As with any battle a reconnaissance team goes in to find out the lay of the land first, this is our starting point for this project. This step gives us a clear understanding of where we stand and will give us guidelines on where we need to go. The first time you do this exercise I can assure you it is going to throw up some very interesting information that will surprise you, even if you are a 25year veteran of this industry. The numbers which are based on facts will tell their own story. So prepare to be surprised and at times shocked if you have never done this before.

Regardless of what the numbers say, it will give you some excellent ideas on how to proceed towards that 3% or higher increase on margins which is our target from this guide.

Export that to a spreadsheet so that it looks like this:

So let’s begin with a very simple first step.

Collate all the airline sales you did for either the last full year of sales or say the past 12 months. If as we are currently in COVID times this skews the picture, pull out data for say January to December 2019. This is the baseline 12 months on which you want to build your future plans. So whatever set of numbers you feel will give you the full picture should be used.

This should be relatively easy to pull out from your mid-office system. What we are looking for to start off with is a report that shows you the airline name or airline code, gross sales, standard or upfront commission % and the commission amount.

Export that to a spreadsheet so that it looks like this:

If you have airlines which have different commission % for say domestic and international routes and you can split them accordingly, do so. If not that’s OK, we can do more refinements later.

If your mid-office system is unable to generate that level of detail, try and source it from other sources like your accounting system or GDS reports. If you have to manually get someone to key in the data that is also OK and you can access the above spreadsheet format from our website.

Its titled “02a Airline Sales and Commission Report.xlsx” and this is the link where you can download it from: www.airlinemetrics.com/agencytools

The next step then is to add back-end incentive or PLB details on to the sheet at an airline level. The back-end/PLB incentives are a separate topic and we have addressed that in a separate guide but if you have exact details on what incentives were earned for each airline then we can add those in.

In case you only have an estimated % level then that’s fine as well, as long as you feel confident that the information is reliable and not overly optimistic or pessimistic with the estimates.

Please note the numbers shown in the example above or the ones below are all made up and do not bear any resemblance to actual values. It is more to highlight the concept and process rather than showcase which airline pays more or less incentives.

So hopefully you are following the steps and now your spreadsheet looks like this:

This by itself now starts giving us some really good insights into our air sales business. Each of us without the help of any reports I am sure can state from memory which airlines we have the highest turnover on. Maybe the top 5 or top 7. But when you create a comprehensive list of all airlines you are issuing tickets on via BSP or ARC or even non-BSP/ARC carriers you may end up with a list of 50 or 100 or more airlines on which you issue tickets over a year depending upon how large or small your air business is.

Our aim remember is to squeeze every point of margin out. So this first step is establishing a clearer picture for us to base some decisions on.

If you start looking at the combined numbers now with up-front or at source commission added together with back-end incentive commission (even if they are conservative estimates) they will start showcasing which airlines pay higher levels on commission. We are not yet at the Profit and Loss picture per airline – we’ll get there but here is something we can start using for some action and insights.

You will notice in the above example some airlines have zero back-end incentives. Your spreadsheet will show the same. So then the question is why are they zero? Is it because you have not approached the airline for an incentive deal or is it because you are waiting for the airline to approach you? Or is it the case that you never realised that your turnover with that carrier was that high?

Regardless of the reason, this now brings the first action item on line for us to do – approach airlines who pay zero back-end/PLB commissions for a deal. Remember in the travel industry the onus is ALWAYS on the travel agent to show value to the carrier. ALWAYS. So you need to take the first step and reach out. Just by reaching out does not mean you will get a deal. I would like to share a case study with you about an OTA (online travel agent) I know where they knew one airline they could promote and channel volume and kept reaching out to with absolutely no response from the carrier. So they did what any good business does – never give up and keep trying. And they did it with some panache. I diverge a bit but here is a good story so please bear with me.

As we all know airlines feel OTAs are encroaching on their patch and competing head on with their own website for online sales. Carriers just cannot get this out of their mind that consumers may want to compare the competition and look for choice. OTAs are deemed to sell the cheapest inventory and collect GDS rebates, commissions and incentives on top and hence airlines loathe paying anything to OTAs traditionally. Not that these assumptions are true, but that is just how it is. Not all airlines loathe OTAs of course but I am just talking about a general mindset that prevails in the industry.

Anyway, back to our case study. So this OTA kept getting rebuffed over and over for any incentive deals by this carrier. So they decided to play a bit of the long game. They started promoting this airline bit by bit on their site. And sure enough sales started increasing for that carrier. What they did however at the same time, was start sending the carrier monthly reports on their sales numbers which they were achieving before and after the promotion started. And they kept promoting them for several months (maybe upto 12 months I think but cannot remember exactly the timeframe). Anyway, by this time they had kept sending the sales and executive team of that airline in that market ongoing sales numbers and it clearly showed that they could deliver decent volume. This had warmed up the carrier as it showed genuine value, but the airline was still reluctant to offer a deal. And then in the 13th month the OTA just pulled out any promotion and channelled everything to their competition. All this was a deliberately thoughtout move. BOOM! Overnight the sales that had been built up for that carrier without paying a single cent in incentives went over to their competition. And the OTA kept sending their sales report that clearly showcased their power of distribution. So what do you think happened? Oh yes, they had a very good deal offered to them within 15 days. That is what proving value to the principal is all about.

This of course does not mean you will get a deal with an airline if you follow this path. It may be very different when you have a TMC business, but you have to think through how you can get the airlines opening that door. Even if it is a small incentive or a marketing fund – anything that brings in additional cash to your business is a good step to increasing profits. And we all know that competition in this industry is fierce. I am sure you can come up with many ways that will showcase how you can add value to an airline and you need to amplify and play that so the airline feels they need you in their network. Once you build that relationship then it is all about growing it.

So let’s say you can convert some of the carriers to incentive paying ones. What does that mean to the bottom line? Make an estimate of which ones may pay how much and compare after each quarter/half year/annually if that was realised or not. And of course, keep asking for more each year and keep raising the bar if you can. You can use the spreadsheet to make some projections for the next year or next 12 months or even the next 24 months. It should not only be a guide but a working document that you continuously refer to and keep adjusting.

So what happens if an airline no matter what just refuses to deal with you? We will come to that in Steps 2 and 3.

Let’s get back to our spreadsheet. We have only just assessed our true commission levels. We have not yet got a Profit and Loss number on hand. So some more work to be done on that from here.

Next step then is to add four more columns – Payout or Discount%, Payout or Discount ($), Retained Income and Retained Income%.

Depending upon your type of business you may be paying out or discounting your tickets. As a consolidator, say you may be paying your agents or sub-agents. Or if you have a home-based agency network there may be commissions paid to them. Retail agents or OTAs may discount the values. Regardless, we want to identify and note the payout or discount value at the airline level.

In our spreadsheet we have put in the % values by airline and added a simple formula to calculate the payout or discount value. Feel free to add those to our spreadsheet or have those extracted from your mid-office system on your own sheet. If we then subtract the Payout amount from the Total Commissions we get what I have termed as Retained Income. This is the net income amount we retain in our business after discounts or payouts. We can then calculate a Retained Income% that shows what the actual income levels are for each carrier we are selling.

These are the columns we added:

At this point we have a much better handle on what our profitability per airline looks like. It is not finished fully yet but we are getting closer.

Have a look at the figures you now have on your own spreadsheet. This starts revealing which airlines provide you higher % of retained income compared to others which are lower. What story have your numbers started telling you now?

From here on it is not just the matter of looking at airlines that have the highest volume or turnover levels. It is also about changing your profitability for each sale you make. If you have any airlines with a negative retained income (hopefully not) those are the top priority. Anything in the red you are losing money on and have to change the game. Either the discount levels or negotiate better deals with airlines.

The airline industry is also always about capacity changes. New routes or new flights on existing routes, or bigger or smaller planes directly impact seats offered in the market and the volume being sold. As we know this is a dynamic factor that keeps changing throughout the year. So it is important to look at these numbers compared to previous periods. At the very least compared to previous year so you get an idea on which carriers you are selling profitably and which of the ones you are not. Once this is clear then it is about what strategies you put in place to sell more profitably.

Hopefully by now you have a good idea on which airlines you should approach for incentives, which airlines you need to sell more of based on profitability and which carriers may need to be discounted at a lower rate for margin increases.

The spreadsheet should now start looking like this:

Next step is to add marketing expenses to this sheet per airline.

If you spend on marketing expenses overall, try and see if you can come up with some formula to allocate it at an airline level. If you have marketing spend allocated at an airline level, then add them in there. If you receive marketing funds from airlines, then best to add another column to put those in there. So from the Retained Income we can now deduct Marketing Expenses and add in Marketing Funds paid by airlines (so as to reflect the true cost) to arrive at the real profit and loss figure. By dividing that against the gross turnover (fare excluding taxes let’s say) we arrive at the true profitability percentage by carrier.>

Think about what other direct cost elements relate to your business and add those in here to make the profit and loss picture clearer. The more sophisticated your model the better results you get when you turn various profitability dials.

So this exercise should already have revealed some interesting results. Some of them could be that the airline with the highest turnover may not be the most profitable. It could also reveal that the profit generated from other airlines are higher than some of the top 5 carriers you sell in terms of turnover. What about non-contracted carriers? Are there some on the list you can approach straight away for an incentive deal?

What does your discounting/payout policy look like? Should you retain that for each airline, or should you change it? The bigger your air turnover the bigger the margin capability, by tweaking each of these dials. There is no need to discount or payout each carrier at the same rate. Nor is there a need to spend more money on marketing low profit carriers unless you see growth for that airline coming through in the future. At the very least it will give you some guidance on where your marketing dollars should be spent if there are no airline contributed funds.

The converse also applies. Why spend less or cap marketing spend on the most profitable airlines? If a carrier is generating great returns why not step up the marketing spending and make sure you communicate this on an ongoing basis so the carrier knows of your support? Maybe you can approach them to contribute towards a joint marketing fund which is a win-win solution.

Each line item on our spreadsheet is a guide that shows clearly what each airline and air ticket you are selling is contributing to your bottom line. It then becomes the basis on which you set your strategy and tactics for your sales framework and marketing spend. It also points towards which relationships you need to cultivate further, and which may be ones you need to reconsider.

Now that we have clarity on how much we are getting it is time to set some benchmarks internally. You may classify different markets or regions with different ROI categories. So domestic routes may be high volume but lower profit percentage but others may be lower volume with higher returns. No matter how you classify your airline categories, there is another layer you need to look at closely – your airline incentive or PLB contracts.

It is not uncommon to have contracts with airlines keep rolling over year after year untouched except for the growth % agreed upon. I have been incredulous at some of the clauses and exclusions that airlines have added and agents have just agreed to.

How to negotiate the best incentive contract is not the scope of this guide – we have a different one for that. But what is important is for you to look at each clause and see if it can be changed in your favour. Especially post COVID. All the old structures can now be called into question during these uncertain times.

We had a customer who had signed up to Airline Metrics and we were just showing them the results from their data. They randomly asked us to bring up the report for one carrier showing revenue by RBD or booking class. We were in a board room with the management team and when the report came up on the screen there was some agitation by some of the senior members there. I was looking at my team trying to see if I said something out of place till the COO said –

“These b****** have been s***ing us for years by excluding W class from all our incentive deals. It makes up almost 70% of what we sell on them. I never realised this till I just saw this report. We are going to get this changed with them immediately!”

And that is just one example of how a clause in a contract setup years ago had grown to exclude a huge chunk of revenue from incentives. And why a thorough review regularly is critical.

If RBDs or booking classes are excluded then you have to ask why and how long and how is the airline going to compensate you for selling those classes. These may not be easy negotiations but in the end it is your effort and your bottom line. Carriers do seem to play hardball on such items and have a “head office insists” curtain to hide behind. But it does come down to how you also manage to limit selling less profitable booking classes or airlines themselves.

There are many other ways to tweak contracts but if you go through each airline’s RBD sales, Origin and Destination analysis, create a competitor report that you compare them on in terms of market, look at their capacity analysis and build a comprehensive composite on sales patterns you can then identify key negotiation points. It will also provide you deep insight on which markets to promote which cities of origins you need to target, seasonality selling as well as KPIs on what returns are expected for each promotion you do with or for them.

Armed with deep insights these become repeatable action items once you have a sales strategy and negotiation plan defined. Each should again significantly add margin points to your profits.

Now that we have our baseline, we can take it further to ask some more hard questions. Keep or Cull?

Time to add 2 more columns to our spreadsheet.

One is the Turnover% and another is the Cumulative Turnover%.

These two columns identify how much turnover is each airline contributing to your business. The Cumulative Turnover% is an addition of the turnover% so we can try and get to the Pareto principle.

The Pareto Principle states that 80% of consequences come from 20% of the causes. By getting a clearer picture of the 80/20 rule we can make some decisions on keep or cull. In our sample list from over 100 carriers only 15 made up 80% of revenue. Yours may not be exactly the samebut the principle will hold.

If there are some airlines within your 80% list, then it is time to make some decisions about how you sell them. When we say cull I don’t mean stop selling those carriers – though at times you may need to make those decisions but more about how can you bring the margins in line with what you need.

So let’s look at some options here.

On your list there may be a few offline carriers. A lot of our first-time customers are surprised by how many offline carriers pop up especially in the Airline Metrics forward revenue or flown revenue reports. This is a pure result of interline and code-share agreement that exists between carriers. There is a direct impact of this on your incentive/PLB payouts. Airlines usually exclude paying on flights that are operated by partner airlines or at times even marketed on them despite them being the operated carrier. This is a very critical part in terms of how robust your internal business analytics is. Revenue leakage can vary significantly based on airlines and markets and can be anywhere from 5% to 40% depending upon how efficiently you have setup your ticketing funnels. More on the ticketing funnels in the next step. But you need some clear analysis on flown revenue and even if you do not have the ability to generate that data through your internal systems, it may be wise to request detailed reports from the carriers and carry out such analysis.

Sorry about the free plug but the Airline Metrics solution has been setup to save time and effort by providing a high degree of accuracy on flown revenue reporting and target management and if you need further support in this area please do visit our website on www.airlinemetrics.com. or do contact us.

Regardless of your choice of systems, it is important to look at potential contracts from offline carriers. Most offline carriers are overjoyed to do deals even on smaller volumes as they can earn a higher commission rate if they are the ticketed carrier. It also means they can boost sales at lower costs from markets they do not fly into but connect with a partner carrier. Most of such markets have GSAs representing them who are also keen to grow their revenue and it may be quite interesting an exercise to see how you can switch ticketing carriers to offline ones participating in BSP or ARC and generating a higher profit percentage.

Anything below the 80% line you need to think or ask if you can either achieve a deal with those carriers or be able to grow the profits and turnover in the next 12 months to bring in a higher level of margin. If you can, then these provide excellent opportunities to push up the margin increase target we set of 3%. If they fall in the cull list, then it is time to stop issuing tickets on your IATA number for them. Best to setup a deal with an airline consolidator/wholesaler and funnel these airlines to them so you can get a better return. What if you are an airline consolidator or wholesaler yourself? Well then you have to be open to form an alliance with one of your competitors and engage in some negotiation so you can offload non profitable carriers to them where they are getting a good return and vice versa. For example, if you are a consolidator who specialises in Europe mostly but also have sales to Asia. There will most probably be another consolidator who has better returns or specialises in the Asian market. So why not join hands and work together? After all the airlines have been doing so for decades. Where did these alliances come from? They are after all some sort of cartel. It is just that the governments have not caught on to them. I am not suggesting you form a cartel but think about partnering with a potential competitor or even a buying group to route all your tickets through them for a better return. It is the post COVID world after all.

So now that we have made some keep or cull decisions it is time to advance our advantage in other ways.

One of the oft missed income sources by agents is what I refer to as SOTO ticketing. Let me explain this further. Many agents issue SOTO tickets on airlines they do not have deals on. For example; you could be an agent in Hong Kong and issue a ticket on say LOT Polish for an intra-European route which is specifically excluded on your LOT contract or you may not have any deal with LOT at all. If this is the case, there are plenty of European agents who do get a commission on those tickets and are more than willing to share a percentage of their income if you let them issue your ticket. So it is a matter of finding the right partner and creating a ticket funnel so that the tickets are issued by your SOTO partner so you can generate a higher return on such tickets.

The same holds true for your own market. Why not offer to issue tickets to agents in other markets where you have a better deal on some of your main carriers? This would funnel a higher volume of sales to you and also boost your bottom line with very little effort. Setting up such ticketing funnels are not difficult from a technological standpoint but do need you to put some effort into how you structure them commercially.

Ticketing funnels also can be setup for what we stated earlier – issuing tickets on offline carriers who participate in your BSP or ARC and are willing to give you a higher level of margin. By setting up your internal business processes and technology in such a manner that you can do so automatically and repeatedly it allows you to create a higher income stream.

Ticketing funnels also should be setup to route your tickets to your “partner agents” as discussed in the previous step. If you are able to automate or efficiently enable this process, then again it brings in a new income source which you were not able to tap into earlier.

Ticketing funnels are more a commercial focus rather than a technological one and there may be other opportunities for you to explore expanding such funnels to.

There is no doubt that each business is focused on selling and providing a high level of service to their customers. I am not in any position here to state anything about how or what you sell to your customers. What I would however like to point out is – now that we have a clear profit and loss report by airline how can we optimise sales on the more profitable carriers?

Let’s look at an example. Most customers like to fly non-stop to their destinations. We know this for a fact. However, let’s consider that instead of flying Sydney to Hong Kong directly on Qantas, it is more profitable for us and cheaper for the client if we promote say Malaysia Airlines on this route which does have a stopover. It may be possible for you to direct a certain percentage of sales to MH which increases your margins. This may be what you already do but it is a tactical step to experiment with on an ongoing basis, so you know how to best optimise sales in different markets and cities.

Another option here which no doubt will be controversial is service fees. There is no set rule that you have to charge the same service fees for all airlines. Infact I would highly argue against it. When some airlines are more profitable for us than others why should we have the same service fee charges for all airlines? If we look outside at any other industry – does any manufacturer or retailer declare what their margins and fees are for each product they sell? So why should you? If by law you are required to show the fees you are charging you can also add a statement that you are paid no compensation for selling that ticket by the airline or paid very poor compensation that does not offset your costs. Infact the entire exercise we did creating a Profit & Loss statement should now focus your service fee strategy on those airlines that fall into the 20% category where you must charge higher service fees. This is an important consideration of linking your customer sales strategy to the airlines you’re selling.

There are other methods too of channelling your customers to your preferred airlines but at this stage my aim is for you to add those service feesyou may collect on a new column of your spreadsheet and see how much of an increased margin can be achieved by this. This should be done for all airlines in your list. Maybe you keep the service charges the same for the first three or four carriers, but it must start creeping upwards from there onwards. If your fear is that you may lose business, I highly recommend experimenting on some of these carriers for a short period of time. The results will surprise you and by that, I mean positively. You will find that you can pass on higher charges for some carriers and it will not impact your bottom line negatively. If it does not work, you can always reverse course.

We know that the above data set may not be something you can easily generate using your mid-office system. Tools like Airline Metrics are available which specialise in business analytics. However, it does not mean you need such tools to start analysing the business. The data for this is available in some form or other in your mid-office or accounting systems. GDS systems also allow for extraction of reports that can provide sales and commission information. If you then tap into your monthly or quarterly airline reports for your incentive deals and see what the percentage rangethey usually land on – you can make some estimates to then putting in the right values into the Profit and Loss spreadsheet.

All marketing and service fees should also be in the mid-office and accounting systems. In addition, there may be other costs you want to add on to the spreadsheet to ensure you are getting the right picture. One of them is credit card merchant fees. If a certain percentage of your business is based on you paying the merchant fees for tickets issued and they are not passed on to the customer then these can quickly add up. Merchant fees can range from 0.60% to 3.5% of gross sales. That is a huge chunk of change to pay. Anything you can do to reduce these fees by negotiating better deals with your payment provider or passing these to the airline as CCCF tickets mean dismantling further costs from your framework.

You may need some assistance from your accounting or analytics team or you can hire external contractors to do such analysis for you.

We at Airline Metrics offer an audit service that helps setup the Airline Profit and Loss spreadsheet and identify cost elements and margin opportunities. More information about this service is available on our website and at the end of this guide.

What is important though is to set up this framework and identify each possible cost and margin element. This framework therefore should be a working document that is constantly updated and repeatedly looked at to ensure you are on the course you set in increasing your margins. As a rule of thumb, you should setup a monthly revenue management meeting that looks at this spreadsheet and records all decisions on what the action plan is going forward and constantly records which tactics worked and which did not. If a monthly meeting is not possible then a quarterly one may be a better option as long as this is a live document.

The last one is not a step at all. It is a mode of practice. At the start of this guide we used the weight loss analogy. To be successful in increasing margins therefore all these steps must be reviewed and repeated on an ongoing basis as part of your business process.

Airlines come and go and so do routes and sectors they operate on. Capacity changes are dynamic and constant. Post COVID we are going to see a huge shift in markets. Smaller airlines have stepped up and taken on routes that bigger airlines used to operate on, others have started flying to cities which were never on their radar. Large carriers are shrinking capacity by retiring bigger aircraft like the A380 and B747. All this reduction of capacity is going to catch up if the market exceeds 2019 levels by 2023 as predicted by IATA.

We as an industry should stand ready to take advantage of market cycles and changes. And the way to do so is set up best practices within your agency business that are repeatable. If you have a team who can execute this on an ongoing basis and provide you with constant feedback, there is room for margin increases beyond the 3% we aimed for at the start of this guide. And these steps were valid even pre-COVID and will be so post COVID.

The only thing required is the willingness to do so.