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The legacy U.S. airlines, most notably United, are paying out substantially more in commissions than they were just a couple of years ago as they compete for high-end customers, and travel agencies are enjoying the boost.
“We’ve definitely had an increase of 40% or even more company-wide on air,” said Leah Smith, president of Denver’s Tafari Travel Cherry Creek, which is a part of the Coastline Travel Advisors network. “That’s a very conservative guess.”
Bureau of Transportation Statistics (BTS) data shows that during the first half of this year, United paid out $170.8 million in commissions, up 43.4% year over year. American paid out $240.2 million in commissions, up 9%. Delta’s commissions jumped 4.3%, to $311 million.
The BTS data isn’t exclusive to agencies and can also include commissions paid to other parties, most notably airline partners.
For United, the large jump in commissions has paralleled strong results in corporate sales, where revenue in the third quarter was up double-digits year over year. In terms of percentage growth, corporate-sales revenue was also up significantly more than United’s overall revenue, chief commercial officer Andrew Nocella said on the carrier’s Oct. 18 earnings call.
On that same call, United president Scott Kirby noted that despite robustly growing its commission payouts, United hasn’t been a trendsetter in that area.
“Our goal is also not to win share through that,” Kirby said, “but to win share through being the airline that customers choose to fly. But we can’t allow ourselves to lose share when our competitors are out trying to buy it.”
Indeed, even with its higher commission payouts this year, United remained the laggard among the Big Three during the first two quarters of the year, the most recent periods for which the BTS has released data. That’s in part because American spiked its commission payments in 2017 by 34%, to a yearly total of $479.6 million.
Delta paid $601.8 million in commissions in 2017, up 12.2% from two years earlier, but actually up just 1.2% from 2014.
Travel agents say that these commissions target sales of high-priced seats and sales on highly competitive routes.
Marc Casto, CEO of San Jose, Calif.-based Casto Travel, said, “It certainly seems that the airlines have been more aggressive in engaging their distribution partners. They’re more cognizant of the relationship that the [travel management company] community has with the traveling public.”
Casto said carriers are focusing commissions on front-of-plane seats in both the domestic and international markets as well as commissioning higher-cost close-in bookings in main cabins. He added that the airlines are more pinpointed in which routes they commission than they used to be, considering not just the class of a ticket, but the route and the time of the flight.
One change Casto said he has observed with United this year is a move away from excluding commissions on flights from hub cities.
Smith said that for Tafari, whose Denver office is in a United hub city, that less rigid approach has been a boon. But the agency has also benefitted from better net-fare contracts with United.
“The airlines are probably aware that more of those desirable first class and business class product sales are through agents,” Smith said. “It could be that we are driving some of that front-of-plane business.”
But while the travel agent community benefits from the more generous commission environment, at least one Wall Street analyst is concerned about the trend.
In a note prepared after United’s recent earnings call, analyst Hunter Keay of Wolfe Research referred to the growth in United’s commission expenses as “severe” and added that it is happening at “alarming levels” across all three legacy U.S. airlines.
“No knock on [United] here — they’re doing what they need to do to be competitive — but this issue is one to watch as airlines work to drive out costs in 2019,” Keay wrote.
Responding to a question during American’s earnings call last week, CEO Doug Parker said that American has been compelled to raise commission payouts in order to remain competitive in the agency channel. But he also said he expects the increases to flatten over time.
Source: travelweekly.com
