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Left Behind

Stripped of commissions, travel agents must compete with airlines and Web sites.

InformationWeek Staff

April 19, 2002

10 Min Read

It's been a long time coming, yet the airlines still managed to surprise travel agencies last month when, one by one, they said agents would no longer receive 5% commissions on ticket sales. Delta Air Lines was the first to break the news, followed by similar announcements from American Airlines, Continental, Northwest, United, and US Airways.

The elimination of commissions promises to intensify the showdown among travel agents, Web-based ticket-sellers, and the airlines to win the ticket-buying public. Each of the players has an Achilles' heel: Travel agents need to show they're still valuable and worth paying a premium for; Web-based ticket sellers need to figure out how to get paid for their services; and airline-specific sites, which are improving service, need to overcome the fact that they don't let buyers comparison shop. In a business in which customer service is prized more than in almost any other industry, technology will play a central role in who wins the battle for buyer loyalty.

There's no room to skimp on customer service, says David Daniels, an analyst at Jupiter Media Metrix. When asked to select the top three retail categories for which customer service is the most important determinant in a purchasing decision, nearly half of respondents to a Jupiter survey of 1,024 U.S. residents named air travel as their No. 1 response.

Agents knew this day would come, because the math is stacked in favor of online sales. Delta spent about $1.7 billion last year on ticket distribution, the airline's third-largest expense. Those distribution costs include travel-agent commissions, as well as printing and mailing paper tickets to travel agencies.

But this marketplace reality provides little solace to travel agencies, which have been struggling with slow business conditions. "We were disappointed with the timing of the airlines' announcements," says Stephen Lewis, senior VP at travel agency Uniglobe Travel International Inc. "The industry was just coming out of a major economic downturn and the fallout associated with Sept. 11."

The recent cash infusion from the government into the nation's air carriers also gave him cause to believe that the airlines would hold off on massive commission cuts and eliminations, Lewis says. That didn't happen, so travel agencies have to decide if customers will agree to pay directly for their services--and whether to invest in new technologies that can help them compete with tech-savvy online travel sites such as Expedia, Orbitz, and Travelocity, which promise lower fares and employ customer-friendly technologies to create loyal customers. Agencies face an uphill battle: They derive about half of their revenue from airline commissions, according to the Business Travel Association.

Many travel agencies have outdated technology, but not all of them think an upgrade is the answer. Some hope their existing services will justify an increase in the fees they charge. Gary Cypres, chairman of Hispanic Express Inc., a $25 million specialized consumer finance and multi-unit travel-service company in Commerce, Calif., says the commission cuts will put pressure on his business. But Hispanic Express doesn't have a Web site or even a general operator to answer its travel department's phone lines. It will continue to bank on its focus on California's Hispanic population to give it an edge over the competition.

Uniglobe Travel International, with more than 900 offices in the United States and Canada, also hopes customers will pay more for better service. "The differentiating aspect of our business is our ability to provide value-added services to the consumer," Lewis says. For example, agents staff a 24-hour emergency help line in case customers experience problems while traveling. Agents also provide high levels of expertise when creating vacation packages. Uniglobe's agents, who already charge customers an extra fee for their services, now must re-evaluate their business models. "We've asked each agency to review its business model and figure out how much extra each needs to charge in order to maintain its margins and stay in business," Lewis says.

chartTechnology has its place in the fight. To help agents stay competitive, Uniglobe recently deployed software from AgentWare Inc. that lets them search for airfare prices on consolidator and other Internet sites to determine the lowest fares. By turning to a consolidator--a company that buys airline tickets in bulk at a low rate--Uniglobe hopes its agents can grab fares that leave room for them to mark up the tickets without making customers feel as though they're paying too much. Travel agencies can nab more airfares from online sites than they can by accessing one of the four global distribution systems, such as Sabre, which are based on mainframe technology and don't allow agents to view as many fares as online and consolidator sites.

Fairlogix Inc. sells similar search technology to travel agents. Its software searches for airfares from consolidator and online sites and then lets travel-agency administrators build rules around the types of tickets that the software finds. For example, an administrator can program the system to add a percentage of the base price of the ticket, a dollar amount, or a flat percentage to the cost based on the different types of airfares, whether it's a consolidator fare, a Web fare, international or domestic travel, the seating class, or a combination of several factors. In the week after the airlines' commissions announcements, Terry O'Neal, president of Fairlogix, says his company received more than 30 new inquiries for its software.

Online travel sites, which lost their commissions from the airlines last fall, have custom-built technologies that do similar searches. "We weaned ourselves from global distribution systems and created our own system," says Alex Zoghlin, Orbitz's chief technology officer.

Orbitz, which is owned by American, Continental, Delta, Northwest, and United, uses Intel-based servers running Linux to grab fares directly from ATG Co., the company that collects fares from the airlines and feeds them into the global distribution systems. Orbitz also pulls schedules directly from OAG Worldwide Ltd., which distributes airfare schedules to global distribution systems.

"Since we're using Intel and Linux, the processing power is cheap, so we can apply hundreds of machines to a search, which gives us more results," Zoghlin says. The goal is to provide customers with the most-comprehensive travel choices. "We're 100% consumer-focused," he says, adding that Orbitz revamps its Web site on a weekly basis. The company is able to make changes based on customer feedback, which it monitors in real time through a custom-built customer-service system. "If a customer has to call the call center, then we've done something wrong," Zoghlin says.

Orbitz looks at each customer request daily. Complaints or difficulties are the next technology project for the Orbitz IT team. For example, a customer called to complain about the calendar feature on the site. She could click a button to see the calendar, but still had to manually input her travel dates into the fields provided. The next day, a new feature went live to let visitors open a calendar and click on their desired travel dates; those dates are automatically entered into the travel-dates fields.

Orbitz isn't the only travel site paying close attention to customer desires. Expedia last month implemented a new instant-messaging feature based on customer requests. Users of MSN Windows Messenger can choose to add Expedia as a tab on their instant-messaging screens. Once customers have booked a reservation on Expedia's site, they can view their itineraries and receive travel alerts via the instant-messaging technology. Expedia is also using Microsoft's .Net technology to notify customers of their flight status via cell phone, pager, or E-mail.

Making sure Expedia is always connected to customers is a key piece of the company's overall Web strategy, says Suzi LeVine, director of product marketing. "We recognize that our connection doesn't end when a customer hits the 'buy' button. We need to be there 24 hours a day," she says.

While online travel sites continue to try to one-up each other on the customer-service front, they still haven't settled on a single, best-business model. Expedia doesn't charge visitors a fee for using its service because, despite online commission cuts, Expedia and Travelocity have worked out side deals that give them performance-based commissions from several airlines. Those require that the sites sell a certain number of tickets for each airline in a given time period in order to get paid. Orbitz, however, charges buyers between $5 and $10 per transaction. The site says that makes it more independent of any one airline, even thought it's owned by several of them. "We want consumers to know that our contract is with them and not with the airlines," Zoghlin says. "We want to offer unbiased searches that provide the most fares possible."

Nevertheless, questions about whether Orbitz is working at arm's length from its owner airlines still abound. Expedia and Travelocity contend that Orbitz is able to offer lower Web fares through its relationship with its owners, because those airlines reserve certain Web fares for the site. Those fares, say Expedia and Travelocity, should be offered through them as well. Their accusations have sparked an investigation by the Department of Transportation. Zoghlin declined to comment on the claim.

Which brings us to the final leg of this three-legged race: the airlines. Not only have they put the squeeze on travel agencies, both online and off, by eliminating base travel commissions and setting up Orbitz, but they're also improving their own direct-sales Web sites to convince travelers to leave all the middlemen behind.

Scott Hyden -- Photo by Brent Humphreys

American is intent on getting people to buy from its Web site, Hyden says.

American Airlines will launch a new AA.com site by June, with the purpose of making shopping the "most desirable way to buy an American Airlines ticket," says Scott Hyden, director of product management for American Airlines Interactive marketing.

American's new site will let customers book frequent-flier-mile trips online without having to contact a call-center representative. The company is also going to offer discounted AA Vacation packages, bonus offers, and Net sAAver alerts that give customers real-time information on their flights. In addition, customers will gain access to a new "My Account" page that will save pertinent information, including credit-card data, seat preferences, and current reservations, and provide news, information, and special offers tailored to customer-preferred airports and destinations.

Delta recently launched a similar redesign of its site, and all of the major airlines are in the process of some kind of upgrade of their sites with similar technologies.

Still, online travel sites and travel agencies say they don't see the airlines' Web sites as major threats--yet. About three-quarters of all airline reservations still come from offline channels. And online travel sites claim the airlines will get only those passengers who are devoted to a particular airline and aren't especially concerned with price comparisons. But most of the $2 billion American books online comes from AA.com, which is larger than Expedia, Orbitz, and Travelocity combined for American airline ticket sales, Hyden says.

Northwest Airlines anticipates the mix of air-travel sales changing during the coming year. "More and more travel will be booked online," says Al Lenza, VP of distribution and E-commerce at Northwest. "Every PC is like an ATM machine. It's great for the customer, and it's great for us, because it's their ink and their paper," says Lenza, referring to the site's feature that lets customers book their tickets online and print out boarding passes to avoid airport check-in lines. Delta is pursuing a similar initiative.

It remains to be seen whether the Internet will ultimately be the demise of travel agents. What's already clear is that the Internet is forcing agents, online sites, and the airlines to re-evaluate their business models--and to adjust to a new, competitive environment.

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