Airlines: Don''t Repeat Mistakes

Airlines: Don''t Repeat Mistakes

Copyright 2002, Traffic World, Inc.

A few months ago, the brokerage firm of Morgan Stanley held a conference in New York for publicly held "logistics" companies to ascertain the state of our industry. Amidst all the gaseous talk and gibberish about "supply-chain management" and "seamless information networks," one executive told it like it is. He is head of the most successful and profitable freight forwarder in the business today: Peter Rose of Expeditors International. When asked to define the role of the freight forwarder, Rose said simply, "We are the travel agents for air freight."

What has happened to passenger travel agents and why should it concern us on the cargo side? It is a cautionary tale for the carriers. The airlines made a huge miscalculation in their relationship with their 30,000-odd travel agents, starting about seven years ago. Wishing to cut costs, they began back in 1995 to cut agent commissions from 10 percent down to 5 percent. Two years ago, they slashed that rate to zero, effectively cutting out agents from the airline ticketing loop. The carriers'' argument: the commissions cost too much.

The airlines thought they had a better idea: use the new Internet services like Priceline, Expedia, Hotline and their own cyberspace network, Orbitz, to sell tickets and cut out the middleman. The new distribution networks did sell tickets, billions of dollars worth. There was only one slight problem: the tickets were sold at incredibly low and inherently unprofitable tariffs. The Internet suppliers were slashing prices right and left with the airlines'' compliance. They added insult to injury by charging higher commissions than the old-line travel agents.

The airlines were caught in a vicious cycle of their own making. They had paid millions of dollars in travel agent commissions but now were losing hundreds of millions of dollars through nonsustainable, extremely low fares via the Internet. The selling of cheap passenger tickets on the Internet is a major cause of the enormous losses currently recorded by the airlines.

Is there a lesson here for the airlines'' cargo divisions? You bet there is. Don''t even think of eliminating or weakening air cargo''s travel agent - the freight forwarder! We are the middlemen who make air cargo work, who fill your bellies and main decks with freight. A healthy consolidator is the key to a healthy air freight industry.

Julian Keeling


Consolidators International Inc.

Los Angeles