Something has to go and mainland airlines have decided it will be commissions to ticketing agents. Carriers have been struggling to get a profit lift as fuel and sales costs have mounted so they’ve been forced to take a hard look at their bottom line. The latest round of cost-cutting involves slicing into the commissions the airlines give agents.
Air China (00753.HK, 601111.CN) was the first down this runway — the flag carrier lowered its commission this month and was soon followed by China Southern (01055.HK, ZNH.US, 600029.CN), which aims to save around 600 million yuan (US$96.59 million) a year.
National Business Daily reported that it shouldn’t be long before more airlines, including China Eastern (00670.HK, CEA.US, 600115.CN), Hainan Airlines (600221.CN, 900945.CN), Shenzhen Airlines and Xiamenair, plot the same course.
The report quoted one ticketing agent in Guangzhou as saying that commissions usually comprise two parts — a fixed 3 percent baseline commission on the sale of each ticket and a discretionary bonus determined by cumulative sales.
Air China and China Southern have all sacked the margin by 1 percentage point. That may not seem like much but it’s a loss of one third for tens of thousands of ticketing agents all over the country. And, since many of them are self-employed, they don’t have any collective bargaining power to negotiate with carriers.
Agents also have to survive on fewer bookings. China’s expanding high-speed railway grid is eating into carriers’ medium- to short-haul domestic business, leaving many small ticketing agencies well short of their annual sales goals and putting bonuses out of their reach.
Agents’ troubles are compounded if customers pay using credit cards because agencies have to foot the 0.5 percent transaction fee. Factoring in costs like rent and tax, an agent won’t break even without a minimum business volume of half a million yuan, the report said.
Bigger and more diversified agents won’t suffer as much because they have other income streams like hotel bookings, car hire and tours to cushion the blow. Over the last few years at top online travel firm Ctrip, for example, flights have generated a diminishing share of earnings.
The broader picture is that airlines are struggling to stay aloft amid fierce headwinds. The Big Three state-owned carriers are desperate to end their profit slump. On top of the 300 million yuan loss in the first quarter, China Southern issued a profit warning this month warning of a combined first-half net loss of 900 million to 1.1 billion yuan.
Apart from fuel costs, a large part of the problem is soaring sales expenses. Annual reports show that commissions paid to ticketing agents are the bulk of sales and marketing outlays at Air China and China Southern. Air China’s sales expenses amounted to 7.2 billion yuan last year, 73 percent of which was commissions. Commissions made up 60 percent of China Southern’s sales costs.
China Southern said ticketing agents sold 60 billion yuan in flights in 2013. If sales continue at that level, the lower commission rate could net the firm no less than 600 million yuan per year.
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