Intense competition is leading more and more airlines to seek low costs and maximum revenues in off-line markets by outsourcing some of their sales and marketing operations. Special report by Doug Rhymes.International airline sales and marketing managers are struggling to cope with the unique challenges presented by an industry bent on consolidation through sweeping global alliances. As a result they are casting aside some hide-bound traditions to bring about the relatively new phenomenon of outsourcing international sales and marketing responsibilities in off-line markets.

Historically, airlines have fiercely protected their brands, preferring to entrust them to their own sales and marketing staff. This philosophy was justifiable as long as costs remained low, fares were stable, and international routes were protected by government regulations and annual double-digit traffic growth.

As many carriers expanded their international reach and established new sales and marketing offices around the world, they remained sensitive about directly controlling brand usage and sales activities and dispatched expatriate managers to establish and run the new operations. But this philosophy has changed in recent years as carriers become more competitive in their quest for lower costs and incremental revenue in non-core markets.

The cost of maintaining and operating airline offices far removed from the carrier's main operations has become prohibitive due to more intense competition, combined with lower yields and strategic alliance initiatives. Regular changes in expatriate management are also costly and cause periodic disruptions as new people learn about the market and get up to speed.

Adding to the equation are the costly quirks often imbedded in local labour regulations. Australian and Spanish laws, for example, can make the cost of letting an employee go equivalent to several months of wages and may only be allowed if the company can prove economic hardship.

Managers must now ask themselves if the cost of either on- or off-line sales offices can be justified and whether it is realistic to think that expatriate management, generally in place for only a limited time, can be attuned to important national cultural, marketing, political, monetary and legal issues.

Airline managers are under constant pressure to find new ways to reduce costs in virtually every aspect of their operations. Many have travelled the traditional roads of route restructuring and reorganisation dubbed 're-engineering' and 'downsizing'. They now increasingly acknowledge that neither the cost nor the return on investment involved in maintaining their own staff to wave the corporate flag in every corner of the world is justifiable.

The wealth of experience and expertise found in outsourcing is a further enticement - a large pool of sales and marketing experts has been constituted by former holders of senior airline positions in the prime of their careers. These professionals, motivated by the autonomy and commission potential on offer to join the pioneers of global outsourcing, bring a vital level of local knowledge that enables airlines to think global.

A few firms have stepped forward to provide off-line sales and marketing representation. Discover the World Marketing of Scottsdale, AZ, was established in 1981 and as of last year had generated nearly $400 million in client revenue. Discover's client list includes Alitalia, All Nippon Airways, America West, British Airways, British Midland, Canadian International, Finnair, Singapore Airlines and USAir. For some, representation is limited to specific markets. Others, among them British Midland and USAir, are virtually represented on a global basis by Discover's 54 offices in 39 countries. Most of the offices are fully automated and able to access client carrier reservations systems and issue tickets locally.

Airline clients are now looking to international marketing firms for outsourcing services that go well beyond the role of the traditional general sales agent and include professional market analysis, strategic planning and public relations support, for example. Outsourcing organisations also have local networks in place that effectively ensure clients almost immediate access to the country's travel trade and political spheres. This would take an expatriate manager years to accomplish, if at all.

Sales and marketing service providers are also expected to steer clients clear of cultural miscues. In Asia, for example, long-term relationships are the nucleus for almost all business dealings. Any disruption in these relationships quickly becomes industry news and is often viewed negatively.

Steve Leonard, vice president sales and services for America West, says that carriers are looking for a far broader range of representation than has been provided by general sales agents. 'We look for organisations of substance which know what it takes to move market share. Its management must possess well developed business skills and be able to represent the company in a variety of areas.'

Those international marketing firms that operate on the 'hub and spoke' principal save airlines and other clients significant infrastructure costs by consolidating and handling all communications and financial administrative functions for far-flung offices at their own hub. Clients are spared the often complex tasks of remitting currencies and collecting revenues from areas half a world away from their headquarters.

Airlines are also looking to their outsourced sales and marketing offices to maximise the local benefit of their often complex strategic alliances and codeshares. While alliances are agreed on at senior management level, their effective implementation requires all aspects of the agreement, including functions like the basic training of reservations agents, to be communicated to the employees of both partners. Outsourced sales and marketing offices within each partner's network are able to carry this out more cost effectively.

Outsourcing firms also enable airline clients to maximise yields and passenger volumes through effective proration agreements, as their local offices have a better understanding of the specific needs of the airlines in their territory. The offices can be relied upon to be neutral in the market, a factor that can make them invaluable in support of codesharing partnerships.

Brian Brett, general manager for off-line and interline development for British Midland, explains that his company was looking for ways to capture the inbound international connecting passengers before they left their country of origin en route to the UK and became fair game for its competitors. But the cost of directly marketing British Midland in all corners of the globe was prohibitive. 'Then too, are the issues of local labour laws, cultural differences, expatriate management, and currency conversions that caused us to cast about for a more cost-effective way to make our services known to potential customers outside our primary route system,' he adds.

British Midland's decision to outsource its off-line sales and marketing functions in 45 countries to Discover has resulted in a 60 per cent gain in the carrier's international off-line revenue in less than two years. In October, British Midland outsourced its entire Zurich operation when it expanded Discover's contract by giving it responsibility for ticket counters, sales and reservations on its London-Zurich flights.

Peter Brass, head of corporate development for British Airways, in a recent speech before an International Air Transport Association conference on outsourcing, said 'The common driving force behind most outsourcing decisions is cost. There are often additional reasons - such as availability of skills - but it is generally a fact that a service can be provided more cheaply or effectively from an external rather than an internal supplier.'

Brass also noted that 'as airlines become more specialised and redefine their core businesses they are, to an ever increasing extent, outsourcing activities of fundamental importance to their reputations and brand integrity. Their most valuable asset, their brand franchise in the marketplace, is increasingly in the hands of third parties, over whom they have no direct control.' Management's concerns about diminished control can be met by careful contract specifications and appropriate monitoring systems, believes Brass.

The ability to pick and choose the areas they wish to outsource, regionally, nationally or even globally, gives airlines the flexibility to target specific areas in which to maximise their growth potential. For those with primarily domestic or regional systems, like British Midland and USAir, outsourcing affords an opportunity to establish an international presence that would otherwise be difficult to justify cost-wise.

Wakelee Smith, a vice president of SH&E, thinks the outlook for outsourcing off-line sales and marketing is solid for the long term, but has reservations about outsourcing on-line functions. 'Much of the driving force behind outsourcing trends is to take advantage of the economics of scale,' Smith says. 'Many carriers have too many people doing a given thing and off-line marketing is certainly an example of that. Using a third party to serve the sales and marketing requirements of several carriers makes the economics of scale very significant. I am not, however, so convinced that outsourcing of on-line marketing is as favourable a trend. I see this to be a core function of an airline.'

However, Neil J Albrecht, assistant vice president of AMR Services, feels that the distinction between off-line has become less important. 'We started by representing carriers off-line, but now, particularly through our alliance with Canadian Airlines, we do both and find little difference,' he says. 'Marketing representation, off- and on-line, is becoming a standard industry practice. We see a lot of international carriers not wanting to have their own people in the United States,' he adds. Carriers represented by AMR Services include Turkish Airlines, Ghana Airways, Ukraine International, Estonian Airlines, Ryanair and Canadian Airlines.

The situation in the global aviation market has significantly changed in the '90s. Carriers that embrace new marketing approaches will thrive, while traditional carriers may find it difficult to compete. Overall industry opinion indicates that the outsourcing of international sales and marketing appears to have a strong future.

While Discover and AMR Services are, by far, the two largest sales and marketing outsourcing firms, others include GSI, which serves some markets in Europe and Asia, and the UK's Flight Directors, which specialises in specific countries.

Perhaps the root of the debate over outsourcing can be found in whether or not sales and marketing is a core or non-core activity. It could be said that the core aspect of sales and marketing covers those functions carried out at the centre of the airline's operations or network, and that the non-core operations are those services carried out in the global market. In addition to British Midland, major national carriers like USAir and America West are steadily expanding their outsourcing programmes.

These carriers have recognised that using the knowledge and expertise of local, highly experienced airline professionals affords them the best of both worlds; a strong national sales operation combined with an equally strong international network.

Doug Rhymes is founder and chairman of Discover the World Marketing.

Source: Airline Business