Travel agencies must adapt to stay afloat in the Internet era. But opportunities remain for those quick-thinking agencies that stay ahead of the game.

Jane Levere/NEW YORK

To paraphrase American novelist Mark Twain, reports of the death of the world travel agency community are exaggerated. But the role of agencies - both offline and online - and the nature of their relationship with airlines are undoubtedly changing significantly and will continue to evolve.

Offline leisure agents are expected to become vacation travel specialists, selling products such as cruises and tour packages that pay hefty commissions. The sale of airline tickets - once the bedrock of their business - will be taken over, for the most part, by the Internet.

Offline business travel agencies will act as advisors to their corporate clients, helping them develop and enforce travel management policies. It is expected that their main income will be from ticketing and travel management service fees.

According to Nick Bredimus, a Dallas-based consultant, the genesis of this evolution dates back to the conclusion by airlines, in the mid-1990s, that agents had become a controllable cost rather than a necessity. This occurred, he believes, when airlines began to rebel against two types of agency-related distribution expenses: global distribution system booking fees, which he says have effectively increased by 10% to 20% annually over the past decade; and rising travel agency commissions.

Commissions, which after labour and fuel are the third largest expense faced by airlines, climbed from 4.3% of total operating costs in the USA in 1978 to 10.9% in 1993.

Since 1995, carriers worldwide, led by the US industry, have greatly cut those commissions. US carriers now pay a 5% commission on both domestic and international tickets; commissions on roundtrip domestic tickets are capped at $50, while those on roundtrip inter-national tickets are capped at $100. Consequently, commission expenses have plummeted, dropping back to less than 5% of expenses from their high in the early 1990s. Other major, non-US airlines are taking similar steps. Cathay Pacific, for example, has cut the commissions it pays its Hong Kong agents - which generate over 30% of its bookings - from 9% to 7%.

Airlines are also reducing distribution costs by selling directly to the traveller, by both online and offline means. "Where possible, airlines are trying to keep the passenger for themselves," Bredimus says. "In the old days, passengers called airlines to book, but airlines didn't have a way to get tickets to people, so travel agents did that. Now, with electronic ticketing, airlines can issue tickets over the phone."

Online distribution systems have grown by leaps and bounds in recent months. Travelocity and Expedia, the two leading online travel agencies (the former started by Sabre and the latter by Microsoft), both have operations in Canada and Europe as well as the USA. Travelocity is also establishing an online distribution system in Asia. Priceline, which sells online discounted airline tickets in the USA, sells the inventory of most major US carriers and is expanding into international territories.

Meanwhile, major carriers worldwide are banding together to form sites that sell published fares as well as discounted Internet fares, previously only available on their own sites. The US multi-airline site Orbitz will start service later this year, while comparable European and Asian systems are in the development stages. Newly launched Hotwire, created by six major US carriers, is offering unpublished discount tickets on airlines that are not identified until the passenger buys a ticket.

Booking online

These online distribution channels are producing increasingly impressive volumes of business. According to PhoCusWright, an Internet travel consulting firm, 1.9% of US airline bookings were generated online in 1998; 49% by airline sites and 51% by online travel agencies like Travelocity. The firm estimates that its online bookings share will climb to almost 13% next year, with 52% generated by online agencies and 48% by the airline sites.

Similarly, Susan Donofrio, airline analyst for Deutsche Bank Alex Brown, projects a "small, but steady increase" in Internet-generated bookings among US airlines. Her research indicates that Southwest Airlines produces the highest percentage of Internet-generated bookings - 31% of its total bookings (30% through its own web site) - while America West is second, with 16% of its bookings made online, and Alaska Air third, with 10.7%. Donofrio finds that American Airlines has the smallest number of Internet bookings - only 5% of its total business.

Airlines are also increasingly dealing directly with their corporate customers, bypassing the agency entirely. "The eternal triangle of the agency, corporation and airline has gotten flatter," says Dan Brewin, British Airways' executive vice- president of sales and marketing for North America. "The cash flows, the economics of relationships have changed. More deals, more financial arrangements are being made directly with corporations, not with an agency intermediary."

Bob King, staff vice-president of North American sales for Continental Airlines, adds: "Like many industries, you're seeing a closer bond being created between the corporate customer and the supplier. We're not going to let the communication or the relationship be impeded by intermediary channels." To this end, Continental, which derives over 50% of its revenues from business travellers, is establishing net fares for its corporate customers. Such fares, which are widespread in the USA, involve major discounts on published tariffs paid directly to the corporate customer. In these arrangements, Continental and other carriers bypass the corporation's agency entirely, paying it no commission. The agency then is left to derive its income from travel management service fees it charges the corporation.

One outcome of these changes has been a decline in the number of accredited travel agencies. According to Airlines Reporting, which monitors the business, the number of retail agency locations dropped 9% from 33,593 in 1995 to 30,886 today.

Paul Ruden, senior vice-president of legal and industry affairs of the American Society of Travel Agents (ASTAS), states that the average number of people employed by an ASTA agency has been halved since the commission cuts were first instituted. He says these cuts have reduced the average commission payment by over 50%. To compensate for this fall in income, at least three-quarters of all ASTA agencies charge service fees.

Joining forces

To cope with these shifts, Richard Copland, president of ASTA, says smaller agencies are joining forces, through merger or consolidation, with larger agencies. Size is important, he says, because agencies that generate over $100 million in sales can swing business to preferred airline partners that will reward them with override payments and discounted air fares, which they can mark up for higher profit.

In the long term, analysts anticipate that offline travel agencies will fall into two categories - vacation specialists that charge fees for selling cruises and tour packages, and corporate travel agencies that charge fees for their travel management services.

Henry Harteveldt, a senior analyst for Forrester Research, a Cambridge, Massachusetts-based high technology research firm, expects the agency locations that survive "will either be smart, independent agencies that understand the market they're in or will have the strength of a franchise, like American Express or Carlson Wagonlit, behind them, to give them access to a brand name and market credibility".

Harteveldt estimates that only 20,000 to 25,000 offline US travel agencies will be left in five years. Robert LaFleur, Internet travel analyst for investment bank Bear Stearns, projects that 25% of all offline US travel agents could lose their jobs as a result of commission cuts and the growth of Internet travel. "Travel agents as we know them are at risk, especially old-fashioned, transaction-processing agents," LaFleur says. He further predicts that commissions will "continue to drift downward", but not disappear entirely.

Among online travel agencies, says Harteveldt, those that survive "will have a strong brand, a large customer base and marketing budget, and will be problem-solvers, not order-takers". He expects that Travelocity and Expedia will be in this group, probably with business travel sites, owned by Galileo, and, owned by Rosenbluth.

Offline agents are still expected to perform certain tasks that online agents cannot do well. Harteveldt describes one of these roles. "It's suggestive selling; the ability to listen to a customer is lacking on the Internet. A really good travel agent can read between the lines," he says. "They can offer alternative options that travellers cannot easily find themselves, either online or offline."

Sam Buttrick, aviation analyst for PaineWebber, also finds that offline agents can be adept at what he calls conflict resolution. "The Internet does a great job of shopping and ticketing, but if there's a problem mid-trip, you need a person to take care of it," he says.

Consultant Bredimus further anticipates that offline travel agents will continue to serve a specialised function for foreign-flag airlines. "They'll always use travel agents for leisure bookings, because it's not possible for them to do their distribution alone," he explains.

On the corporate front, Continental's King predicts that net fare arrangements will become more prevalent. "Corporations will find such deals increasingly attractive because they recognise the value of the lowest deal they can get from an airline. Net fares put all airlines on an equal playing field. Any time you have more visibility with the cost components in a distribution channel, the more efficient the channel becomes," he says, adding: "Net fare deals allow us to tailor our programmes more precisely." In fact, to streamline the net fare process, Continental has introduced an automated system that helps it develop and monitor discount agreements with corporate clients by speedily analysing their travel data.

Carriers also anticipate that the Inter-net will be responsible for increasing amounts of their business. British Airways' Brewin says the airline aims to produce 50% of its sales online by 2003. Close to 5% of Continental's flown revenue was generated by all online channels in the second quarter of this year, a figure it expects to climb to 6% by the year-end. Cathay Pacific also anticipates that its online business will grow. The airline, which is relaunching its web site in October to include a business-to-business initiative, aims to be a leader in e-business in Asia.

Although most executives believe travel agents will continue to book a significant portion of carriers' business in the long term, a growing percentage of this will be generated by non-traditional online agents. By 2004, Forrester's Harteveldt predicts that US online and offline agents will produce 60% of airlines' business, down from around 80% today. He further anticipates that this trend will ultimately spread worldwide, noting that Internet travel trends that develop in the USA generally occur year or two later in Europe, 18 to 24 months later in Latin America and take two to three years to filter into Asia.

Bredimus believes offline agents worldwide will eventually produce less than 50% of airlines' business, in part because of "the explosive growth of electronic retailing", but also because of the advent of web sites that promise the lowest price.

Surprisingly, such prospects do not daunt ASTA's Ruden. "Agents may be better off financially if they concentrate more on complex and remunerative travel services," he concludes.

Source: Airline Business