From the managing editor
While seemingly in a completely unrelated sector, the collapse of the Dick Smith Electronics chain earlier this year could have some intriguing ramifications for the travel industry. The high profile retailer, which ran outlets in shopping centres across the country, had a turnover (read TTV) of about $1.3 billion when it went into voluntary administration, owing creditors a whopping $260 million. Reading the creditors’ report is instructive, because it shows how much Dick Smith relied on “rebates” from suppliers – bonus payments based on purchase volumes. The rebates gave management an incentive to allegedly buy excess stock, because the revenue was recorded when items were received, rather than when they were actually on-sold to customers. In the end the extra stock had to be sold at a discount – but it was hoped the original rebate would cover the shortfall. That turned out not to be the case, and the business collapsed because it was actually selling items at below cost. Sound familiar? The contractual arrangements between airlines and travel agents could lead to a similar situation. While agents receive base commission on many airfares, retail groups also negotiate “overrides” and “super-overrides” giving additional payments based on volume targets. As deadlines for achieving these targets approach it is becoming increasingly common for groups to discount prices below cost, in the hope they get to the sales figure required and make an overall profit. The problem, of course, will occur if this strategy fails and the agent ends up losing money on a large number of tickets – just not quite a large enough number to reach the target and wipe out the losses. The proliferation of sites such as Skyscanner and Cheapflights, which allow easy comparisons of fares, seems to be a factor in driving them ever lower as OTAS search for market share by being just a little bit cheaper than their competitors. The agencies hope their overall result will be a profit because they will hit the targets, but it is potentially a slippery slope and contradicts the fundamental of business that you should always sell something for a higher price than you paid for it. MEANWHILE in this issue we look back at 2016 which has seen some major developments in the industry. Next year I expect more big changes – particularly in the light of the increasing age of some key players. It will be fascinating to see this play out, with Helloworld’s cunning acquisition of MTA having surely prompted thoughts among others about their exit – and perhaps in the process making way for the rise of the next generation of Australian travel entrepreneurs.