09 September 2008

Virgin's V Australia sets up Independent Travel Agency Clearing

The wheels of the IATA BSP machine clearly rolled too slowly for Virgin Blue's new long haul subsidiary V Australia. So rather than sit on their behinds - those sassy Aussies decided to set up their own facility in Australia where most of their revenue will originate for the early flights.

The new VSP - V Australia Settlement Plan will be available almost immediately. Given the strength of Virgin Blue's brands in the market: Virgin Blue, Pacific Blue, V Australia and the proposed joint venture with Air Asia and you have to wonder whethr this is the writing on the wall for the BSP facility in Australia.

This is a good issue to examine. The direct costs of BSP have for a long time been rather small. However both ARC and the variou BSP's have raised charges to a point where not just the direct costs but the total cost of maintaining a BSP facility becomes less attractive. Indeed we have seen airlines like LCC Spirit in the USA exit all together. In the age of Google Checkout and eBay's Paypal, you have to ask what value does this form of financial fulfilment bring?

I firmly believe that an airline should be looking hard at the cost of BSP/ARC infrastructure if it is to reduce total costs. Remember chaps its not about cost cutting it is about simplification and cost removal. Perhaps IATA should consider some of its own medicine in "Simplifying the Business".


1 comment:

Mike Premo said...

Greetings Timothy,

I was reading your blog about V Australia and took some offense at ARC being lumped into the “high costs” of BSP infrastructure. I am personally not so well-informed about BSP costs and carrier views of them here, but as you are generally extremely well-informed, I attribute your views about us to not being completely up-to-date on ARC.

This summer’s Independent Arbitration Panel (IAP) decision ended our recent effort to ask agencies to bear more than their current 10% of the cost of operating our settlement business (the other 90% paid by airlines). As a result, ARC will be increasing transaction prices to carriers for the first time in 17 years. We have worked hard to reduce the cost for a full participant carrier to process an individual ticket sale from about 42 cents in 1991 to 17 cents last year. The IAP decision, along with the plunge in the number of tickets sold via ARC agencies this year, will mean full carriers will pay 18 cents this year. In addition, because the US remains the largest single air travel market in the world, the value of a carrier joining ARC and having access to the $80 billion travel agency market (of which nearly 50% represents international sales) is superior to having to join multiple BSPs in other regions of the world to access the same amount of travel activity. In addition, ARC, our agencies and carriers have worked virtually eliminate fraud in the ARC agency channel---carriers in the mid-1990s were absorbing fraud losses totalling $30 million a year; today that number is about $1 million.

Foreign carriers like V-Australia have seen the value of ARC participation at our lower-tier associate and transaction-only carrier levels. These carriers pay a higher unit cost but zero or a far reduced monthly flat fee. Consequently, we have increased the number of ARC participating airlines from 124 in 2002 to over 170 today. No small feat considering the number of carriers who have disappeared due to mergers or bankruptcies during that span. To focus on V-Australia for a moment, ARC extended ticketing privileges within the US on an interim basis based on their DOT certification—a reflection of our focus on becoming a more flexible, responsive organization. I suspect you would get happier comments from them about their ARC relationship than you might expect.

It is true that low-cost carriers have expressed some concerns around ARC costs. However, we have also found the technical (and philosophical) hurdles for those low-cost carriers hosted on Navitaire to move from the so-called “ticketless” world to the standard ticketing world to be equal or greater than the ARC cost hurdle. Case in point is AirTran which, while a Navitaire hosted carrier, was an ARC participant just for the tiny number of paper tickets issued by ARC agents. The combination of Navitaire’s enabling of e-ticketing for them along with ARC’s new FlexRate program (which allows carriers who increase their sales through ARC to process those incremental sales for only 9.9 cents a transaction) resulted in AirTran’s decision to turn on e-ticketing for ARC agents next month.

We certainly were sorry to see Spirit leave us and wish them well, but in today’s environment where revenues matter SO much, we hope they will soon return. We also wish that agencies would see the value of paying a bit more of the freight for the system in order to attract those types of carriers into the ARC system and permit the agencies to take better advantage of the efficient, secure and cost-effective ARC channel to service their customers better than direct channels currently allow.

Finally, in regards to Google Checkout and such, the ARC agency channel still processes over $10 billion per year in CASH sales. This alone saves the airline industry over $200 million a year in credit card fees—far more than the cost of the entire ARC operation—while likely making access to air transportation possible for a substantial number of “unbanked” passengers thereby increasing carrier sales.

There remains much to do to address issues on both sides of the fence—from the GDS billing practices around passives and unworked schedule changes, to debit memos, to addressing the significant business risks (fraud, bankruptcy, identity theft and more) that both airlines and agencies face when interacting with their clients and each other. That said, at least from the ARC viewpoint, we feel agencies and airlines have gotten and continue to get good value from their participation with us.

Warm regards,


Michael Premo

Vice-President - Marketing, Sales and Customer Care

Direct: +1.703.816.8592

Fax: +1.703.816.8591

Email: mpremo@arccorp.com


4100 N. Fairfax Drive, Suite 600

Arlington, VA 22203 USA