Ole Mortensen: The future of TMC pricing models

Today travel management companies receive their income from a long range of services.

• Fees from booking and changing trips online or offline
• Fees for other services offered to travel managers
• Fees or subscription for duty of care services
• Various income from vendors from marketing, advertising or commissions (low percentages where given) including income from the GDS
• Override from the same vendors depending on a variety of key performance indicators

Over the last decade it has become clear that this income has been under pressure and many TMCs have seen the need to decrease staff, service and product offerings in order to survive. Online booking, with very small fees, has replaced offline bookings. However, the offline fees have been under pressure for the last two decades.

Depending on transactions and the direct income from them alongside less income from suppliers, the TMCs have been forced to let people go, most of them from the frontline. The adjustments have not hit the support functions as hard because of the expertise, but this raised indirect cost per transaction and those are difficult to sell to travel buyers, who believe they only need the frontline expertise.

The background

The deregulation of airspace in EU in 1997 had much the same impact as the US experienced after their deregulations early eighties resulting in

• Lower airfares
• Increased competition
• New remuneration structure for the distribution (from 7-9% commissions to almost zero)

The way intermediaries/distributors handled this enormous change was very different from country to country, but in general most built a fee structure charging customers/companies a library of fees for different services.

The advantages to customers were increased substantially as they suddenly became the real customers paying for the services, instead of buying services from vendors remunerated and paid by the airlines. Because the structure was based on percentage, virtually all the TMCs had a strong incentive to sell higher fares. Of course, this was not black or white but the fact is that suddenly this incentive was gone and the corporate customers were in focus.

One of the challenges was that everyone was relying on the existing structure created by the airlines through the GDS, built to allocate seats for late bookings to obtain highest possible fare. This is still the same structure and a key challenge for the industry. In the new world, there was suddenly no incentive in selling expensive tickets and while the price of airfares decreased, the market was still opaque.

At the time I was CEO of a company developing systems trying to change the old business model and make our TMC a true retailer, offering total price with a flexible margin structure. But due to the old booking structure, few TMCs could offer such a model and relied on the fee structure.

Twenty years on the old power of the TMC has decreased substantially because:

• The internet suddenly made the opaque airfare structure transparent
• The customers insisted on working with transparency, showing and selling net fares
• Online booking engines enabled the traveller control over their booking
• Metasearch engines increased transparency
• Low cost carriers (LCC) launched new business models

Travel managers began to assume all TMCs delivered the same with very few different advantages because they still had problems with the opaque pricing structure, online booking tools (OBT) and lack of transparency. They ended up looking at the only items giving them control: the fees.

The fees were, and still are, loaded into Excel and the TMC with the lowest cost structure won. I've exaggerated this because of course each TMC is different from the other; however, it is very difficult to document this due to the ancient structure of the industry.

We're already seeing new price structures

It has become clear that the business model needs to change to benefit not only the TMC but also the airlines, other vendors and the travel managers.

The current income structure has changed due to the pressure.

• Still the fee structure but with lower fees totally due to competition.
• Hidden markup, margin or fees added to either the tax area or ticket price with some credit card companies supporting the TMC by bundling air and non-air.
• Where multi-source exists the TMC just collects the data, or offers online booking for so-called click fees.
• Still small commissions from some vendors like hotels and some airlines.
• Marketing and advertising deals depending on reaching specific targets.
• Override from vendors based on specific targets but decreasing because the fares have gone down.

Today we have already seen new pricing structures entering like the airlines' auxiliary offerings, Lufthansa's GDS fee and Amex GBT now charging $10 for bookings made outside the GDS structure.

This makes it seriously difficult for a company to find the right TMC as it is still an opaque structure. It is getting almost impossible to just look at the fees and enter them into the spreadsheet, as low fees may end up costing higher fares or taxes.

I still strongly believe in making a retail multi-source structure where customers are forced to compare total price, as it will benefit the travel managers and suppliers in the long run. Travel managers will have a harder time considering and identifying the right supplier and evaluating their offerings and differential advantages. However, competition will force TMC to develop more products and services.

Suggestions for future pricing models

• Subscriptions based on the hours a travel manager/company may need for a TMC
• Consulting, including management information and other soft services, at hourly pricing
• If the TMC offers duty of care, a subscription based on number of travellers
• Vendor negotiation per hour
• Concierge arranging VIP and group travel, changes at reasonable fee structure ensuring profit to the vendor

Many other services have a similar structure and while it will move focus away from bookings, it will start a much-needed change for the industry.