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The impact of information technology on travel agents.
Abstract:
The advent of information technology (IT) is causing major changes among travel agents as a result of a shift in distribution channels. Electronic commerce, for instance, is reducing the roles of travel agents as information brokers and processors of transactions with the introduction of electronic ticketing services by airlines. Travel agents are also experiencing a decline in commissions and revenues and a corresponding increase in labor, IT and administrative costs. Travel agents need to use IT to their advantage by exploiting their core competencies.

Subject:
Travel agents
Airlines
Information technology (Usage)
Travel industry
Authors:
Lewis, Ira
Semeijn, Janjaap
Talalayevsky, Alexander
Pub Date:
06/22/1998
Publication:
Name: Transportation Journal Publisher: American Society of Transportation and Logistics, Inc. Audience: Academic; Trade Format: Newsletter Subject: Business; Transportation industry Copyright: COPYRIGHT 1998 American Society of Transportation and Logistics, Inc. ISSN: 0041-1612
Issue:
Date: Summer, 1998 Source Volume: v37 Source Issue: n4
Product:
Product Code: 4721000 Travel Agents; 4510000 Scheduled Airlines; 9912600 Information Systems & Theory NAICS Code: 56151 Travel Agencies; 4811 Scheduled Air Transportation SIC Code: 4724 Travel agencies; 4510 Air Transportation, Scheduled, And Air Courier Services
Accession Number:
21089568
Full Text:
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 airline reservations.(2)

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 diminished.(7)

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 discussed below.

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 space.(22)

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 market:

* 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 price.(24)

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 traveler.(28)

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 significant value-added.(30)

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 reservations.

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 focus.(35)

CONCLUSION

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 agency consolidation.

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.

ENDNOTES

1 Joan M. Feldman, "Sticker shock," Air Transport World, 34(4), April 1997, 67-71, "Agents squeezed as carriers chop commissions," Financial Post (Toronto), October 18-20, 1997; Helen Johnstone, "Internet threatens agents' survival," Asian Business, 32(9), September 1996, 64-66; Lisa Miller, "United Airlines to reduce travel-agent commissions," The Wall Street Journal Interactive Edition,September 1, 1997 (http://www.interactive.wsj.com).

2 Andrew Tausz, "Internet bookings await takeoff," The Globe and Mail (Toronto), September 23, 1997; Stephen H. Wildstrom, "The PC travel agent takes off," Business Week, February 17, 1997, p. 18.

3 Duncan G. Copeland and James L. McKenney, "Airlines reservations systems: Lessons from history," MIS Quarterly, 12(3), September 1988, 353-370.

4 Michael Bloch and Arie Segev, The impact of electronic commerce on the travel industry: An analysis methodology and case study, Fisher Center for Information Technology and Management, Walter Haas School of Business, University of California (Berkeley), June 1996 (http://haas.berkeley.edu/-citm/trav-proj/travel.htm).

5 Ira Lewis and Alexander Talalayevsky, "Travel agents: Threatened intermediaries?" Transportation Journal, 36(3), Spring 1996, 26-30; Mitra Barun Sarkar, Brian Butler, and Charles Steinfield, "Intermediaries and cybermediaries: A continuing role for mediating players in the electronic marketplace," Journal of Computer-Mediated Communication, 1(3), December 1995 (http://www.usc.edu/dept/annenberg/voll/issue3/sarkar.html).

6 Thomas W. Malone and Kevin Crowston, "The interdisciplinary study of coordination," ACM Computing Surveys, 26(1), March 1994, 87-119; Thomas W. Malone, JoAnne Yates and Robert I. Benjamin, "Electronic markets and electronic hierarchies," Communications of the ACM, 30(6), June 1987, 484-497.

7 Vive Choudhury, "Strategic choices in the development of interorganizational information systems," Information Systems Research, 8(1), March 1997, 1-24.

8 Patrick Butler et al, "A revolution in interaction," The McKinsey Quarterly, Issue 1997/1, 4-23; Ravi Kalakota and Andrew B. Whinston, Frontiers of Electronic Commerce, Reading, MA: Addison-Wesley, 1996, p. 40; Paul Hart and Carol Saunders, "Power and trust: Critical factors in the adoption and use of electronic data interchange," Organization Science, 8(1), January-February 1997, 23-42; Christopher P. Holland and A. Geoffrey Lockett, "Mixed mode network structures: The strategic use of electronic communication by organizations," Organization Science, 8(5), September-October 1997, 475-488.

9 Troy J. Strader and Michael J. Shaw, "Differentiating between traditional and electronic markets: Toward a consumer-based cost model," 1997 Association for Information Systems Proceedings (http://hsb.baylor.edu/ramsower/ais.ac.97/papers/strader.htm).

10 Robert I. Benjamin and Roll Wigand, "Electronic markets and virtual value chains on the information highway," Sloan Management Review, 36(2), Winter 1995, 62-72.

11 "See Malone, Yates, and Benjamin, op. cit., and Bloch and Segev, op. cit.

12 Thomas W. Malone, "Modeling coordination in organizations and markets," Management Science, 33(10), October 1987, 1317-1331.

13 Ibid.

14 Laura Ramsay, "Now boarding - on the Web," Financial Post (Toronto), September 18, 1997; Tausz, op. cit.

15 Sarkar, Butler, and Steinfield, op. cit.

16 Joseph P. Bailey, "The emergence of electronic market intermediaries," Proceedings of the 17th International Conference on Information Systems, 1996, 391-399.

17 Transportation Research Board, Winds of change: Domestic air transport since deregulation, Washington, DC: National Research Council, 1991, p. 287.

18 Alexander Talalayevsky and James C. Hershauer, "Coordination cost evaluation of network configurations," Journal of Organizational Computing and Electronic Commerce, 7(2&3), 1997, 185-199.

19 Figure 2 is adapted from Talalayevsky and Hershauer, op. cit.

20 Marc Gunther, "Travel planning in cyberspace," Fortune, September 9, 1996, 187-188; Danna K. Henderson, "Commission costs nosedive," Air Transport World, 33(10), October 1996, 104-106.

21 Joan M. Feldman, "Surf's up for distribution," Air Transport World, 32(6), June 1995, 169-174. 22 Bloch and Segev, op. cit.

23 Ibid.

24 Perry Flint, "Delta's 'shot heard round the world,'" Air Transport World, 32(4), April 1995, 61-65.

25 Gary McWilliams, "Clipped wings on the web," Business Week, May 12, 1997, p. 48.

26 Belinda J. Grant, "Trends in US airline ticket distribution," The McKinsey Quarterly, Issue 1996/4, 179-184.

27 McWilliams, op. cit.

28 Grant, op. cit.

29 J.G.M. van der Heijden, "The changing value of travel agents in tourism networks: Towards a network design perspective," in Stefan Klein et al, ed., Information and communication technologies in tourism, New York: Springer-Verlag, 1996, 151-159.

30 Wildstrom, op. cit.

31 Rob Walker, "Back to the farm," Fast Company, Issue 7, February-March 1997, 112-122.

32 Grant, op. cit.

33 Strader and Shaw, op. cit.

34 Gunther, op. cit.

35 Michael E. Porter, Competitive strategy: Techniques for analyzing industries and competitors, New York: The Free Press, 1980.

36 Ikujiro Nonaka, "The knowledge-creating corporation," Harvard Business Review, 69(6), November-December 1991, 96-104; Claudio U. Ciborra, Teams, markets and systems: Business innovation and information technology, New York: Cambridge University Press, 1996, p. 183.

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.
Gale Copyright:
Copyright 1998 Gale, Cengage Learning. All rights reserved.