We earlier covered the launch of Rang7, OTA created by Kingfisher/Spicejet and Indigo airlines that will enable users to buy tickets directly from the site (and help airlines reduce agency/distribution cost).
Though there are few concerns we had regarding domain name etc, but assuming that the news is true (it’s also published in all the leading newspapers, like ET), we did ask OTAs to share their thought on airlines creating their own agency, citing distribution cost as the sole reason to do so.
Hrush Bhatt (Co-founder, Cleartrip)
First, I’d like to challenge this concept of “biased” search results. Cleartrip’s search results have always been sorted by price—cheapest to highest—and the prices are set by the airlines, not by Cleartrip. Our arrangements with an airline have exactly zero influence on our search results.
Over and above that, Cleartrip has made extensive sorting and filtering options available to customers since our launch. We’ve never believed that the order in which search results are presented is a sustainable way to influence demand—customers want what they want and no amount of “biasing” is going to impact their behaviour.
Second, I think continually blaming “high distribution costs” is either a fad or a diversion for airlines to ignore their single largest business concern: unsustainable pricing due to over-capacity. And this is true for airlines the world over. They cannot tell shareholders that the glut in capacity is the reason for their oversupply of red ink, so they’ve created a red herring called distribution cost.
In a nutshell, the domestic airlines collectively lost Rs. 4,270 crore last year, so saving Rs. 200 crores of “distribution costs” isn’t going to fix anything. For some absurd reason, the airlines are hell bent on fighting the wrong battle.
I don’t know who it was that said “Those who cannot learn from history are doomed to repeat it.” Whoever it was, they were obviously a lot smarter than the people at the airlines. Let’s take a brief look at history from the perspective of major US airlines. Major US airlines began reducing the amount of commission they paid in 1995; by early 2002, these airlines reduced their commissions to zero. Today, each major US airline is awash in red ink, is seeking taxpayer bailouts, and some of them have even gone through Chapter 11 bankruptcy filings.
So, what happened? How come removing this burdensome cost didn’t send airline profits soaring? There are many unique things about Southwest, but in this context, two of them stand out. Southwest is the only US airline to:
- Have 36 consecutive years of profitable operations
- Never reduce the commissions paid out to travel agents
There’s a lesson in there somewhere for any airline smart enough to learn.
Third, the cartel-owned OTA model is no business innovation—Rang7 has precedents in the US (Orbitz), Europe (Opodo) and Asia (Zuji). The airlines should take a good look at the state of those businesses today as well as the current nature of the relationship between the founding airlines and the portal—none of these businesses was ever a market leader and none of them have cosy airline relationships any more.
It doesn’t matter who owns an OTA, the economics of building and operating an OTA stay the same for everyone. Unless, of course, the airlines plan to run the site purely as a “cost centre.” That is a scenario in which the site can afford to sell airline tickets while making operational losses as the airlines will keep subsidising the costs.
Airlines would do well to consider that direct distribution is not free distribution—it costs British Airways £30 million annually to operate ba.com (something they are now looking to outsource). There are GDS costs, marketing costs, payment processing costs and the hundreds of other costs that go into operating any business.
Aloke Bajpai (Co-Founder, iXiGo)
The premise that an “Orbitz” can be built in India is fundamentally flawed. If the airlines see it as a way of reducing distribution cost, the question I will ask them is who will support the cost of the technology infrastructure, call centres, customer support, distribution (after all there is still a GDS) and marketing/branding of rang7? Hopefully not the airlines. There is a simple reason why travel agents either need a commission or a service fee from customers (and increasingly both), and it’s because of their inherent business model
Also, with 3-4 OTAs well-entrenched in the market, it is difficult for a newcomer to gain market share without either
- a differentiated product or technology (which Orbitz had) -Orbitz built the first “direct connects” to airlines bypassing GDS and innovated the famous Orbitz matrix way od displaying the results. Now both of these are commodity.
- Huge sums of VC investment (which many OTAs in India had).
While we welcome more players in our ecosystem, we continue to believe that growing direct sales on their own website, with the help of meta-search is the only efficient long-term solution to reduction in airline distribution costs, in conjunction with building an airline’s own brand saliency
Also – When Orbitz had launched Airlines paid 5-8% commissions and 13-15$ per booking to GDSs. In India, on average commissions are around 3% and 6-8$ per booking to GDS is more like it (no GDS fee for LCCs). The saving doesnt look too exciting any more.
What would be interesting to see is how much transaction-fee Rang7 will add to customers to sustain its business model, given that it will charge no commissions. Today OTAs add on average 200 Rs. per ticket AND get some commissions.
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This article will be updated as and when we receive replies from the other players.
Share your opinion.
Aloke – Did you even read the Eco Times article? It said airlines are NOT investing capital, but a VC is. So there is no need to keep saying “hopefully airlines are not investing”.
As a neutral observer (I own a design firm and have not worked with any travel company so far), I think a lot gets written about Airlines by people who know too little. Cleartrip is out telling the airlines what to do to turn the tide. If only all startups could focus on themselves, it would do the world a lot of good.
But these startups afterall have done a good deed – redistribution of wealth – from the VC to the founders/employees. Until the VC stops doling out funds, that is.
pluggd.in gives coverage to IXIGO more than it is due.
100% true,I think Ashish of Pluggd.in has interest but he is not disclosing on why he is covering certain Startups often??
I thought Blog & new media is all about transparency and level playing ?no?
Vijay and Vikas
We asked these questions to other OTAs as well – out of which few declined any official comments,.
you need to realize that only few come out in open (I respect Hrush and Aloke for this) and we publish their replies.
No – I do not have any interest in ixigo or any other startup. Get this and focus on dsicussion – do not try to bring irrelevant topics to derail the discussion.
-Ashish.
Well it is evident that all the OTAs (mmt, yatra, ct) and meta-search (ixigo, Mobissimo, kayak) are going to get some serious competition from Rang7…
1. Payment gateway cost is always there (OTA, Rang7 or airline site) so airline is not adding an additional cost… The guy could have booked it on Kingfisher or on Rang7 (PG cost is same).
PG cost is the single most factor — which can break or make any OTA business model and Rang7 has an advantage here to get a good deal from Via / Master OR do something like irctc.co.in
2. The only *value* that OTA offered was the guy does NOT have to go to 9 airlines site to figure our what the best fare is…now the airlines are giving this feature as Rang7.com In short instead of showing SpiceJet result on FlyKingfisher.com they came up with new OTA…
Rang7 has an advantage over existing OTAs.
Rang7 advantage -
1. No markups – less price (they will always be cheaper or can afford to go cheaper).
2. Deals – So called cash backs and discount deals will for obvious go to Rang7, instead of any other OTA.
3. They can support rang7.com with “free” advertising – image rang7.com printed on boarding pass, on airline magazine, announcement made by the flight crew… or (worst for any OTA) the aircraft itself
The idea is good, execution still matters. Airlines are helping the customer by taking out “the middle” man…More airlines should move out of GDS and support a common OTA..
Spike – Since it is obvious you work for Rang7, here are some questions for you:
Why do the airlines even need a Rang7 to sell cheaper tickets when the lowest price is already on their own website ?
Will Rang7 ever price lower than the airline sites ?
Why would someone choose Rang7 over MMT/Yatra – after all everyone claims to have best prices and give cashbacks.
If not, won’t metasearch remain the most efficient distribution channel ? the orbitz founders must have realized something to leave and start kayak or the ixigo founders to leave amadeus?
> Spike – Since it is obvious you work for Rang7
No I don’t work for but Rang7… in fact looking to find out who is working for them
>Why do the airlines even need a Rang7 to sell cheaper tickets when the lowest price is already on their own website ?
FlyKingfisher.com only sells Kingfisher fights and not SpiceJet, so they require one common OTA site to sell all the tickets…
>Will Rang7 ever price lower than the airline sites ?
I don’t know
>Why would someone choose Rang7 over MMT/Yatra – after all everyone claims to have best prices and give cashbacks.
Whole point of Rang7 is to sell fights and compete with MMT/Yatra.
> won’t metasearch remain the most efficient distribution channel
Meta search won’t sell tickets they will direct traffic to OTA, Airline sites. But in India they have not really made an impact as in other markets (hinting Kayak).
> the orbitz founders must have realized something to leave and start kayak or the ixigo founders to leave amadeus?
What are talking about here…?
>FlyKingfisher.com only sells Kingfisher fights and not SpiceJet, so they require one common OTA site to sell all the tickets…
Dont we already have 10 OTAs doing that ?
>Whole point of Rang7 is to sell fights and compete with MMT/Yatra.
Best of luck !
>Meta search won’t sell tickets they will direct traffic to OTA, Airline sites. But in India they have not really made an impact as in other markets (hinting Kayak).
too early to comment here.
Not 10 only 3… rest 7 don’t matter.
The top 3 are NOT competing each other they are competing against the airlines.
Airlines think OTAs are eating the cake while the airline is running into losses (which in a way they are). An offline agent has to do a LOT, in terms of manual work and interfacing with the customer etc.
Now the airlines have there own OTA… this is going to be interesting
> The top 3 are NOT competing each other they are competing against the airlines.
So now the airlines will create another OTA to compete with them ?
since it is obvious that frequent traveller works for an existing OTA, I have a question for him – what does it take for one to appreciate that competition is bound to come up in an attractive (?) sector ?
second, not sure if hrush is reading these comments, but if he is – what business innovation is he claiming? cleartrip was late to market with a fancy frontend for innovation – makemytrip has caught up to a large extent and so has yatra. so where does that leave them?
I think Ixigo and rang7 have the best chance to compete in this market, if this business model is true afterall.
This is a timely post, Ashish. Great work
Somebody needs to interview the airline guys too now.