airlines’
sophisticated yield management systems. Airlines have good commercial reason to
clamp down on the practice. It is perhaps only now, when NDC is shifting some
supply chain power from TMCs to airlines, that the carriers feel able to
address the issue.”
Penston is not so sure this
will bring transparency.
“NDC continues to be
misunderstood,” she says. “Airlines control the distribution of their content
at a much more direct level, but this does not necessarily mean that there is
full transparency between the .com sites and the TMC NDC content. This
means that, as has always been the case, different airlines will view the
benefit to them, to the corporate, and to the TMC, each from their own
perspective.”
And as we are only too aware,
baked beans have been with us for a long time and we are still no closer to paying
a standard price for them. If you need beans on toast, you will pay what the
market thinks you will pay.