Markup and Commissions
So, how do travel companies make money?
This chapter is a basic history and overview of the entire industry – including economy and domestic. The specifics of how international premium airfare is marked up and how agents earn commissions and fees will be discussed in Part 3.
Up until the 1990s, airlines relied on travel agents to sell tickets, and paid them well with nice commissions.
Two things changed all this:
- Cut commissions: Between 1990 and 1995, the U.S. airline industry lost $13 billion. As a result, the airlines cut as many controllable costs as they could. Commissions accounted for 8% of their overall costs, and were the 3rd largest expense – after labor and fuel. Commissions were seen as ‘non-essential’, and drastically reduced.
- Internet: By 1999 internet sales were still in their infancy, and accounted for just about 1% of overall sales. However, that was about to change drastically. Today, the majority of tickets are purchased online.
Thus began a period of decline for the ‘travel agent’, and unfortunately, many agencies went out of business. However, the need for a new breed of agent was also born during this time; the agent that did more than just turn tickets for profit. Today there is as great a need as ever for agencies, and the ones that make it are those that can deliver an ‘experience’ using their expertise.
Even though agents have made a resurgence, today’s agents rely much less on the (low) commissions, and instead earn their profits in other ways.
Let’s dig a bit deeper, shall we?
How It’s Done Today
- Service fees: In order to supplement the lost commissions, agencies introduced ‘service fees’. Many corporate and leisure agencies charge them, and the fees range from $25-$50.
- NET fare markups: As discussed in the previous chapter, there is much more room for profit on NET fares. Agents are always in the hunt for good NET fares, especially on international itineraries.
- Ancillary services: By shifting from travel ‘agent’ to travel ‘consultant’, many more revenue sources have become available. Hotels, cars, insurance, tours and cruises are just to name a few.
- High ticket niche markets: Even with less commission percentages, selling higher priced airfare is still quite lucrative. Now you’re starting to see why selling high-ticket priced luxury air is so important…
- Overrides: For the big mega agencies, online OTAs, and host agencies, there’s more than just commissions and fees. If they hit their sales goals they may be eligible for generous overrides from their vendors. This can include airlines, hotels, car rentals, cruises and even GDSs.
Chapter 6 Takeaways…
- Commissions used to be the bread-and-butter of agencies
- Since the airlines cut commissions, agencies have had to be resourceful in finding new revenue streams
- Selling international premium airfare is a great example of this
Now that you have a basic understanding of how the industry works,
we ceremoniously tap you on the shoulder and hereby authorize you to proceed to Part Two – where you will learn all about the huge benefits of the Luxury Air niche.