Commission capping will not have the same effect on travel agents as the giant meteor, which created the Gulf of Mexico in one massive bang, had on the dinosaurs (if you subscribe to that theory). But only those that take a leap into the unknown using technology and diversification as twin parachutes can avoid extinction.
After US airlines imposed the cap two years ago, the widely held belief was that the action would lead to the wholesale demise of the travel agent community. But a poll of a broad spectrum of analysts and managers in the sector by Airline Business suggests that only those agents who fail to embrace and exploit the new technologies of the electronic era, or fail to expand their portfolio of services beyond issuing airline tickets, will follow the dinosaurs into history.
Although the comments of the majority of the interviewees concern the travel agency community in the US, they can certainly be extended to agents worldwide, particularly in Europe, where carriers are also starting to impose their own commission caps.
But the trend was firmly set in the US by Delta Air Lines, which decided to tackle its distribution costs in early 1995 by capping domestic commissions, which were traditionally paid at a rate of 10 per cent, at $25 for a one-way ticket. The logic was straightforward: distribution expenses, which Andersen Consulting estimates account for as much as 25 per cent of the total price of a ticket, and commissions in particular, representing half of all distribution costs, were getting out of hand. Figures from the Air Transport Association show that agency commissions had been climbing steadily since US deregulation, jumping from 4.2 per cent of total operating expenses in 1978 to 10 per cent in 1994. And, unlike fuel, and to a lesser extent labour, commission was one item which carriers felt they could control.
As a result of the caps, which were adopted by most major US airlines (with the exception of Alaska Airlines, America West, Southwest and TWA), commissions have started to decline, dropping to 8.7 per cent of total operating expenses in 1995 and 8.3 per cent in 1996.
According to the Airlines Reporting Corporation (ARC), which processes travel agents' ticket sales in the United States, the overall domestic commission rate paid to agents dropped from 9.17 per cent in 1995 to 8.57 per cent in 1996; the international commission also fell, from 16.24 per cent to 15.37 per cent. Significantly for the travel agencies, however, the total commissions paid to travel agents actually increased by 2 per cent, to $6.5 billion, due to fare level increases last year over 1995.
As a result analysts' predictions that commission caps would kill off 5,000 US travel agents - one-ninth of the total in 1995 - have not materialised. Quite the opposite, in fact: at the end of 1996 there were 47,286 ARC-accredited travel agents in the US, up over 1 per cent from 46,765 the previous year. But this increase is due to growth in the number of corporate outlets - on the back of the economic boom - which hides the decline in the number of independent agents. 'We've seen the number of independent agents and single office locations go down by 2-3 per cent,' says David Collins, president of ARC. 'But on the other hand, the number of corporate locations has grown, so the overall number has remained stable.'
Despite the overall growth, life has been hard for travel agents. 'With the commission cuts, the airlines sent signals to the travel agency community that they need to get costs out of the system,' explains Lynne Rosenbaum, senior vice president of marketing and sales of Apollo Travel Services, which distributes the Apollo CRS in the US and Mexico. 'The expectation was that travel agents could reduce operating costs and that they would use technology to do this.'
'The commission cuts significantly changed the way US agencies view their business,' adds Greg Merkley, a former Galileo and United Airlines employee who currently markets Spy Travel Net, an Internet inventory system, in North America. 'Before they relied solely on commissions primarily from airlines, but the caps forced them to rethink how they're getting compensated.'
Merkley and others feel the commission caps were a necessary 'splash of cold water' in the collective face of agents, forcing them to focus on the realities of their business and revise their modus operandi. 'The commission caps have strengthened agents,' suggests Merkley. 'Their business is more solid after the caps than before; they have a more business-like mentality. Before they saw themselves as agents of suppliers, but now that airlines are not providing enough revenue, they have been forced to look to other parties. They're more active, less reactionary in their approach.'
Agents have taken a number of countermeasures to fill the gap in revenues left by the caps. Corporate travel agents have started to charge fees for the advice offered to clients, while the leisure sector specialists are shifting sales efforts to products other than air travel. Mike Estill, the chairman of the travel technologies committee of the American Society of Travel Agents (Asta), says the revenue split at his leisure agency consortium is now 50:50 air to non-air, compared to 75:25 before the caps.
A common trend across both corporate and leisure sectors is that agents are slowly beginning to adopt the new technology as a sales tool. According to the most recent automation survey conducted by Asta, 70 per cent of agents had booked trips involving electronic ticketing in 1996, up from 53 per cent the previous year, while 11 per cent of total tickets issued by agents were electronic. The number of agents using the Internet also increased significantly - 38 per cent compared to 21 per cent the previous year.
Of those agents who subscribed to an on-line or Internet access provider, 31 per cent had a home page, while 59 per cent of those who didn't were considering this or developing one. Asta expects the statistics in the 1997 survey to show a similar 'dramatic' increase.
Just as the Internet has sparked a heated debate within the wider business community, there is great discord among travel agents as to what extent the new distribution technology will cut them out by allowing the customer to book direct. 'Most lay people do not understand the pricing structure of airlines; yield management on a per flight basis doesn't make sense to the typical human being,' says Estill. 'Asking people to use technologies to buy a product with pricing they don't understand will lead to frustration,' he maintains.
Bill McFarlane, a California-based consultant and one-time Galileo and Pan Am employee, agrees. 'I think a great deal needs to be done with on-line systems before they get general use. They're not really that reliable, and travellers don't have the feeling they're getting the lowest fare. Until the systems can provide that guarantee, agents will continue to get the reservations.'
These caveats notwithstanding, many analysts expect on-line bookings to burgeon, whether it is through Web sites operated by airlines, by giant agencies on the Internet like Microsoft's Expedia or Sabre's Travelocity, or by individual agencies. Philip Wolf, a Connecticut-based travel technology specialist, predicts that $1 billion worth of air travel will be booked on-line this year. But Forrester Research, a high-technology consulting firm in Massachusetts, disagrees, projecting that only $400 million of an estimated $76 billion in air travel purchased this year will be sold on-line. However, it projects that by the year 2001, over $8 billion in ticketing transactions will occur on-line, representing more than 45 million tickets.
Although any figure on future use of on-line distribution technology is a guesstimate at best, there will undoubtedly be growth in this new electronic marketplace and all those surveyed agree that agents have to position themselves at the forefront of travel technology to enable them to react as quickly as possible. 'Travel agents should embrace the new technology. They should not be afraid of it because it's not going away,' says Michael Platt, director of commercial affairs for Hogg Robinson, a major UK-based corporate travel agency.
'Agents need to get familiar with all the technology intimately,' adds Apollo's Rosenbaum. 'I'm amazed at the number of agents who are relatively unaware. It's not necessarily leading-edge technology they need to get familiar with.'
Tamir Rankow, president of Atlas Travel Management in Florida, suggests one potential benefit for agents who adopt the new technologies could be higher commissions. 'If airlines see that ABC agency is a more effective distributor, shouldn't they have a different kind of (commission) relationship with them than with an agency that wastes their time and money?' he asks.
There is some disagreement about how the new technology will affect travel agents. On the corporate side, Platt believes there is plenty of opportunity for agencies to continue to apply fees to supplement revenues by charging their clients for non-bookings activities, like travel and expense management. 'Customers will clearly want to see the benefit to them before they take on extra requirements like self-service reservations, or electronic ticketing. Some say these things are great, while others think they're a waste of employees' time. These issues need to be addressed,' says Platt.
Stream of bookings
Agents will come under increasing pressure to justify these costs as distribution technology becomes more sophisticated and user-friendly. Peter Nordstrom, a senior manager at Andersen Consulting in Stockholm, believes the agents' relationship with their corporate customers is already being jeopardised and could be further damaged by the proliferation of self-booking software provided by airlines to business travellers. This equipment means that 'agents will no longer control all the travel of corporations. They'll see a stream of bookings go past them and lose a lot of their most profitable volume,' says Nordstrom.
One possible solution for the corporates is to diversify and expand into the leisure sector. Woodside Travel, a consortium of 132 agencies in 66 countries, is already doing this. In mid-June, it announced a new in-house leisure travel programme, based on partnerships with five cruise line and tour package companies.
But the future for leisure specialists appears less clear-cut. Rosenbaum suggests that they need to become more flexible and 'communicate with the customer the way the customer wants to be communicated with: let people express their needs through means other than the phone, like the Internet or e-mail.' Agents need to get away from the old habit of acting like 'an order taker' and train staff in better sales techniques 'because personal service and sales are things electronic systems can't provide.' Another must, according to Rosenbaum, is to remove costs from agency operations, by using systems like Apollo's Millennium 3, a front end to the Apollo CRS which helps agents learn the system in only a few days and frees them up to do more lucrative selling. She also expects further consolidating of both locations and operations.
Wolf suggests leisure agents can boost revenues in the future by charging for services like processing refunds, or issuing paper tickets, should these become relatively obsolete. Others believe leisure agents could levy fees for advice on complicated itineraries or remote destinations.
Several also believe leisure agents should become more imaginative marketers, particularly on-line. 'If agents want to play in the new distribution channels, they need to become merchandisers like the guy who displays stock on store shelves,' explained Scot Hornick, a Chicago-based associate partner of Andersen Consulting. The agents need to offer flexible services in cyberspace. The perception of 'how they use their Internet shelf space, and whether they have an appealing range of products will change with every customer,' Hornick adds.
Wolf and McFarlane even predict that leisure agents might turn to selling non-traditional products like luggage, travel clothing and guidebooks, or perhaps video-conferencing services.
But one factor that could colour all of these scenarios is a downturn in the economy: US agents owe much of their recent success at staving off the effects of commission caps and new technology on the domestic boom. 'If there's a downturn in the economy, it will make it tougher for agents that have not positioned themselves well,' predicts ARC's Collins. 'If they've reviewed their business opportunities these past two years, extended their products and looked at their costs, hopefully this will put them in a better position when a downturn comes.'
Profound forces
Andersen's Nordstrom, for one, urges agents to act quickly. 'Change is happening very fast, faster than one would typically expect,' he says. 'It will only be a couple of years before everything is turned upside down. The forces behind the change are so profound, there is no alternative.' He includes Europe in this prediction, even though the use of capping there is still in its infancy: 'There's no return in Europe,' he adds.
The continuing need for airlines to improve their returns, combined with new technology, means that pressure for radical change within the global travel agency community will continue. Hogg Robinson's Platt warns that all agents 'will have to justify their existence. If they cannot, they just don't deserve to be there.'
Source: Airline Business
