China Southern’s commission cut may cause serious repercussions
China Southern Airlines cut its agents’ commissions from 2% to 1% possibly sparking a struggle over distribution involving: airlines, agents, and OTAs
ChinaTravelNews - China Southern Airlines announced on January 7 it will lower its agents’ commissions from 2% to 1% effective February 2, 2015.
Second commissions cut in six months
Six months ago, China’s four major carriers all lowered their agent commissions from 3% to 2%. Air China led the move in June and the other three followed suit in July.
This time round, Air China, Hainan Airlines and China Eastern will likely follow China Southern, which holds the largest domestic market share.
Commission cut to weed out the weak
Ticket agents’ reactions to China Southern’s latest commission adjustment is relatively muted.
“Actually it didn’t come as a surprise. Last September Lucky Air already cut commissions completely though it kept up incentives for monthly, quarterly and yearly sales,” Shanghai-based agent Mr Lu told our reporter.
Mr. Lu speculated that airlines are attempting to accelerate the realignment of travel agents by lowering commissions. “It is a matter of course that airlines would give up on the small-time agents to control the larger agents,” he said.
ChinaTravelNews columnist Jiangyun Ning believes that the change in remuneration structure would eventually prompt small to medium-sized travel agents to turn to bigger agents rather than airlines for air tickets.
“Small to medium-sized agents are being squeezed as their profitability is lowered. Yet bigger agents can flood the market with discounted tickets via traditional travel B2B platforms like Jinri and new platforms like Qunar. By then airline commissions get will be lower than the service fees offered by the bigger agents, so it makes sense that they would issue tickets through agents rather than airlines,” Mr Ning said.
“Yet the commission cut may also hurt online platforms ultimately, as smaller agents with lowered commission income can’t afford Qunar’s pay-per-click fees and will pull out,” he said.
Transformation inevitable for struggling agents
Bigger agents might actually end up with higher commission incomes, as the other variables in the airlines’ remuneration formula besides commission can be adjusted according to market conditions and seasonality. They may also end up with the market share of the agents that are forced out of business.
Mr. Ning told our reporter the impact to the industry depends on how airlines implement this policy. “It remains to be seen whether airlines will further manipulate the variables of the remuneration formula and deprive agents of all profits or find another way to compensate them,” he said.
While the Matthew effect, i.e.: accumulated advantage phenomenon, is inevitable even the dominant agents of will have to transforming their business model for survival, such as bolstering service or niche products.
Will cuts drive OTAs to start own airlines?
Mr. Lu suspects that the airlines' cuts are also meant to increase their proportion of direct sales and avoid external control of their distribution channels.
PMS FangCang’s CEO Qing Xu thinks squeezing out SME agents will have an adverse effect on airlines as distribution channels become more concentrated and airlines have to rely on Qunar and Ctrip.
“If airlines aren’t careful they can cause more harm than good and can create an uncontrollable beast through over-reliance on large distributors. OTAs can already swallow up Global Distribution Systems (GDS) and buy cruise liners so what’s to stop them from building their own airlines?” Mr Xu said.
On the other hand, Mr Ning thinks that customers may turn to airline’s websites and boost their B2C sales if SME agents are forced out. Whether airlines have adequate manpower to handle sales influx and after-sales remains to be seen.
(Report by Xianhao Zeng)
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(Translation by David)