China Southern ordered to cut commission by RMB1 billion
State-Owned Assets Supervision and Administration Commission required the carrier to lower its agents’ expenses by RMB900 million.
The move by China Southern Airlines to cut ticketing agents’ commissions was prompted by the directive of the State-Owned Assets Supervision and Administration Commission (SASAC) that requires the carrier to lower its agents’ expenses by RMB900 million (approx: US$145 million) this year.
Squeezing out ticket agents
China Southern announced earlier that it would completely cut ticketing agent commission on June 1. The news that came much earlier than observers had anticipated sent shock waves through the ticketing sector.
A director in one of the state-owned airlines said that all commissions are generally divided into three parts: basic commission fee, additional commission fee and incentives. “The loss of commissions will be a huge blow to small ticketing agents and will likely cause some of them to fold, but the impact on large ticketing agents will be limited as they will still enjoy rebates,” he said.
Accelerating direct sales strategy
Ticketing agents are squeezed out of the market as airlines endeavor to lower sales cost and implement their direct sales strategies.
For example, one airline had a commission budget of almost RMB4 billion (approx: US$644 million) in 2014, yet it could save almost RMB1 billion (approx: US$161 million) on commission for every 10% increase in its direct sales ratio.
However, China’s airlines still do not have high direct sales ratios. China Southern only had 18% direct sales in 2014, which is indicative of the industry average. Low-cost carrier Spring Airlines has the highest ratio of direct sales in China’s aviation industry, at 85% according to its spokesperson Wuan Zhang, and its sales cost was only a fourth of the industry average.
From the start, Spring Airlines has never conducted sales via Chinese national GDS Travelsky. Instead it relies on its travel agency Springtour and its original IT system for sales on its official website and app.
One industry observer said China’s carriers are getting orders to increase the ratio of direct sales from planners at the highest levels. SASAC had pushed the three state-owned carriers to increase direct sales while IATA is pushing the New Distribution Capability (NDC) as a communications standard for international flights.
NDC is designed to allow airlines to apply dynamic products to strengthen distribution and even exchange information with end users in real-time to lower the final distribution cost. Currently China Southern and a number of Chinese carriers are conducting trials of NDC.(Translation by David)