When the major airlines last year capped the commissions they pay to travel agents, Joe McClure knew his agency was in for a spell of turbulence.
The president of Montrose Travel near Glendale calculated that his agency stood to lose $20,000 a month in revenue unless he moved quickly to fill the gap.
So McClure beefed up his agents’ sales incentives and retrained employees to focus their energy on selling and service, rather than administrative chores. The agency dropped unprofitable accounts, sheared some overhead and redoubled its marketing efforts just as competitors were slashing their ad budgets. The firm also launched a new high-volume ticket consolidation venture to capture a chunk of the fast-growing market for rock-bottom air fares.
The result: 1995 sales topped $30 million, net income was the highest in company history and Montrose Travel was recently named a winner of the national Blue Chip Enterprise Award, which recognizes small businesses that prosper in the face of adversity.
“A lot of agencies adopted this ‘woe-is-me’ attitude” after the airlines instituted the caps, McClure said. “We looked at it as a growth opportunity.”
Not all have adapted to the new terrain. Hundreds of agencies have closed their doors or been forced into mergers to stay afloat since carriers altered their straight 10% commission structure in early 1995 and slapped a ceiling of $25 on one-way tickets and $50 on round-trip fares on domestic flights.
Millions in revenue vanished overnight. Panic gripped an industry where ticket commissions make up a significant portion of the average agent’s compensation.
But serious travel sellers have hunkered down for the long haul. Agencies are slashing costs, instituting fees, changing their client mix, speeding automation, even peddling luggage and cameras from their storefronts to make an extra buck.
While no one is celebrating the loss of revenue, many agents admit that the new environment has forced them to sharpen their business skills and become tougher competitors.
“There was a lot of complacency in this industry,” said Ellie Knight, a Brea-based travel industry management consultant. “The caps were a wake-up call. Now agents have to get serious or get out.”
Long a laid-back business of dabblers and travel buffs, travel sales are undergoing a radical transformation. Budget competitors such as ticket brokers and consolidators have grabbed market share from traditional agencies, while computer technology is allowing consumers to book more trips from home. Last year’s ticket caps finally forced many agencies to make changes they had been considering for some time.
One of the most common, and controversial, strategies embraced by agents over the last year has been the implementation of service fees. Carol Raetz, owner of Boulevards of Travel in Newport Beach, now charges $5 to $10 to process, change or void airline tickets. She also requires a $100 nonrefundable deposit to research a major excursion.
Raetz figures it costs her $25 to process a single airline ticket. At a 10% commission rate, that means she loses money on every fare less than $250. Prior to the ticket caps, she simply offset those losses with profits from higher-priced tickets. Ditto for hours spent researching trips that clients never booked. But Raetz says the caps have forced her to make every transaction pay for itself.
“Customers who want the services of a good agent have accepted the fees,” said Raetz, who adds that she has lost very few clients. “We’re professionals and we’ve had to start charging like it.”
In fact, travel sellers say they’ve had to become as proficient at preparing an income statement as a travel itinerary. Agency owners now scrutinize their overhead expenses much like they prowl the computer terminal for bargain fares.
Raetz froze her agents’ base salaries and has taken to buying office supplies in bulk. Montrose Travel renegotiated its reservation system contract and funneled document deliveries to an outside courier to save money. Jeff Abels of Bixby Knolls Travel in Long Beach reduced his staff, switched long-distance carriers, pulled out of the Yellow Pages and dropped unprofitable accounts after sifting through every client his firm serves to figure out which were money losers.
“We developed mathematical models for everything,” Abels said. “You have to figure out what things cost now.”
Like many agencies, Abels has changed his client and product mix. A year ago, more than half his revenue came from airline ticket sales to corporate customers. Today, the majority of his business comes from the sale of leisure travel, such as cruises and package tours, which offer higher profit margins.
Firms have banded together into large consortiums to gain more buying power from travel suppliers. Agencies also are supplementing the bottom line through sales of travel-related services and merchandise.
Some locations stock travel guides, language tapes and tour videos. Bev Zukow, owner of First Travel of California in Villa Park, is pushing travel insurance, disposable cameras and luggage that she buys at a discount from a travel trade group. Last December she even sold poinsettias left over from a holiday function--for double the price she paid wholesale.
“Hey, every little bit helps,” she said with a laugh.
The ticket caps have also forced agents to become more sophisticated about their marketing.
Consultant Knight says many agencies are targeting specific segments of travelers instead of trying to be all things to all people. Travel sellers are cultivating new clients by specializing in areas such as cruise vacations, eco-tourism, adventure travel and golf holidays. Many firms are working on programs to win vacation business from employees of their corporate customers.
Others have rededicated themselves to their existing clients. Doug Delanoy, vice president of Brea Travel Service, says the ticket caps convinced the family-owned firm that customer service is the only way to set themselves apart from the pack.
The agency last year performed an extensive survey of its customers, computerized that data and now does targeted mailings to inform clients of trip specials and promotions. The firm launched a quarterly newsletter in which travelers can display their vacation snapshots and gush about their exploits. The agency also hosts a weekly champagne send-off to wish cruise clients and international travelers “bon voyage” and thank them for their patronage.
“This business is built on relationships,” Delanoy said. “We’ve got to be proactive in maintaining them.”
Although some agencies like Delanoy’s have nearly replaced the revenue lost to the ticket caps, profits are still not what they were a year ago. Nearly 500 mom-and-pop travel agents nationwide have disappeared since last year, and industry veterans say more closures are on the way.
“We’re going to see a tremendous shake-out in the next six months,” said Abels, who posted his first-ever loss in 1995. “A lot of agencies have been living off [savings] that are running low by now.”
The American Society of Travel Agents last year filed a class-action antitrust lawsuit against the major carriers, alleging price fixing and collusion. That case is still grinding its way through the courts, but some agents don’t hold out much hope for relief. Ticket caps or no ticket caps, pragmatists like McClure say the industry is changing, and travel sellers are going to have to change with it or find another line of work.
“The travel business is like any other,” McClure said. “There are trials and tribulations and constant challenges. If you stand still you’re going to get left behind.”
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Travel agents used to be paid a straight 10% commission. But after Delta Air Lines announced a cap on domestic ticket sales commissions last year, six other major airlines followed suit. Details on the changes:
One way: Domestic tickets with base fare higher than $250 will pay a maximum $25 commission.
Round trip: Domestic tickets with base fare higher then $500 will pay a maximum $50 commission.
No impact: Lower-priced domestic tickets and all international tickets will pay the same 10% commission.
Other Commission Sources
Commissions from these travel options provide a higher profit margin:
* Package tours
* Resort accommodations
* Travel insurance
Status of Lawsuit
After several major U.S. airlines imposed caps on travel agent commissions, the American Society of Travel Agents filed an antitrust suit in a Delaware federal court. Details on the suit:
Complaint: Airlines conspired and violated antitrust laws
Response: Airlines contend that commission caps were part of overall cost-cutting efforts required to remain in business
Airlines named: Delta, American, Northwest, USAir, United, TWA, Continental
Date filed: March 3, 1995
Relief sought: Undisclosed monetary damages
Court date: Sept. 4, 1996
Source: American Society of Travel Agents; Researched by JANICE L. JONES / Los Angeles Times