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25 years ago, high margins were available to Travel Agencies for the sale of flights and Travel Agencies could be profitable selling only flights to its customers. Airlines paid large, and mostly uncapped commissions on flight sales for both domestic and international fares. This was also a time when online travel agencies (OTAs) were in their infancy, Meta channel was only an idea and low-cost carriers (LCC) were very limited in number. Many consider this to be the “Good Old Days”.
Over the last 25 years the landscape has drastically changed. Airlines have expanded their distribution strategies to the internet and capped, lowered or completely eliminated commissions. In an attempt to combat this trend, travel retailers created service fees and passed these on to their customers to try to make up for the lost revenue. This was done by smaller retailers as well as the larger OTAs like Expedia & Travelocity. However, that model was short-lived and the large OTAs stopped charging service fees with most other travel retailers following suit in order to stay competitive. LCCs became more prevalent and airlines started marketing directly to consumers over the internet, limiting available flight content to flight retailers via traditional channels. The result created more pressure on profit margins in addition to the struggles on persevering through other major industry altering events like 9/11 and the Covid-19 pandemic.
The “Good Old Days” for Online Travel Agencies (OTA) are long gone, but not all is lost. Technologies have evolved and new opportunities have been created including the creation of Virtual Interlining (VI).
Virtual Interlining combines flights from carriers that do not have interline or code-share agreements, into a single itinerary. This creates more options, better prices for the consumers and healthy margin opportunities for the OTAs. VI itineraries can be built on any route, but work extremely well on specific types of routes:
Long-haul routes to & from small destinations (e.g. Toronto to Bali)
Trans-Atlantic routes utilizing LCCs for the long-haul leg (e.g. Las Vegas to Stockholm)
Trans-Pacific routes utilizing LCCs for the long-haul leg (e.g. Perth to Los Angeles)
Short routes from small-market airports (e.g. Cincinnati to Portland)
Routes from/to an airport without daily full-service-carrier coverage (e.g. New Orleans to Seattle)
A review of some examples will illustrate the margin opportunities available to OTAs.
Example 1: Paris (CDG) to Lima (LIM)
The best traditional fare that is available is a 1-stop itinerary with a cost of $1006 USD and a duration of 12h 30 min (Kayak).
TripStack builds many VI itineraries on this route including an itinerary that combines a Low-Cost-Carrier (EasyJet) with a Full-Service-Carrier (Latam) into an itinerary that costs $507 USD. This itinerary has 1-stop where the passenger has to “self-transfer” their baggage from the EasyJet flight and onto the Latam flight. Although a slightly longer trip, the itinerary is 50% cheaper for a flight with the same number of connections. This itinerary presents a tremendous opportunity for the OTA to add markup to the fare and still maintain a very attractive price for the consumer.
Example 2: Munich (MUC) to Dubai (SHJ)
The next example shows that a VI itinerary is not only cheaper but also the fastest way between two destinations. The cheapest traditional itinerary between Munich (MUC) and Dubai (SHJ) is a 1-stop itinerary priced at $441 USD with a duration of 14h 40m. TripStack’s best itinerary is not only the cheapest but also the fastest itinerary. It is priced at $239 USD (46% cheaper) and 3h 30 mins faster.
The examples demonstrate how VI itineraries can be cheaper and faster AND offer much more choice to consumers. The scale of Virtual Interlining (VI) is very significant. We estimate 40+% of all global routes can produce meaningful itineraries that are either the cheapest or best itineraries.
With much lower prices vs traditional options, there is much more margin for the OTAs while being competitive and allowing for great savings for travellers. Currently, OTA margins are 3-6% for the best travel retailers on regular flight itineraries, but with Virtual Interlining (VI) the margins are 15%+ in competitive environments like meta search engines (e.g.Kayak and SkyScanner) and can exceed 25% for offline environments. Selling additional ancillaries such as baggage, seat selection, priority boarding, etc for each leg of the itinerary will provide even more margin opportunities.
The Covid-19 pandemic has increased the importance of VI fares as airlines have reduced schedules and fleet sizes. This translated into less flights and less options for the traveller which increases the likelihood that aVI fare is selected by a traveller. We have seen a significant increase in VI itinerary sales during the pandemic and sales continue to grow as we begin the road to recover.
Currently, only a fraction of OTAs offer Virtual Interlining fares and therefore these fares have not become a commodity. There is a real opportunity for OTAs to embrace this emerging technology and sell these flights that are increasingly more popular with the traveling public.
Is the end of high margins over in a few years? The answer is No. We are just at the beginning of Virtual Interlining. It will continue to evolve and more options will be made available to the public through more online / offline distribution channels.
In the next few years VI will become normalized with consumers and will expand to include Multi-Modal VI (flight + rail/bus/ferries) as well as improvements to the airport experience (e.g. baggage being automatically transferred between the carriers). As travel continues to recover from Covid 19 and demand returns, Virtual Interlining will continue to grow and provide more options for consumers and margin opportunities for the travel retailers who embrace and offer it.
To find out more and learn how Virtual Interlining can transform your travel business please reach out to sales@tripstack.com.
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