This document discusses airline distribution channels. It analyzes developments in airline distribution, specifically the travel agency system. It describes how travel agencies historically served as the dominant distribution channel for airlines but became very expensive. Airlines have increasingly moved to direct distribution through their own websites to reduce costs and gain more control. Global distribution systems also played a role but their profits declined with increased direct airline distribution. The future will likely see more airline ticket sales through direct channels.

1. Distributing the productDistributing the product
In all area of marketing, linksIn all area of marketing, links
must be made between themust be made between the
customer and product. Thesecustomer and product. These
links are known as distributionlinks are known as distribution
channels.channels.
Our focus will be to analyzeOur focus will be to analyze
current developments in thecurrent developments in the
field of airline distribution.field of airline distribution.

2. Type of distribution channelType of distribution channel
Direct RouteDirect Route: where the product make: where the product make
direct contact with final customersdirect contact with final customers
without intermediaries. It is usual in thewithout intermediaries. It is usual in the
field of aircraft manufacturing. It is alsofield of aircraft manufacturing. It is also
used in less costly items through mailused in less costly items through mail
order backed by extensive adverting.order backed by extensive adverting.
No mark-ups or commissions have to beNo mark-ups or commissions have to be
paid to intermediaries and to keeppaid to intermediaries and to keep
complete control of marketing activitiescomplete control of marketing activities
Difficult for producer to achieve sufficientDifficult for producer to achieve sufficient
geographical coveragegeographical coverage

3. Type of distribution channelType of distribution channel
WholesalersWholesalers: buy in bulk from a: buy in bulk from a
range of producer, using theirrange of producer, using their
buying power to gain appropriatebuying power to gain appropriate
discounts. They sell on goods eitherdiscounts. They sell on goods either
by adopting direct sale policy or byby adopting direct sale policy or by
using retailersusing retailers
Producer’s risks are reducedProducer’s risks are reduced
because once goods have been soldbecause once goods have been sold
to a wholesaler or retailer, unsoldto a wholesaler or retailer, unsold
goods cannot be normally begoods cannot be normally be
returnedreturned

4. Type of distribution channelType of distribution channel
Aircraft leasing company – ILFCAircraft leasing company – ILFC
(International Lease Finance Corporation)(International Lease Finance Corporation)
& GECAS (General Electric Capital& GECAS (General Electric Capital
Aviation Services)- as a wholesaler byAviation Services)- as a wholesaler by
large number of aircraft fromlarge number of aircraft from
manufacturer at a substantial pricemanufacturer at a substantial price
discount. They then lease out thesediscount. They then lease out these
aircraft to their customer airlinesaircraft to their customer airlines
Another example is the relationshipAnother example is the relationship
charter airlines and tour operator incharter airlines and tour operator in
European package holiday industryEuropean package holiday industry
They do assume significant risksThey do assume significant risks

5. Type of distribution channelType of distribution channel
Agency: Common in service industries whereAgency: Common in service industries where
intangible rather than a tangible product offeredintangible rather than a tangible product offered
for salefor sale
Agent is able to make a living in the form ofAgent is able to make a living in the form of
commission by selling a variety of products oncommission by selling a variety of products on
behalf of may firmsbehalf of may firms
Agents may be tempted to use their marketAgents may be tempted to use their market
leverage by working harder to sell products ofleverage by working harder to sell products of
firms which pay them higher commissionfirms which pay them higher commission
Travel agency system has been dominantTravel agency system has been dominant
distribution channel for airline in the past &distribution channel for airline in the past &
remains so in many less developed aviationremains so in many less developed aviation
marketmarket

6. Concept of “super profits”Concept of “super profits”
The concept of control of distribution channels isThe concept of control of distribution channels is
a straightforward one.a straightforward one.
In any channel where wholesalers, retailers orIn any channel where wholesalers, retailers or
agents are involved, producers must ensureagents are involved, producers must ensure
control of rewards received by intermediariescontrol of rewards received by intermediaries
If intermediaries are in powerful position, theyIf intermediaries are in powerful position, they
will be able to play one producer off againstwill be able to play one producer off against
another for the sake of higher commissionanother for the sake of higher commission
In turn, producers will receive only the rewardsIn turn, producers will receive only the rewards
needed to keep them in businessneeded to keep them in business
““Super Profit”- profit over & above these basicSuper Profit”- profit over & above these basic
rewards- will accrue to the intermediaries who arerewards- will accrue to the intermediaries who are
able to exercise controlable to exercise control

7. Travel Agency distribution systemTravel Agency distribution system
The reliance always brought airlinesThe reliance always brought airlines
very important benefits. These are:very important benefits. These are:
Geographical coverage- airlinesGeographical coverage- airlines
would have found it prohibitivelywould have found it prohibitively
expensive to have its own salesexpensive to have its own sales
shops in every high street &shops in every high street &
shopping mall around the world.shopping mall around the world.
Travel agent provided such aTravel agent provided such a
presence by selling tickets onpresence by selling tickets on
behalf of all airlines & tourbehalf of all airlines & tour
operatorsoperators

8. Travel Agency distribution systemTravel Agency distribution system
Relive of heavy overhead burden:Relive of heavy overhead burden:
airlines had to incur the cost of agencyairlines had to incur the cost of agency
support in the form of such things assupport in the form of such things as
training for agency staff & relevant otherstraining for agency staff & relevant others
Relieved airlines of a great deal of costlyRelieved airlines of a great deal of costly
administrative work of air travel such asadministrative work of air travel such as
issue tickets, assisting with visa & queriesissue tickets, assisting with visa & queries
of pax about check-in & baggage rulesof pax about check-in & baggage rules
Despite the obvious & strong advantages,Despite the obvious & strong advantages,
the system is now undergoingthe system is now undergoing
revolutionary reformrevolutionary reform

9. Travel Agency distribution systemTravel Agency distribution system
The commission cost of BA during 1986 & 2004The commission cost of BA during 1986 & 2004
are as follows:are as follows:
During 1990s the situation was a disturbing one,During 1990s the situation was a disturbing one,
& which are typical of almost all airlines& which are typical of almost all airlines
Year Commission
in million ₤
% of total
operating cost
Year Commission
in million ₤
% of total
operating cost
1986 223 8.43 1996 916 13.85
1987 269 9.12 1997 864 11.64
1988 332 9.32 1998 847 11.54
1989 391 9.7 1999 825 11.44
1990 467 10.67 2000 817 10.6
1991 506 11.38 2001 627 9.14
1992 563 11.79 2002 524 8.07
1993 650 12.28 2003 431 6.7
1994 768 13.76 2004 365 5.46
1995 821 13.97

10. Travel Agency distribution systemTravel Agency distribution system
Safe to draw a conclusion that UKSafe to draw a conclusion that UK
airlines, travel agency distribution systemairlines, travel agency distribution system
became very expensive as well as USbecame very expensive as well as US
domestic marketdomestic market
Increasing commissions were often usedIncreasing commissions were often used
by travel agents an intensive battleby travel agents an intensive battle
themselves rather than for investment tothemselves rather than for investment to
provide airlines with better distributionprovide airlines with better distribution
service in two forms:service in two forms:
In pursuing market share oftenIn pursuing market share often
prepared to pass on a portion ofprepared to pass on a portion of
commission to their customers in thecommission to their customers in the
form of discount either to build loyalty orform of discount either to build loyalty or
to buy clients of other agencyto buy clients of other agency

11. Travel Agency distribution systemTravel Agency distribution system
Proliferation of sales outlets as firms opens moreProliferation of sales outlets as firms opens more
retail shops to strengthen their geographicalretail shops to strengthen their geographical
presence relative to their rivals in consideration ofpresence relative to their rivals in consideration of
higher commissionhigher commission
These are done at the cost of airlines money. ThisThese are done at the cost of airlines money. This
was not acceptable situation, bearing in mind thewas not acceptable situation, bearing in mind the
huge investment made by airlines &huge investment made by airlines &
comparatively small investment made by agentscomparatively small investment made by agents
In 1996, some airlines began to make radicalIn 1996, some airlines began to make radical
changes. Internet held out the promise of beingchanges. Internet held out the promise of being
an alternative distribution channel which couldan alternative distribution channel which could
challenge the dominance of the travel agencychallenge the dominance of the travel agency
systemsystem

12. Travel Agency distribution systemTravel Agency distribution system
First sign came when Delta airlinesFirst sign came when Delta airlines
announced the commission capping ofannounced the commission capping of
$50$50
It was followed by all other major carriersIt was followed by all other major carriers
in USAin USA
The process of reform has been bothThe process of reform has been both
strengthen & widenedstrengthen & widened
Tickets sold by traditional travel agentsTickets sold by traditional travel agents
has fallen, as website has become morehas fallen, as website has become more
popular & new breed of on-line travel haspopular & new breed of on-line travel has
appeared. Travel agents have had to seekappeared. Travel agents have had to seek
new sources of revenuenew sources of revenue

13. Travel Agency distribution systemTravel Agency distribution system
Agents have changed their roleAgents have changed their role
into being a travel consultantinto being a travel consultant
with specialist skill of bookingwith specialist skill of booking
travel, negotiating corporatetravel, negotiating corporate
deal & tracking & tracing traveldeal & tracking & tracing travel
spending in consideration ofspending in consideration of
management feesmanagement fees
It has saved airlines large sumIt has saved airlines large sum
of money & has given themof money & has given them
better control over distributionbetter control over distribution
channelchannel

14. Future of DistributionFuture of Distribution
Future is going to see greater proportion of airlineFuture is going to see greater proportion of airline
seats are sold using direct distribution channelseats are sold using direct distribution channel
Most of this growth will come from the increasedMost of this growth will come from the increased
use of airline websitesuse of airline websites
Internet access is spreading rapidly around theInternet access is spreading rapidly around the
worldworld
The new entrant Low cost carriers have alwaysThe new entrant Low cost carriers have always
done this, and legacy carriers are increasinglydone this, and legacy carriers are increasingly
respondingresponding
The best opportunities for travel agency industryThe best opportunities for travel agency industry
to hold over airline websites for providingto hold over airline websites for providing
consultancy to their clients with “best buy”consultancy to their clients with “best buy”
recommendationrecommendation

15. Global Distribution System (GDS)Global Distribution System (GDS)
Until early 1970s, contact between airlines &Until early 1970s, contact between airlines &
distribution outlet was mainly by telephone whichdistribution outlet was mainly by telephone which
was time consuming & costly & becomewas time consuming & costly & become
unsustainableunsustainable
As 1970s proceeds, carriers set out to automateAs 1970s proceeds, carriers set out to automate
airline/travel agency contact- Computerairline/travel agency contact- Computer
Reservation System (CRS). Also gave agent visualReservation System (CRS). Also gave agent visual
confirmation that reservation had been madeconfirmation that reservation had been made
The leading airlines behind this move wereThe leading airlines behind this move were
United Airlines with Apollo & American AirlinesUnited Airlines with Apollo & American Airlines
(AA) with SABRE in USA(AA) with SABRE in USA
By end of 1970s, in Europe, Lufthansa (withBy end of 1970s, in Europe, Lufthansa (with
START) & British Airways (with BABS) had joinedSTART) & British Airways (with BABS) had joined

16. Global Distribution System (GDS)Global Distribution System (GDS)
The system allowed other airlinesThe system allowed other airlines
upload their schedules for sales byupload their schedules for sales by
agentsagents
Bookings were made initially with noBookings were made initially with no
chargecharge
By mid 1980s, complaints were madeBy mid 1980s, complaints were made
by some airlines that biasness in displayby some airlines that biasness in display
in reservation system significantlyin reservation system significantly
hindering the operationhindering the operation
 once displays became regulated, byonce displays became regulated, by
1980s with interference of US Govt &1980s with interference of US Govt &
European Commission, AA claimed to getEuropean Commission, AA claimed to get
their return investment, more than atheir return investment, more than a
billion, on SABREbillion, on SABRE

17. Global Distribution System (GDS)Global Distribution System (GDS)
Initially $2.8 per was charged per flightInitially $2.8 per was charged per flight
sector bookedsector booked
The effect of booking fees was dramatic,The effect of booking fees was dramatic,
GDS were transformed into highlyGDS were transformed into highly
profitable businessprofitable business
At that time, more than 40% of theAt that time, more than 40% of the
travel agents were using SABRE in USAtravel agents were using SABRE in USA
To address the perceived threat ofTo address the perceived threat of
SABRE, AMADUES & GALILEO formed aSABRE, AMADUES & GALILEO formed a
consortia in 1987consortia in 1987
Enthusiastic use of internet by airlinesEnthusiastic use of internet by airlines
as distribution channel has ended theas distribution channel has ended the
“Golden Age” of GDS profitability“Golden Age” of GDS profitability

18. Global Distribution System (GDS)Global Distribution System (GDS)
The ownership stakes of airlines in GDSThe ownership stakes of airlines in GDS
have almost been sold-offhave almost been sold-off
Almost all airlines have now a commonAlmost all airlines have now a common
interest in lowering booking fees tointerest in lowering booking fees to
achieve more cost-effective distributionachieve more cost-effective distribution
Low Cost Carriers has achievedLow Cost Carriers has achieved
elimination of GDS booking fees andelimination of GDS booking fees and
agents commission by using direct routesagents commission by using direct routes
of distributionof distribution
GDS companies are now contemplatingGDS companies are now contemplating
to diversify their business strategyto diversify their business strategy

19. Distribution Channel in Air FreightDistribution Channel in Air Freight
Air Freight Forwarder is equivalent to travel agentAir Freight Forwarder is equivalent to travel agent
in air freightin air freight
Integrated carriers dominate “Express” marketIntegrated carriers dominate “Express” market
with powerful retail brands, the remaining “heavywith powerful retail brands, the remaining “heavy
freight” market dominates by forwarding industryfreight” market dominates by forwarding industry
– well over 90%– well over 90%
Such a reliance on a single channel would beSuch a reliance on a single channel would be
unhealthy in itself.unhealthy in itself.
Fewer than 15 global forwarders now dominatingFewer than 15 global forwarders now dominating
the marketthe market
Overcapacity enabling them to play one carrier offOvercapacity enabling them to play one carrier off
against another, lowering the rates that they paidagainst another, lowering the rates that they paid
& increasing profits they made on their& increasing profits they made on their
consolidationconsolidation

20. Distribution Channel in Air FreightDistribution Channel in Air Freight
Number of airlines are now forming consortiaNumber of airlines are now forming consortia
aiming to streamline the process of booking in theaiming to streamline the process of booking in the
air freight by the use of internetair freight by the use of internet
Present status of distribution channel for airPresent status of distribution channel for air
freighter is unsatisfactoryfreighter is unsatisfactory
Airlines have too little market power despiteAirlines have too little market power despite
making the bulk of capital investmentmaking the bulk of capital investment
Recent initiative of Air France has developedRecent initiative of Air France has developed
brands in air freight base on time-definite deliverybrands in air freight base on time-definite delivery
These brand will be requested more whenThese brand will be requested more when
forwarder are contemplating which airlines to useforwarder are contemplating which airlines to use
Airline should control their distribution channelsAirline should control their distribution channels
as it is largely their money that is at risk throughas it is largely their money that is at risk through
these channelsthese channels