Cutting out the Middle Man

clip_image002As large companies continue to consolidate and look at ways to rationalize they inevitably focus to cut out the middle man. The falling out of Singapore International Airlines with one of their major agents, Flight Centre in Australia, tells the story of this type of change.

In service industries, such as travel the consumer is mature and often makes choices to go direct to the web with no thought of an agent. People want advice about destinations, hotels, transfers, tours, car rental, connecting flights, and so on often do this themselves in the comfort of their homes or office with ease. Previously this was the domain of Agents, who travelled widely on discount fares to stay up to date on best places and best deals. That work for them now seems largely redundant..

As margins tighten agent are hedging to more specialized services like arranging holiday and tour services, and catering to specialist markets of business and affluent people such as retirees etc., Ticketing also is now a low level process that agents do for very small reward.

In my case I still enjoy the luxury of an agent  to book my e-tickets as I don’t have the time or patience to work through a screen.  I also know I can call her at a moments notice from anywhere in the world if I need help. But as a class of client she tells me les and less of her clients are using her this way as they are unwilling to pay the premium.

Putting the SIA Flight Centre impasse issue aside, airlines on the other hand now face fierce competition with cut price operators with no frill services making the grade where traditional services are struggling. Companies Like Thai Air Asia a cut price carrier that has for three years seen rapid and profitable expansion, without I might add any support form an agent network, include things like flexibility options and links to hotels and so on while other services like trip  travel insurance policy is being built into screens as up-sell item.  It is also interesting that Jetstar, the Qantas cut price subsidiary last year contributed around 120% to the bottom line of it parent which of course means the flagship carrier service of Qantas is actually operating in the red.

The Australian public company, Flight Centre Limited’s standoff with SIA over SIA discounted web pricing policy is bead on the issue. Flight Centre last year had revenues of $A 1.454 billion and boasts itself as Australasia’s best known travel agency group with more than 2000 shops and businesses in 11 countries and employing about 8000 people, Its inevitable response is clearly a sign they have to fight hard to retain a key service a bit longer while they rethink their plans. With the impasse about selling tickets on their website at just above the agent net price, SIA announced last week announced SQ flights could not longer be sold through Flight Centre . This understandably caused Flight Centre to make a tactical move to announce it could and would sell SQ flights if requested but also stop hemorrhaging by putting a national stop order out on selling SIA SQ flights with instructions to staff to recommend other airlines. To ensure observance internally it was reported they also blocked all SQ flights on their GDS booking system to force their sales people to refocus on selling other more profitable non SIA products.

Many in the travel business say the SIA actions and general business behaviour with agents is now arrogant. And to knock out punch to such a large agent and reseller seems na?ve and commercially unintelligent. It also seems even more amplified in the current economic environment, where agent distribution channels see themselves as more important than ever in the mission to get full payloads on the airlines again.

One quote I read on the web from an agent about this issue said:

"Personally I won’t sell SQ (SIA) unless its requested, it’s simply not worth to deal with their staff.  I’m sick of being left feeling like they’re doing me a favour letting me promote and sell their product."

So it is clear the halcyon agent selling days are numbered. It also seems that the previously vital commission based work done by agents that delivered the value services that actually got people to fly, is no longer needed. The airline on the other hand who has never been really interested in anything more than getting the travelling public’s bums on their seats, is highly capital sensitive in the volatile travel business. SIA I should add have build a very good brand in the lat 8 years based on giving excellent service.

Understanding the issue more, events such as British Airways announcement  this weeks of a loss ?375 million for their year ending March 31, 2009 compared the year before 2008, they made a profit of ?694 million profit At a minimum it is critical that airlines cover their now massive fuel burn bills that feature prominent in airline operating costs. In the BA case this took a massive 1/3rd of the ?9.billion revenue in 2009. So emotion aside, especially for someone like me who happens to still hold some Fight Centre shares, it is also quite understandable that airlines want more control and we will take more direct approach on what is now largely bread and butter product available to the always cost conscious masses.

But this is not only happening in the airline industry It also occurring  in other industries that have maturing products, especially where merges and consolidated have occurred. Once a market is mature, efficiency to remove or down grade peripheral services is obvious. There is not point on trying to hang on once vital value add services are down graded. It is always clear sign to move on when attitudes to a middle man belie any respect at all. When his occurs agents and distributors who may have worked so hard to add market share to a host product, must rethink their mission.

In my industry, being consulting and software services related, my first hand experience is no different. The enterprise business software industry has gone through a major consolation in recent years and now discounts service alliances that got them there, in some cases completely. Companies like Oracle IBM Microsoft Infor SAP and so on are equally arrogant as they claw back margins and services and downgrade agents and domain specialists. 

In these cases, as the mature phase of product business cycle management invokes, the belief that one size fits all  means the reduction of marginal services must be revalued by services industry so customers understand the value changes and pays directly for the service they need directly. This of course, like the travel business recreates opportunities for value add services and add on specialist niche products that can be often be sold at premium. But like travel it is also driven by the competitive forces and changes in consumer maturity.

As with the business consulting services industry using software to deliver efficiency and change management the travel industry must also rethink about unbundling its services so the planning and consulting value is clear and saleable to consumers willing to pay.

It occurs to those who think this right through, the mass market in the infancy of the high end high cost high margin early adopter stage is never about mass markets, whether it be travel or software services.

So now it seems for maturing products industries a new ball game is on to embrace the change and reincarnate to do it all over again.

Reblog this post [with Zemanta]

Leave a Reply