How the travel industry works
To help readers make the best decisions around travel I thought it might be useful to explain how travel works. The travel industry is very complicated with many different players, so I’ll try to keep it simple. Also to avoid unnecessary brain explosions (mine not yours), we will run a series of articles over the course of a few weeks which we hope will help make sense of how the industry works, how it’s evolved in recent years and what impact COVID-19 is likely to have on this once vibrant industry.
Firstly, there are service providers, for example, airlines, hotels, car rental and rail transport companies. Traditionally, service providers distribute their services through the Global Distribution System (GDS). Essentially, a GDS is a technology that allows travel industry service providers to sell their products through third parties (online travel agents and travel agents) to their customers. The most popular GDS’s include Sabre, Travelport (made up of Galileo, Worldspan and Apollo) and Amadeus. For simplicity, I’ll focus on the distribution and selling of airline tickets.
Essentially, the GDS is a massive warehouse where airlines deposit all the seats they have available on their commercial flights. And to get access to this warehouse, you need to subscribe to a GDS, and this is where travel agents come into it.
There are generally two types of travel agents. The first is your traditional bricks and mortar travel agent, like your local Flight Center or Helloworld or from a corporate perspective, local players, including CTM, FCM and QBT, and global players, including Engencia, CWT and American Express. The second is online travel agents such as Booking.com, Expedia and Webjet.
Traditional travel agents offer a more personalised service, where customers contact them to make a travel booking. In short, the customer outlines what they require, and in turn, the travel agent does the research via the GDS and books the options that best meet the customer's needs. Online travel agents, on the other hand, require the customer to do the research themselves using their website. This allows the customer to search, filter and book the flights without having to speak or interact with a person. Technically, both offerings are the same because they both use the GDS to search and book flights on behalf of their customers.
These days travellers have the option to bypass travel agents and book directly with the airline using their website. Most airline websites are powered by the GDS or alternative booking platforms (more about this in a future article). Direct bookings reduce the airline's distribution costs, which in some cases, is passed onto the customer in the form of cheaper airfares. However, direct bookings are not ideal for the customer as they cannot compare pricing across multiple airline brands.
This is where metasearch engines such as Skyscanner and Google Flights come into the equation. These aren’t online travel agents because they don’t integrate, book or sell airfares directly from the GDS. Instead, they scrape or harvest content (airfares) from online travel agents and airline websites and present all the available options to the customer on the one page. After the customer makes their selection, the metasearch engine directs them to the online travel agent or direct to the airline's website (depending on the choice they make) for them to book their ticket.
Another lesser-known but significant player within the travel distribution chain is ticket consolidators. Ticket consolidators are essentially wholesalers; a middle man that sits between the airline and the travel agent. Consolidators buy large volumes of seats from airlines for reduced rates and sell them back to travel agents who then on-sell them to their customers. Consolidators only really deal with international airfares and the tickets will be sold by traditional and online travel agents. The airfares available through consolidators are cheaper than the prices the airlines quote on their websites. This allows the agents to add a margin to the airfare to cover their costs to run their businesses.
Follow the Money
Now we understand who the key players are, here is a basic understanding of how the money flows and how it impacts each player within the chain.
Airlines that use the GDS to distribute their content pay a fee to the GDS company when a booking is made. The fees paid to the GDS are in the region of 11–19USD per booking. The GDS use this income to run their businesses and maintain the infrastructure that propels the whole process. In some cases, the GDS companies pay a rebate to the travel agents for every booking they make. While the rebates paid to travel agents are small, they can add up, especially for travel agents that transact large volumes of bookings.
When bookings are made directly with the airline, the GDS charges a lot less. This is a major reason why airlines want their customers to book directly as they don’t have to pay the higher GDS charges.
Another cost factor for airlines is commissions paid to travel agents for the airfares they sell. Traditionally, commissions were paid on all airfares sold by travel agents. However, in recent years the commission paid to travel agents has all but disappeared, especially in domestic markets where there is one dominant airline. In these markets, airlines tend to negotiate market share agreements and reward travel agents that help them continue to maintain their dominant position in the market.
One way that travel agents make their money is by buying tickets through a ticket consolidator. As mentioned, consolidators buy bulk allocations from airlines at discounted rates and on-sell them to travel agents (with a markup). This allows travel agents to apply a markup when they sell the ticket to a retail customer. There are no rules around the level of markup applied by the agent and it’s really based on what their customer is willing to pay, and in theory, as long as they remain under the price the airline is selling the ticket they will remain competitive and likely get the sale.
That said, the digital revolution has kept a cap on the travel agent margins as online travel agents are prepared to sell tickets, which they buy through the same consolidators, at much lower margins. Essentially, it’s become very difficult for traditional travel agents to make as much money as they could’ve before because they are competing with technology.
This is the basic explanation of how the travel industry distribution system works and how the money flows. In the next post, I will look at the effects the internet has had on the traditional travel agency distribution systems and how it’s threatening the viability of the industry.