Cover Story

The zero mile

Whether it is unexpected or inevitable, the possible move by airlines to zero per cent commission is threatening the agents' profits. As partners in growth, can the two parties find an amicable solution? By Andrea Lopez

The warring partners are running out of patience even as the conflict between the agents and the airlines has reached the penultimate phase. The national carrier, in a written statement issued to all agent associations, has announced its decision to move to nil commission effective October 1, 2008. Jet Airways and Kingfisher Airlines have decided to follow suit.

The question is: Even as airlines are struggling to remain airborne with the steep rise in fuel costs, is abolition of agent commission an ethical solution to the problem, especially since they have supported the airline for years?

Biji Eapen, president of IATA Agents Association of India (IAAI), who has taken upon himself to do all that he can towards this issue, feels that since 80 per cent of the tickets are distributed through the agents (and airlines have admitted to this), it is their legitimate right to receive a commission for promoting and selling the airlines' products.

His association has in fact alleged that the national carrier's decision to shift to zero mark is based on its impending membership with Star Alliance, which does not support agent commissions. Eapen says, "No one seems to be concerned about the unemployment that this would create; hundreds of smaller players will be completely wiped out."

An international trend?

Capt P P Singh COO Air India Express

Karl Dantas Chairman ETAA

Biji Eapen President IAAI

Praveen Chugh President TAFI

C V Prasad President TAAI

Looking at the international scenario, agents in Australia and Japan earn nine per cent commission, with the support of their governments. Those in Kuwait, UAE and Singapore still enjoy seven per cent commission on all carriers except those that are part of Star Alliance. In India, the Gulf carriers offered seven per cent commission until March 31, 2007 while the erstwhile Indian Airlines continued to give seven per cent for the Gulf sectors till March 31, 2008. American carrier US Air still gives out seven per cent commission in India.

Here's a bit of agent commission history in India. In 2005, Air India reduced commissions from seven to five per cent, which prompted the agents to go on a nation-wide agitation and boycott Air India. On the assurance given by the then regional director of Air India, Capt PP Singh (who is now the COO of Air India Express), the boycott was withdrawn on April 7, 2005 and both agreed to reopen discussions.

Says Eapen, "Air India had assured us in writing that agency commissions will be retained at five per cent for four years and agreed to form a sub-committee with representatives from airlines and agent associations to formulate remuneration policies. Regrettably, no further action in this regard has been taken to date."

Other members of the travel fraternity have mirrored the opinion that agents are made to bear rising airline operational costs. Says Hector D'Souza, president of L'Orient Travels, "To put things in perspective, even if an agent sells a bus ticket, he gets a commission which is an incentive and offers satisfaction for the work done." He added that the commission offered by airlines barely covered expenses like salaries and other bills. "In order to boost sales, airlines start undercutting one another by offering net fares to consolidators. These fares do not necessarily show up on any GDS and the consolidator can charge what he likes. Agents who buy from the consolidator add their mark up. This nullifies the `zero commission' policy. Airlines are probably seeking to reduce their marketing expenses by relying on half a dozen consolidators instead of the entire industry," D'Souza says.

Moreover, airlines sell at a lower fare when the passenger buys directly from them instead of the agent. To this D'Souza says, "If the base price offered by airlines is the same, how do they offer cheaper fares on their website? Obviously airlines have factored this when pricing fares. So where is the question of additional expenses when paying commission to agents?"

The airlines also feel that too much money is blocked with the agents since payments are settled once in 15 days. A possible solution is for the airlines to reduce the payment cycle to once in seven days.

The airline argument

Defending Air India's decision to move to nil commissions, Jude Crasto, its manager (Kochi), says it is time for agents to look at alternate revenue sources. "It is not only the agent who is going through difficult times. The airlines have had to deal with some major losses and the only way we will survive in the market is if we cut costs. Travel agents should understand this and look for other avenues like selling insurance and car rentals. They should look at the issue from a different perspective." According to Jet Airways, it has already adopted the nil commission policy at its overseas offices and has registered some savings from the same.

So is it time that the agent moved into consultancy and adopted a service-fee model? Most agents feel that customers in India will not be comfortable paying a consultation fee. Capt Singh says, "Air India Express has had nil commissions from the beginning. We operate on a transaction fee of Rs 150 per segment which is retained by the agent. Zero per cent commissions is not a new concept; it is followed the world over and agents should begin to look at charging for passenger services - from processing passports to delivery of tickets and so on."

The agent argument

The agents speak out in their defense. Praveen Chugh, president of Travel Agents Federation of India (TAFI), says that while agents are aware that airlines have been incurring losses, the agents are in the red as well.

"We believe that everyone should make a profit but cutting off the travel agent does not seem like the solution. The transaction fee that the airlines claim they will introduce is going to be a heavy burden on the travel agent - costs will increase for both the consumer and the government. Even now, as the notice has been issued, we are not aware of the nature of the transaction fee that will be distributed to the agent. We plan to take a legal view on this decision. We do not know if the Ministry of Civil Aviation will come to our rescue," he says.

According to Karl Dantas, chairman of ETAA, the entire travel fraternity and the airlines should discuss the modalities of a zero per cent commission. He suggests that if the agent is to conform to a handling charge, it should be added to the ticket fare and not be charged separately. "For instance, on a ticket of upto Rs 20,000, there should be a fixed handling charge of Rs 1,000. If an agency defaults, it is penalized. But what happens when an airline defaults?" says Dantas.

Meanwhile, CV Prasad, president of TAAI, "The announcement by full-service carriers to move to a zero commission structure violates the passenger sales agency agreement. We are planning to counter this by taking up the issue with the DGCA." The writ petition filed at the Karnataka High Court in this regard nearly two years ago is still pending.

Says co-chairman of FICCI Tourism Committee, Himmat Anand, "The possibility of zero per cent was almost staring at us in the face. It first happened in Europe and the US and is now slowly coming to this part of the world. Middlemen in any business are numbered. The quicker travel agents realise this, the better it will be. Agents will have to get into a wider service model to be able to survive. Many airlines are already promoting their websites and it is only a matter of time before they start selling directly to the end-user. The industry will slowly be ruled by technology."

It is uncertain how things will turn out in the end and who will trounce the other. The fact however remains that zero per cent commission, if it does happen, will put many smaller players out of business. It seems unfair that the airlines choose to unceremoniously cut off their principle distributors.