Although there have been very few profitable years in the lifetime of the global aviation industry in both absolute and relative terms, the industry is indeed going through its toughest year ever. Airlines in India posted cumulative losses of about $2 billion (Rs9,400 crore) in the last fiscal ended March. Air India reportedly lost $1.1 billion on revenue of $3 billion and is expected to lose around $1.2 billion this year too if corrective measures aren’t taken. It is also currently in talks with the government for a bailout. The two largest privately owned competitors also lost money last fiscal: Kingfisher Airlines Ltd lost about $350 million on revenue of $1.1 billion, or about 30%; Jet Airways (India) Ltd lost $209 million on revenue of $2.8 billion, or 7%.
Industry experts have been dissecting and diagnosing the problems and have suggested quick fixes for some of them. Overcapacity, overstaffing, high employee costs, high oil prices, high airport fees and inefficient yield management have been some of the obvious areas examined by these analysts. However, there has been relatively little discussion on a major inefficiency that is also the third biggest cost item on an airline’s expense sheet—distribution.
Also Read Srivatsa Krishna’s earlier columns
From the 1960s through 1980s, global airlines invested in the development of global distribution systems (GDS) such as Sabre in the US and Amadeus in Europe. The low-cost carrier (LCC) business model emerged in the 1980s and 1990s, which, along with other operational efficiencies, leveraged the growth of the Internet to push direct sales through the most efficient online distribution channel. In addition, online travel agents (OTAs) emerged.
At the beginning of the 1990s, reservation and sales expenses as a percentage of sales for airlines in the US hovered at around 20%. With the introduction of initiatives such as Web-only fares and by working with direct-connect technologies such as Orbitz, airlines in the US brought distribution costs down to under 10% of sales in the last few years. However, average GDS booking fee per segment in the same period kept increasing by almost 5% year on year.
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