However, competition and weak economies have led to increasing cost pressures on both airlines and computer reservations systems, which have become the agents' primary tool. The resulting implications have the potential for substantial changes in product distribution.
The travel agent community has suddenly become an important focus for airline cost reduction. Agencies are struggling to adjust to new CRS pricing policies, alternative sales channels which could bypass them, and caps on the commissions paid by US airlines on ticket sales. In each case, airlines are driving agencies to reduce their costs substantially.
Booking fees
Take CRS. Airlines developed them initially to control their seat inventories and ticket office sales, only later recognising and exploiting the possibilities for using CRS for distribution through travel agents. So CRS development has been airline driven and all the 'mega' CRS today are effectively owned or controlled by airlines. However, the airlines are well aware of the additional CRS revenues that can be obtained by including other elements of the travel and tourism product such as car hire, hotels and theatres, and these are now commonly accessible through CRS.
At the same time, there are very significant differences in the way the different products are made available in CRS and in the degree to which the CRS is used as a distribution channel. For example, airline schedules appear as an integrated display in the first instance, and many governments regulate the ordering of this display in an attempt to limit potential bias. In contrast, car hire and hotel information often appears in a fragmented fashion, with listings by hire company or by hotel chain, and it is necessary to switch from one display to another to obtain comparisons; there is no mandating of an integrated display or of anti-discriminatory presentation.
In the US, where some 60 per cent of travel agency revenue comes from airline reservations and 97 per cent of agency locations are automated, some 90 per cent of an average travel agent's reservations on a CRS are air bookings, with car and hotel reservations accounting for most of the rest. In most European countries, fewer than 25 per cent of hotel reservations are automated, the dominant reservation method being the telephone call (to hotel reservation centres and/or to individual hotels).
These differences in the distribution of products in travel and tourism can be exemplified by comparing hotels and airlines.
The hotel industry, despite continuing consolidation, is far more fragmented than the airline business, with large numbers of independent and small enterprises as well as the chains. While efforts are being made in many countries to accommodate the smaller units in CRS, there may be practical limits to the degree of penetration that can be achieved, from marketing and cost perspectives as well as from the desire to retain local control over inventory.
Hotels also tend to use a more diverse range of distribution methods than scheduled airlines, including additional forms of intermediaries and greater use of packages. There also appears to be a perception that hotel reservations are unprofitable for the travel agent; the lack of common sales procedures and the slow (and in some cases non-existent) payment of commissions do not help. The joint evolution of a standardised hotel voucher by the International Hotel Association, the Universal Federation of Travel Agents' Associations and the International Air Transport Association is a valuable tool in this regard.
Another factor is that hotel databases have not maintained the same level of accuracy or currency as airline databases, although they are fast catching up.
Not only are the CRS presentations of hotel chain information separate, requiring switching between them, but they also use different formats and transaction languages, and immediate confirmation is not as readily available as for the airlines. Again, however, the situation has been improving with the development of common switching mechanisms such as Thisco (The Hotel Industry Switch Company).
So, while there are significant differences between airlines and hotels, there appears to be a trend towards convergency and commonality, for the benefit of travel agents, hotels, airlines and travellers alike.
But this trend may be threatened by CRS pricing policies. The past year has seen some airline withdrawals from CRS in the US by airlines which felt the booking fees were too high, followed by Thisco planning to bypass CRS and provide direct distribution to travel agents. The airline withdrawals led to the introduction of different levels of pricing for different levels of participation in a CRS, a practical and cost-related marketing solution but one which adds complexity to the travel agency business.
As well as adding complexity, the Thisco plan would require a travel agent to add a direct line to Thisco, which agents with relatively few hotel transactions may not be able to afford. In other words, in reducing distribution costs for airlines and hotels there may be an increase in costs for many travel agents. Furthermore, the European Commission is suggesting that travel agents, rather than airlines, should pay CRS booking fees.
Agency bypass
At the same time technology is increasing the capability for leaving the travel agent out of the distribution chain entirely. Airline ticket sales have for many years been possible through online services to individual PC users, but very recently there have been substantive entrances into marketing through World Wide Web sites on the Internet. These were led by Southwest and rapidly followed by other airlines in the US and elsewhere, as well as by individual hotel chains, Thisco, rail services (including Eurostar), cruise lines, tourist authorities and even CRS themselves.
The advent of self-ticketing through vending machines at airports and elsewhere proved a bit of a damp squib in the US, but has this year been introduced in Japan with a positive initial response by passengers. Ticketless travel, which takes the process one step further by providing the passenger with a simple confirmation number combined with a requirement to present some proof of identity at the gate, is a proven success for domestic travel in the US. While most airlines have been careful to reiterate their commitment to travel agents when introducing such technology, and some have been directing bookings to agents, the potential for bypassing agents is undoubtedly there. ValuJet, ticketless since day one, reportedly only relies on travel agents for 25 per cent of its bookings.
Cap stresses
Additional stress on the existing product distribution system derives from the introduction of the commission 'cap'. Earlier this year Delta, followed by American, United, Northwest, USAir and (temporarily) TWA, placed a commission limit of $50 on domestic return fares and $25 on one-way fares. After a considerable initial furore, and contingent on the outcome of a class action lawsuit by travel agents alleging airline collusion, the concept now seems to have taken a firm foothold in the US. Airlines elsewhere are not denying that they are considering something similar.
The cap could mark a watershed in the distribution of air transport and tourism products. Since travel agents started acting for airlines (or indeed for other providers of the tourism product) they have been remunerated by a system of commission based on a percentage deducted from the fare paid by the passenger - the higher the fare the higher the commission. This made eminent sense at first, since by earning greater commission for itself the agent was providing greater revenue to the airline. There may even have been a cost relationship in that 'normal' first class and economy travel was often subject to change, involving additional work for the travel agent in comparison with travel on excursion fares.
However, increasing pressure from both tourists and business travellers for lower fares, as well as intensifying competition and the advent of yield management, has led to the agents (and their airline masters) needing to pay greater attention to seeking lower fares. Such fares are often hidebound by conditions and thus not readily evident, and finding them can involve considerable effort by the travel agent. So the system of commissions has gradually become inverted; a percentage based commission tends to provide the greatest reward to a travel agent for the least effort.
A further anomaly arises from the fact that airline costs, and hence revenues, vary substantially from region to region and according to distance. For example, a travel agent in the UK selling a normal economy fare across the South Atlantic receives, on average, over four times the commission for travel in Europe, although the costs incurred by the agent are generally similar.
Overhaul overdue
So an overhaul of the commission system is long overdue. Inevitably, airlines and travel agencies have markedly different views about what form that overhaul should take.
In 1978, commissions formed 4 per cent of the operating costs of carriers for scheduled passenger operations within North America. By 1994 this figure had risen to an estimated 12 per cent. On the worldwide front, and for international services only, the increase is apparently less dramatic, from 6 per cent to 11 per cent, but this difference is the equivalent of US$4.5 billion in today's prices - a substantial sum from any perspective. Not surprisingly, other product distribution costs have fallen in relative terms over the same period as a result of less reliance on inhouse functions, but by no means sufficiently to prevent overall ticketing, sales and promotional costs from rising significantly, to the point where they currently represent over 20 per cent of the operating costs of international passenger services worldwide. For comparison, aircraft fuel costs represent some 13 per cent.
However, travel agents do not see this as a bonanza. Between 1978 and 1994, the number of travel agent locations endorsed by Iata, and in the US by Iatan, rose at a rate of 6.5 per cent a year, or 172 per cent in total, to 76,000 (see chart).
In the same period, total airline passenger revenues from scheduled services grew by 297 per cent (from US$47 billion to US$187 billion), but by only 75 per cent when adjusted to account for inflation.
The crunch for travel agents is that this means average passenger revenues per location were 46 per cent higher in 1994 than in 1978 when expressed in current prices but, after adjustment for inflation, some 36 per cent lower in constant prices. Also, average passenger numbers per location were 26 per cent lower in 1994 than in 1978 (see chart).
These apparently negative trends in the basic income source of travel agents are similarly marked when broader parameters of travel, such as those of tourist arrivals and receipts, are considered. The number of tourist arrivals per agency location fell by 27 per cent between 1978 and 1994, while the inflation-adjusted tourist receipts per agency location fell by 25 per cent over the same period.
Even bearing in mind that these figures are generic in nature and do not, for example, take into account possible changes in the distribution or the size of agency locations, one stark fact remains: while the pie is getting larger, the number of travel agent locations is growing even faster. And travel agents have presumably increased their productivity over this period (CRS introduction is estimated to have increased agent productivity by some 40 to 50 per cent in the US). So travel agents are finding themselves between a rock and a hard place.
Value-added service
Are we seeing the beginning of the end of the travel agent? This seems unlikely. Travel agents provide a much broader and often more personalised service to passengers than the airlines do directly. They are not tied to an individual supplier and offer expert (and hopefully impartial) advice and 'one-stop shopping' on different carriers, fares and routings, different hotels and different car hire companies. And agents can themselves offer loyalty benefits (at least one franchising chain already has a frequent traveller award programme).
Furthermore, some travel agency chains have major purchasing power and are able to negotiate 'private' fares with the airlines, passing on at least some of the savings to their passenger clients - in effect, they are acting as consolidators as well as agents. And there is no reason why a travel agent cannot itself make greater use of the Internet to serve these clients.
Consequently, while there is likely to be some sort of shakeout, coupled with more intensive consolidation into consortia or franchising networks, the travel agent appears to be here to stay because of the value added service that the agent provides to the passenger client.
In fact, the capping of commissions and the gradual introduction of transaction fees by travel agents to their passenger clients could be a step towards clarifying for whom the agent is working. Legally, the travel agent is accredited to its principal, in this case the airline. In practice the travel agent is also an agent of one or more CRS vendors. Travel agents in some countries also bear some direct responsibility to governments. Divided loyalties to airlines, CRS vendors and governments are all very well, but surely the primary loyalty should be to the passenger? Clients tend to believe that travel agents are their agents and have little interest in the obligations.
A reduction in the financial obligation of travel agents to airlines should be offset by a reduction in under-the-counter rebates and the introduction of transaction fees to passengers. In the US, transaction fees have become almost universal for corporate accounts and fairly widespread for individual leisure travel. This may actually prove beneficial for all concerned. Passengers are demonstrably prepared to pay for good advice and service from travel agents, and in the long term the long talked about introduction of 'net' (non-commissionable) air fares may take place.
The real fault with the commission cap in the US lay with its abrupt introduction and the form it took. It would have been better to associate the cap with a commission 'boot' - a minimum level of commission to reflect the costs incurred by the travel agent in selling travel at lower fares. Even better, it could have been simply in the form of a transaction fee to be paid by the airline to the travel agent. This would have been more rational from a purely economic standpoint and certainly less complex from an accounting standpoint.
There is the possibility that other travel and tourism sectors will not impose commission 'caps' or otherwise move towards transaction fees. In the past few months cruise lines, car hire companies and hotel chains in the US have been gleefully marketing 'no commission caps' to travel agents. But this probably does not make sense in the long term. Cruise lines, hotels and others have gradually developed more complex but more effective pricing policies and associated yield management programmes. If their commission payments are not cost-related, there may be a general move towards transaction fees in the travel and tourism industry.
Source: Airline Business
