The travel agent industry is coordination intensive; in other words,
it is centered on the communication and processing of information. The
commodity-like nature of the products offered by travel agents and the
ease with which many travel products can be described have led to
concern about the future of travel agencies given the evolution of
information technology (IT). Early indications of this trend towards a
shift in the role of travel agents are the significant reduction in
agency commissions paid by airlines(1) and the increasing use of the
Internet and other online services to obtain travel information and make
Trends affecting the travel industry generally include changing
customer demands (such as interest in exotic destinations, or travel by
seniors), increased expectations in terms of value and convenience, and
increasingly knowledgeable consumers who are themselves users of IT. The
travel industry is being fundamentally altered by IT. Historically
airlines and large hotel chains, for example, have been early adopters
of new technologies such as Computer Reservations Systems (CRSs).(3) The
distribution network being used by the travel industry is in many ways
outdated, relying on third parties such as CRS vendors or travel agents
who have traditionally justified their presence through a specialized
technology infrastructure and specific knowledge.(4)
A frequently cited impact of IT is that the emergence of electronic
markets will promote the bypassing of intermediaries.(5) This hypothesis
is principally based on the ability of IT to significantly reduce
transaction costs.(6) A useful way to examine the specific impact of IT
on a given type of intermediary may be to compare the value added by an
intermediary under different transaction characteristics, and determine
whether the role of the intermediary is likely to be enhanced or
DISINTERMEDIATION AND INFORMATION TECHNOLOGY
The advent of the Internet and other online services, combined with
widespread adoption of personal computers by businesses and consumers,
had led to a growing role for electronic commerce in the world economy.
Electronic commerce is the buying and selling of information, products,
and services through computer and telecommunications networks. The
emerging electronic commerce marketplace is expected to support all
business services that normally depend on paper-based transactions.(8)
Firms choose transactions that economize on coordination costs.(9)
These costs include the costs of the information processing necessary to
coordinate the work of people and machines that perform a primary
process such as manufacturing a product or providing a service.(10) IT
is allowing buyers and sellers to communicate directly over data-rich,
easy-to-use information channels. Where products take on a
commodity-like nature and are easy to describe, decentralized electronic
markets rather than single-source sales channels may be an efficient
form of coordination.
Travel products and services possess many characteristics needed to
function in the electronic environment. The ease of description and
commodity-like nature of many travel products (such as airline seats or
hotel rooms) suggests that the travel industry exhibits the product
attributes that are favorable for electronic commerce.(11) The
structural elements of the industry also support a shift towards more
electronic means of carrying out transactions. The current travel agent
market structure favors a centralized market configuration.(12) Figure 1
depicts a common centralized market arrangement among service providers,
travel agents (or brokers), and consumers. Most consumers use a single
or a very small number of travel agents for each trip, while most agents
have access to all (or most) providers of travel services.
Within the travel agent industry, the traditional centralized market
structure is currently under attack from many providers in the
marketplace who are trying to access their customers directly. This
trend is particularly evident in the airline industry where carriers
such as Southwest Airlines sell most of their tickets without the use of
travel agents. Even established airlines such as American and United are
using more direct channels such as online services, the Internet, and
toll-free telephone numbers to reach customers. In fact, the structure
is currently acquiring more decentralized market characteristics where
each buyer/consumer has direct access to each seller/provider.(13)
The ability to make travel-related reservations online directly with
the provider significantly reduces fixed and variable coordination costs
because there is no human intervention between the consumer and the
travel provider. The human intervention can take the form of a travel
agent or an airline employee in a telephone reservations office or city
ticket office, but in either case eliminating human intervention
minimizes costs to the airline. This is why many airlines are offering
discount fares that are available exclusively to online users, and
promoting the use of electronic ticketing.(14)
In the travel industry, the two factors mentioned above - product
uniqueness and ease of description - have become critical factors in
determining whether an intermediary, in most cases a travel agent, will
be used by a prospective traveler. Some itineraries, such as a simple
business round trip by air, may be just as easy to arrange while dealing
directly with a carrier. However, a package tour or cruise is inherently
complex to describe, and will vary greatly in content and price
depending on the different suppliers and options. Such leisure trips
often involve pitfalls and uncertainties, and the average consumer needs
advice on these matters before making a decision.
A number of social and institutional factors mitigate against the
elimination of intermediaries. Consumers may choose to continue to use
traditional or online intermediaries because those intermediaries in
fact represent multiple suppliers of travel products.(15) It has also
been argued that electronic markets do not become
"disintermediated" but are rather facilitated by IT, with new
intermediaries emerging in an electronic environment.(16)
Travel agents do not have the same biases as the suppliers they
represent, although the agents' behaviour can be affected by such
practices as commission overrides.(17) Finally, aspects such as trust
and social contact are important to many consumers, particularly when
planning leisure travel; face-to-face contact with an agent at a
physical retail location will remain important for many travelers.
THE ROLE OF INFORMATION
In the traditional travel industry environment, the CRS platforms
remain difficult to use. User interfaces are cryptic and lack visual
interaction with the user, who is usually a travel agent. These
conditions promoted the use of intermediaries because consumers were not
sophisticated enough to use these systems directly. The environment has
changed in two dimensions: consumers are more educated with respect to
the travel industry, and access to IT and its capabilities are much
improved. For example, the common user interface provided by Windows
software such as Web browsers significantly reduces the learning curve
for users connecting to new service providers.
These conditions lower the fixed coordination cost of direct linkage
in the marketplace. As a result, consumers and providers alike can now
explore more direct relationships that result in transaction cost
savings. Figure 2 illustrates these changes as a tendency toward
decentralization in the industry.
There exist tradeoffs for decentralized and centralized markets with
respect to variable coordination costs.(18) Figure 3 further
demonstrates the differences in cost as a function of available
information that consumers and agents possess.(19) Given this
difference, travel agents must provide significant quantities of
high-quality information to consumers in order to succeed in the
marketplace. If agents can provide only less than perfect information,
it becomes more efficient for consumers and service providers to bypass
travel agents and deal directly with each other.
Figure 3 illustrates the area of dominance (i.e., lowest cost) for
each alternative. Centralized markets that include travel agents acting
as brokers have a clear advantage if information quality is high;
however, they are not cost efficient if information availability is
poor. The point of intersection is dependent on the number of
brokers/agents and the extent of connectivity between brokers and
consumers. Reductions in the number of brokers will lower the
centralized market curve, shifting the point of intersection to the
right, thus increasing the area of dominance for the centralized market.
This condition further explains the trend toward fewer yet larger travel
agencies or consolidation.
Travel agents can also create brand loyalty by their customers, which
effectively decreases those customers' connectivity to other
agents. In effect, the additional connectivity enabled by IT provides
new channels with different costs. These changes provide challenges and
opportunities for agents and providers in the travel industry and are
AIRLINE COST CONTROL STRATEGIES
U.S. airlines currently spend $6.4 billion annually on travel agent
commissions, although this total amount is now declining as carriers
significantly reduce their payments to agencies.(20) Commissions are the
fourth largest operating expense for U.S. airlines, after labor, fuel,
and maintenance.(21) Travel costs are also the third most important
controllable expense for large corporations, after people and office
Consumers now demand rapid access to accurate information on fare
options and frequent-flyer programs, while corporate customers want
detailed travel expense and usage information in order to control costs
and negotiate better rates. The advent of Windows-based software systems
and the Web user interface also support direct access by consumers and
corporations to carrier information systems. The following business
drivers have been suggested for the two key segments of the travel
* Leisure travelers are interested in a convenient way to access
information such as airline schedules and fares, and obtain personalized
advice or share past experiences.
* Business travelers and their employers want to control travel
costs and enter into long-term pricing arrangements with travel
suppliers. They also want to have repeat information (such as travel
preferences and corporate travel policies) stored for later use.(23)
When travel agents established Web sites in order to reduce their own
costs and expand their markets, airlines quickly reduced their
commissions for online sales by agencies. While most carriers still
offer an 8 percent to 10 percent commission for a traditional (paper)
ticket issued by a human agent, that amount is capped; for example,
Delta will pay a maximum $50 commission regardless of the ticket
This stands in contrast to the situation for online sales, where
American Airlines pays travel agents $15 per transaction, while United
offers $10, regardless of ticket value.(25) The average cost to book and
issue a paper ticket with a human travel agent using one of the CRSs
controlled by the major airlines has been estimated at $35 to $45. At
the other end of the spectrum, when a traveler books directly through an
airline's online service and uses a "paperless" or
electronic ticket (often called "E-ticket"), the average cost
falls to between $2 and $5.(26) With an electronic ticket, the passenger
receives a reservation number which must be shown along with a piece of
identification at the airport gate.
With online booking and E-tickets, the last physical objects needed
to reserve and undertake travel disappear. Electronic ticketing
therefore serves as an enabler for automated delivery of travel
products. Also, any direct communication between travelers and travel
suppliers such as airlines and hotels supports the collection of
valuable consumer information by the supplier, which suppliers such as
airlines do not wish to share with third parties. Knowledge of consumer
behavior, including buying profiles and purchases of related products
(such as rental cars), is critical information that serves as the basis
for developing marketing strategies; the information collected by
airlines on their frequent flyers is an example.
Airlines are beginning to perceive both travel agencies and paper
tickets as unnecessary, and view with some disdain the attempts by
travel agencies to establish an online presence which sometimes involves
an additional intermediary such as an Internet service provider:
"We believe there could be huge efficiencies," says Mark
Hoehler, electronic distribution director at United Airlines. But online
agencies, he says, while automating selection and reservations,
don't push paperless, or electronic ticketing. The vast majority of
customers who buy from United's online service, in contrast, chose
E-tickets, which United says eliminates fourteen accounting and
processing procedures. Airlines also say online agents' frequent
offloading of services, and the fee-sharing that it involves, adds to
costs. "Here's a medium that's designed to allow the
customer and supplier to deal directly, and now you've got two in
the middle," says Al Lenza, managing director for distribution
planning at Northwest Airlines Inc.(27)
The reduction in travel agent commissions is part of an overall
strategy by airlines to respond to cost pressures, changing customer
demands, and emerging uses of IT. For example, airlines have also
reduced their payments to credit card firms and put pressure on firms
operating CRSs to limit increases in the fees charged to carriers, as
well as the number of charges incurred by airlines for each
CHALLENGES FACED BY THE TRAVEL AGENT INDUSTRY
Travel agents currently play three key roles. First, they act as
information brokers, passing information between buyers and suppliers of
travel products. Second, they process transactions by printing tickets
or forwarding money. Third, they act as advisors to travelers.
IT will profoundly affect the first two roles and force travel agents
to focus on the third, advisory role. Travel agencies can play a
valuable role by using IT to assist the consumer in dealing with the
complexity of the marketplace.(29) Despite incentives to do so,
travelers will not always want to approach travel suppliers directly.
Some agencies have set up Web sites that allow prospective travelers to
compare schedules and fares from different airlines, in effect
repositioning the agencies as electronic intermediaries that offer
The decline in commissions paid by airlines illustrates the
fundamental dilemma facing travel agents. As the agents' revenues
decline, labor, IT, and administrative costs continue to increase. In
particular, IT costs have become a major barrier to entry for agencies.
CRS charges to agents for both monthly rental and for each transaction
are significant, and a firm that wants to make investments in other IT
infrastructure and an Internet presence faces major expenditures.
Accordingly, the minimum volume of business required to support an
agency's overhead costs has led to widespread travel agency
closures and consolidations.
There is a trend towards a dichotomy in the structure of the travel
agent industry. Large agencies are emerging that are focused on major
corporate clients and that have the market power to negotiate
compensation structures with airlines. Travel agencies which leverage IT
can also provide services such as travel cost management for
corporations, and ensure compliance with corporate policies for employee
travel. For example, Rosenbluth Travel, a large Philadelphia-based
agency, provides Wal-Mart employees with desktop access through the
Wal-Mart Local Area Network (LAN) to air, hotel, and rental car
The Rosenbluth system is programmed to ensure compliance with
Wal-Mart travel policies, and links directly to the Wal-Mart financial
system. Smaller companies which do not require LAN access can use
Rosenbluth's Web site, accessible through the Internet or direct
dialup.(31) Proprietary information systems such as Sabre's
Business Travel Solutions, which support strong customer relationships,
combined with flexible use of technology, will emerge as a key
competitive tool for these large agencies.
At the same time a viable core of smaller travel agencies is
developing. These will be focused on the needs of leisure travelers and
small businesses, and may use off-the-shelf technology, perhaps combined
with an Internet presence, which could support a small firm providing
specialized expertise. Smaller agencies will also tend to concentrate
more on non-airline revenue sources such as tours and cruises because
airline commissions for simple trips will no longer even meet the cost
of issuing those tickets.(32)
Many travel agencies have begun charging for ticketing low-cost
flights, and there will be some demand for this type of service because
of the requirement to search for low fares, which justifies the
additional charges for busy travelers. However, this search could be
carried out by either a local travel agency or an agency with an online
presence. A related point is that the ability to make travel
arrangements online adds to the complexity of the consumer
decision-making process by adding options to consider, and to the risks
that might be associated with those options.(33) One industry observer
gave a somewhat pessimistic view of making travel arrangements online:
By the time you get your PC booted up, log into an Internet provider,
sign up for a Web site, figure out how to use the search engine, and
sort out the airport codes, you may need a vacation. Unless you're
a do-it-yourself type who enjoys playing around online, you'll
probably want to rely on a travel agent to hammer out the details -
provided yours is knowledgeable.
In the not-so-distant future, though, online agents may gain the
edge. Imagine watching videos of beach resorts you're considering
for a vacation and getting a look at the room you want to book. Or
receiving a single weekly bulletin alerting you to last-minute bargains
at airlines and hotels that are trying to shed unsold inventory.(34)
As travel agencies consolidate, brand names will become important,
and there will be an increasing need for agencies, large and small, to
differentiate their offerings by adopting strategies providing some
combination of cost advantage, product leadership, and customer
Travel agents are an example of a mature industry offering
commodity-like products. The travel industry is currently undergoing a
major transition due to a shift in distribution channels which reflects
the impact of IT. Business and leisure travelers are increasingly aware
of the travel options available to them, and favor user-friendly
software that gives them direct access to relevant information.
However, travel providers such as airlines have a vested interest in
steering the traveler toward their own services, leading to considerable
justification for the continued presence of agencies. Travel agents also
provide value-added services by integrating the needs of carriers with
those of travelers, and continue to be in a unique position to develop
value-added services to leisure travelers and corporate clients.
However, the highly competitive nature of the travel industry and
declining commissions paid by airlines will lead to widespread travel
As in other industries, the emerging challenge is to use IT to
exploit the core competencies of the travel agent, and support the
ability to transform easily available data into information that
provides competitive advantage by creating new knowledge? The outcome
will depend on travel agencies' abilities to capture the
market's loyalty, ensure access to travel information while
providing value-added services, and develop winning product strategies
supported by information technology.
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3 Duncan G. Copeland and James L. McKenney, "Airlines
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8 Patrick Butler et al, "A revolution in interaction," The
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10 Robert I. Benjamin and Roll Wigand, "Electronic markets and
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12 Thomas W. Malone, "Modeling coordination in organizations and
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14 Laura Ramsay, "Now boarding - on the Web," Financial
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15 Sarkar, Butler, and Steinfield, op. cit.
16 Joseph P. Bailey, "The emergence of electronic market
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17 Transportation Research Board, Winds of change: Domestic air
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18 Alexander Talalayevsky and James C. Hershauer, "Coordination
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20 Marc Gunther, "Travel planning in cyberspace," Fortune,
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25 Gary McWilliams, "Clipped wings on the web," Business
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26 Belinda J. Grant, "Trends in US airline ticket
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28 Grant, op. cit.
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30 Wildstrom, op. cit.
31 Rob Walker, "Back to the farm," Fast Company, Issue 7,
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33 Strader and Shaw, op. cit.
34 Gunther, op. cit.
35 Michael E. Porter, Competitive strategy: Techniques for analyzing
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36 Ikujiro Nonaka, "The knowledge-creating corporation,"
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Mr. Lewis is research officer in the Management Renewal Services
Branch, National Defence Headquarters, Ottawa, Ontario K1A OK2 Canada;
Mr. Semeijn is associate professor of international business and
logistics, Faculty of Economics and Business Administration,
Universiteit Maastricht, 6200 MD Maastricht, The Netherlands; Mr.
Talalayevsky is assistant professor of information systems, School of
Business and Economics, Chapman University, Orange, California 92866.