1996 Summer ACTE Quarterly: President's Message | The New Era of Distribution | European Airline Liberalization

No one disputes that the traditional airline ticket distribution system is convoluted, inefficient, even irrational. The airlines are dependent on travel agencies to deliver more than 80% of their product, and they pay dearly for the privilege: Experts estimate that anywhere from 20-25% of the price of a ticket goes to delivering it. "It's shocking and frankly incomprehensible that the cost is so high," said travel management consultant Tom Wilkinson, President of Travel Management Group in Alexandria, Virginia. "Especially when you consider the cost to deliver a General Motors car, which weighs about 3,000 pounds, is about 3%, and bank transactions run about 2%. The irony is that airlines are paying 20-25% to deliver something--a paper ticket--that consumers don't really want much now anyway. And it's not just the airlines that pay the price. Consumers help pay for the inefficiency in higher ticket prices. The whole process has been ripe for reengineering for a long time."

The agency community may understand that better than anybody, having been forced to reengineer itself in a hurry following the abrupt institution of commission caps 18 months ago. And it's not just agency commissions that have been targeted as the distribution system is being transformed. The other parts of the distribution cost pie--CRS fees, credit card fees, and various incentives like overrides and frequent flyer programs, are all coming under intense scrutiny. All but frequent flyer programs are undergoing profound changes.

"Commission caps were only the beginning of a real transformation of ticket distribution," said Larry Silman, Vice President of Marketing for Arrington Travel Center in Chicago. But even that first step created a significant wake, behind which flowed the shift from a commission-based form of travel agency compensation to a fee-based one. The quick acceptance of fee-based pricing for agency services paved the way for net-fare deals; and those in turn encouraged a direct dialog between airlines and corporate clients. "Being able to bypass credit-card fees by direct payments to airlines helps sweeten net-fare deals," Silman said.

At the same time, technology is playing a leading role as these changes evolve. Automated reservations systems, either involving E-mail, on-line service or Web, made the idea of do-it-yourself reservations quick, reliable and convenient--especially if your reservations software was linked to expense report software (which eliminates a lot of repetitive manual data entry). New technology solutions are being developed by traditional players in travel and some unconventional ones as well, said Philip Wolf, President of PhoCusWright, the travel technology consultancy.

So exactly where are we in the distribution revolution? Will CRSs become hopelessly obsolete? Will travel agencies get squeezed out of the ticket distribution process altogether? And most importantly, will airlines share the savings they're reaping in the process?

Major Distribuiton Trends

• First, whither commission caps? Mixed messages here. It's hard to argue with the kinds of savings--$150 million--that American Airlines reportedly saved since caps were instituted. So it was not exactly a surprise that in June, Canada's two major carriers announced caps effective this month. Meanwhile, British Airways continues to deny it's going to institute caps. Dan Brewin, speaking at ACTE's regional forum in London recently, said that BA is instead directing focus on agents who can swing market share, and is looking at cost efficiencies through electronic ticketing instead of cutting commissions. UK travel agents and corporate travel managers protective of revenue-sharing arrangements, however, remain skeptical that British Airways will hold out for long.

• Changes in the physical delivery of tickets. Despite some early reports of consumer resistance, E-tickets are quickly growing in acceptance. And if you thought ETDNs were history, think again. Actually, think of a combination ATM + EDTN. San Francisco-based Docunet's machines print airline tickets --even complex itineraries--plus theater and other tickets booked through Ticketron, and travelers checks as well. Once Docunet's partner EDS succeeds in providing a nationwide ATM network, these hybrids will offer cash as well as tickets.

  The boom in smart card technology is playing a role here too. Lufthansa and the Delta Shuttle have both been successful using different types of smart cards for ticket purchasing and boarding on certain types of flights, but so far at least, this system only works for passengers traveling without baggage. On the drawing board are other sophisticated kinds of smart cards that allow payments on all travel expenses. These hybrid charge/boarding/calling cards also have the capacity to store spending data, for eventual download into an expense account or MIS report. Look for early prototypes from software developers as early as next year.

• Do-it-yourself bookings save on agency costs. There are plenty of new alternative booking methods: user-friendly proprietary software delivered via CD-ROM or disks that interface directly with CRS. Web sites and Internet bookings are all growing in favor with corporate travelers, according to PhoCusWright's Philip Wolf. Airlines are busy building or enhancing Web sites that allow ticketing over the Internet. In the case of Southwest Airlines, a paper ticket isn't even an option--all Internet reservations are totally electronic, and a travel agent is never involved. (Even if they were, they wouldn't get a commission.) British Midland and Alaska Airlines are the only two airlines that offer Web site bookings right now, although most major international carriers claim to be building their sites. It's even possible to book charter aircraft on the Web and avoid paying the 5-10% commission for a charter broker.

These kinds of booking systems, says Randall Malin, President and CEO of TravelNet, "provide companies with the opportunity to reduce costs by improving agent productivity," which keeps agency fees manageable. Perhaps more important, Malin points out, is that "corporations not agencies have direct control of their travel data," information that can be crunched any way corporate clients want whenever they want. Also, Tom Wilkinson pointed out, these booking systems underscore why corporations and airlines have such a shared stake in moving distribution from the agency to the traveler's desktop. "Companies can save a lot more money by negotiating new direct distribution relationships with carriers than they will with tweaking personnel compensation in current agency configurations," he said.

So what does this mean for the corporate travel agency? Industry experts, while acknowledging more massive changes to come, think the transition to an entirely new distribution paradigm will be gradual. Sabre President Jeffrey Katz predicts that travel agencies will remain a major force for "at least the next 10 years, if not until 2010." His opinion, not surprisingly, is echoed by agencies, who have found a comfortable and even profitable niche as travel management consultants. "There's plenty for an agency to do besides book airline tickets," Tom Wilkinson noted drily.

One way, ironically enough, is to help corporate clients improve efficiency in the reservation process. Smaller agencies are building proprietary Web sites for their clients, which allow travelers to view reservation information, access past and current itineraries, and complete their expense reports on-line. Mega-agencies like Carlson Wagonlit and Rosenbluth have developed more sophisticated integrated travel management systems that link the reservation, expense management, and reporting functions. Using travel agencies as the source for automated reservations has become so mainstream that agency bids now include them as a way to demonstrate how well they can reduce the number of agency personnel assigned to accounts.

And what about CRSs? They're banking on the continuing strong relationship between travel management companies and corporations, since they're marketing their new automated booking products through agencies. "All the corporate research we have says that agencies are in the loop, and our model is that agencies must be integrated in," says Sabre's Jeffrey Katz. At the same time, admitted Katz, "We're always looking at ways to reduce our dependence on airlines for revenue."

Responding to criticism about the price issue, CRS vendors are also coming up with clever ways to keep fees down. United is testing expansion of the time-period allowed for travel agents to ticket a reservation; it is believed that if customers have more time to make changes before making a final decision, rebooking fees will be go down. (TWA has already adopted the 72-hour policy system-wide.) Both Sabre and Worldspan recently introduced functions that allow agents to check fares without creating an itinerary first. That means less busy work for agents and no CRS fees to airlines. Amadeus has invested heavily in systems that allow for greater agent efficiency, by cutting the number of transactions an agent must go through by as much as 30% per booking.

Nipping at the CRSs heels, too, are third party companies like IBM and Unisys, which are developing altogether new reservations systems designed for smaller or startup airlines to manage reservations and sell tickets; and small software companies that are designing low-cost reservations systems that use travel agencies in the distribution loop, keeping CRS involvement to a minimum. "Everyone in the industry is nervous about their future, because travel technology and the distribution system are both changing so quickly," said Tom Woodall, Editor of the Travel Distribution Report. "But I think the CRSs will evolve and embrace new and more open technologies to keep the distribution channel viable."

Whatever form the distribution channel ultimately takes, experts believe that the future of corporate travel runs parallel with the new distribution paradigm. If a corporate travel program costs a company 5% of its travel budget to administer, and companies successfully negotiate with airlines to share their new cost savings, the net result could considerably lower the cost of transportation. "The really interesting changes haven't happened yet," summed up consultant Tom Wilkinson. "Airlines haven't come up with innovative ways to pass those savings on to companies and travelers, so the change is not as sweeping as we would like. Not yet, anyway." AQ

1996 Summer ACTE Quarterly: President's Message | The New Era of Distribution | European Airline Liberalization