China Southern Airlines has revealed that its revenues from direct sales grew by 38% y-o-y in the first quarter of 2015, and its goal is to lift the proportion of direct sales by 10% this year.
Sales expenses go down a billion yuan for every 10% increase in direct sales
China Southern has already notified ticketing agents that they must sell tickets at the carrier’s fixed price from May 28 and are not allowed to offer discounts or additional services in the form of bundling insurance or airport shuttle with air ticket deals.
China Southern will also cut ticketing agents’ commissions on June 1 and will set up an incentive program linked to agents’ performance to help raise their customer service quality.
Some analysts say internal and external causes are motivating China Southern’s recent moves.
CIC transport industry researcher Jianming Cai said China Southern is getting pressure from the State-owned Asset Supervision and Administration Commission (SASAC) to cut its agents commission budget by RMB900 million. Analysis International’s executive analyst Zhenyu Zhu said: “SASAC has mandated state-owned airlines including China Southern and China Eastern to increase their ratio of direct sales to a specific level.”
As for internal causes, Mr. Cai said: “By increasing its direct sales, China Southern will obtain much more comprehensive customer data which can then be used to forecast consumer trends and do better marketing.
“At the same time, cutting sales costs will add to contribute to the bottom line. Air China, China Southern, China Eastern and Hainan Airlines collectively made RMB6.063 billion in profit for Q1, RMB6.3 billion more than the same period last year. China Southern did the best, making a remarkable turnaround from heavy losses in Q1 last year to record a profit of RMB1.903 billion,” he said.
OTAs’ reaction to China Southern’s new rules
An online price comparison of China Southern’s Guangzhou-Beijing service on May 30 showed tickets were RMB730 on China Southern’s official website, RMB706 on Ctrip, and RMB670 for a discount ticket + RMB30 insurance on Qunar. It shows that OTAs were still flouting China Southern’s rules on ticket prices by offering lower prices than the official fare and there are also bundling insurance into offers .
Mr. Zhu said agent commission for airfare insurance is higher now so ticketing agents are using the profit from selling insurance to cover their losses on ticket sales.
China Southern is cracking down on packaged air tickets, which make up only around 30% of Ctrip’s offerings. However, the ban will have a greater effect on the OTAs that have such products make up over 70% of their listings.
Can Airlines do away with agents?
As to whether airlines can do away with ticketing agents, Mr. Zhu thinks that it’s theoretically possible but they would have to go through a very arduous process. “Air tickets are highly standardized products, and consumers are extremely price conscious so they will choose the company with the lowest offers. If airlines want to do it themselves, they will have to make a huge investment to set up large-scale sales and transaction platforms. Once they get set up, the benefits will be very clear though.”
“Although airlines will go through some growing pains in the short term while they readjust agents’ ticket prices, it will be beneficial for them in the long term,” he said.
However, Mr. Cai thinks that China Southern is only trying to lessen its dependence on ticketing agents for sales and has no intention of cutting them out completely. “Almost 80% of China Southern’s ticket sales is via ticketing agents so it would put enormous pressure on its sales department if it completely takes over from agents. At present there are still shortcomings in China Southern’s sales system, so agents still have a strong influence on the market.”(Translation by David)
