Six Characters In Search of a Strategy
Big-company partners putting the squeeze on. Technology undermining the value of your services. Sound familiar? As travel agents are discovering, the new economy can force you to find a whole new way to make money
On the surface, the plight of travel agents seems pretty simple. It also seems unusual, meaning that it's their problem and not yours. Hah! Life should be so easy. Our bet is exactly the opposite: what smart travel agents are doing right now -- learning how to make money in whole new ways, because the old ways don't work anymore -- is exactly what a lot of businesses will have to do over the next several years. Travel agents are just going through it first. See if you agree.
The basics of travel agenting are about as straightforward as business gets. Customers call for a flight, a cruise, a hotel reservation. The agent finds out what's available, maybe offers a little advice, and books the transaction. The bread and butter of most agencies has always been commissions on airline tickets, which account for three-fifths of the typical company's revenues. For years, agents pocketed a 10% commission on every ticket sold.
That moneymaking arrangement has never been a pot of gold -- most agencies are low-margin operations with maybe seven or eight employees -- but it has kept a lot of small companies in business (with the perks enjoyed by travel agents everywhere). It has also provided a foundation for some savvy, fast-growing enterprises. Aggressive, entrepreneurial agents could collect fat cash "overrides" from airlines they did a lot of business with. They could compete on price by offering discounts to good clients. They could compete on service by (for example) supplying a company's full range of travel needs.
Then, a year ago, came a temblor that felt to travel agents like 8.0 on the Richter scale of the marketplace.
The initial shock wasn't so bad. Delta merely announced it was ending the 10% commission. From then on it would pay agencies no more than $25 for a one-way domestic flight and $50 for a round-trip. No problem, said agents blithely, we'll just direct business to other carriers. But then the main quake hit. Nearly all the other airlines followed Delta's lead.
That's when the roof seemed to cave in. Local newspapers ran stories on the impending demise of mom-and-pop agencies. The American Society of Travel Agents predicted that up to 30% of agencies would be put out of business. (ASTA also filed a suit against the airlines for collusion. Don't hold your breath.) After a year the shakeout doesn't appear quite so devastating -- but it isn't business as usual, either. The commission cap "absolutely cost me a million dollars," moans Jeffrey Smith of Fugazy Executive Travel, in Boston, an Inc. 500 company in 1995. "If we had been a public company, our stock would have dropped from 10 to one -- and I wouldn't have told anybody to buy it at one." Meanwhile, the vultures are circling the industry's small players. "We see some major opportunities for our company," says Hal Rosenbluth of industry giant Rosenbluth International, who announced last spring that he would be hiring extra people to pick up business from failing small agencies.
If the commission cap were the industry's only problem, it would indeed be self-contained and thus uninteresting to anybody not related to a travel agent. It would probably lead to a modest shakeout, with the surviving companies being a little savvier, a little bigger, a little better at what they do. The reality, though, is that the caps are only the most visible sign of tectonic shifts in the marketplace -- shifts peculiarly characteristic of today's new economy. Those shifts are shaking the ground under a lot of industries, not just travel agents.
Consider what a travel agent really does, and you'll see the parallels.
At root, agents are brokers of information. They're like stockbrokers, real estate agents, consultants, publishers, and any number of other businesspeople. Their stock in trade is what they know and what they can find out. But the flow of information these days, as every fact- and opinion-monger knows, is being utterly reshaped and rechanneled by new computer networks. You hardly need a real estate agent if you can call up on the screen a fully indexed and illustrated list of all your city's homes for sale.
Agents are also distributors. Like any distributor, they occupy a niche on the economic food chain between producers and their customers. But distribution today is a notoriously perilous business. Producers may decide to muscle you aside. (Think of the pharmaceutical manufacturers that have bought up big mail-order drug-distribution houses, and be glad you don't own a local pharmacy.) Customers or other companies may figure out ways to bypass you entirely. (Ask a convention of supermarket owners how they feel about Wal-Mart's superstores.)
Right now, travel agents are facing a bevy of threats on both fronts.
The information they peddle -- notably about airline schedules and fares -- is more and more widely available, no travel agent required. Two years ago American Airlines introduced "Eaasy Sabre" on America Online. A simplified version of the system used by agencies, it lets people make reservations from their home computers. Other suppliers are following suit: United Airlines and Microsoft, for example, have announced a deal for an on-line service designed to turn PCs into "desktop travel systems." On the corporate side of the business, "agentless" software such as TravelNet's Resolution 2.0 helps companies do for themselves most of what a travel agent traditionally did for them: tap into airline booking systems, implement corporate travel policies, take care of travel-and-entertainment cost accounting, and so on. Bragged TravelNet chairman John Schoolery to an industry reporter, "We know that we can save 10% to 20% off T&E above and beyond what travel agencies can do."
Alternative distribution systems are cropping up all over as well. Retailers such as Costco have begun issuing discount airplane tickets. Southwest Airlines sells tickets through the Internet and is setting up big in-house reservations offices to handle telephone business. Upstart airline ValuJet does 80% of its business directly with passengers, saving about half the customary distribution cost. A company called Docunet is installing automated ticket-printing machines in locations such as offices and supermarkets; customers with reservations can swipe their credit cards through and get a ticket on the spot. Another company, Business Travel Contractors Corp. (BTCC), is attempting to set up direct relationships between the airlines and large travel buyers. Agents would still write tickets under the plan -- but they'd be working, in effect, for BTCC and would get only a flat fee for every ticket written.
So what's a travel agent to do? What, indeed, is any company in similarly uncertain circumstances to do? Ask travel agents that question, and a lot of the answers you'd get are predictable. Serve the customer better. Deliver more value. Cut costs. It's the usual range of business nostrums, and in ordinary times it might be enough.
But these are far from ordinary times, and a few companies in the travel business seem to know it. Instead of trying to do the same old thing, only better, they're trying to come up with new ways of adding value and hence new ways of making money. They're thinking, as the saying goes, outside the box.
On the next few pages, we profile six of those revolutionaries. Check out their strategies -- because your industry may be next on the new economy's Richter charts.* * *
Location: Austin, Tex.
Number of employees: 88
CEO: Gary E. Hoover
Strategy: Revamp the way travel is sold
Gary Hoover founded the Bookstop chain of book superstores, which he and his partners then sold to Barnes & Noble for close to $42 million. Looking for another business to get into, he cast an incredulous eye on the travel-agent industry.
"It was as if all the retail revolution of the past 20 or 30 years had completely missed the travel business," he says. Agencies closed at 6 o'clock. They weren't open weekends, though their ads typically ran on Sundays. Their offices were drab and uninviting. They did most of their business over the phone, rather than face-to-face. Resolving to yank travel out of the retail Stone Age, Hoover created what he styles as the Home Depot of the industry.
Walk into one of Hoover's two Travelfest stores and you know you're not in Kansas anymore -- or at least that you don't want to be. Fourteen video monitors are going at once. Four backlighted walls show slides from different parts of the world. The light fixtures are globes, the ceiling a giant mural. A full-size replica of an airplane wing projects from the wall over the reservations center.
The stores -- one with 6,000 square feet, the other with 10,000 -- sell some 20,000 travel-related items: Books. Videos. Maps. Luggage. Water purifiers. Customers can pick up visa applications and check out the Hotel and Travel Index, widely used by travel agents (and almost never by their clients). Europe gets its own room, complete with language books and tour information. So does the United States, as well as Asia and Africa, and Latin America and the Caribbean. Kids get a room of their own: Geofun, it's called. A "learning center" offers 20 classes every month on travel-related subjects, from Spanish classes to how to overcome the fear of flying.
Oh, yes: the store is open from 9 a.m. to 11 p.m., seven days a week. It also accepts mail and telephone orders.
Hoover's business model? More than 80% of his revenues, he says, come from ticket sales, mostly to leisure and small-business travelers. He doesn't sell a lot of domestic flights priced at more than $500, so the commission cap doesn't affect him greatly. (The cap doesn't apply to international flights.) Then there's all that other stuff. It accounts for less than 20% of the stores' revenues, says Hoover, but considerably more than 20% of the profits. And it gets customers in the door, where he can sell them travel.* * *
Company: Capitol Prestige Travel
Location: Sacramento, Calif.
Number of employees: 128, excluding home-based agents
CEO: Derek Messenger
Strategy: Change the service-delivery model
Derek Messenger of Capitol Prestige Travel, which is a franchise of Carlson Wagonlit Travel, likes to market big: he spends $1 million a year on statewide travel ads and infomercials about discount cruise sailings. Call his toll-free number and you can sign up.
Other agencies, however, have foundered on these rocks. It's no trick to get people to call. The trick is to have enough trained people on hand when the calls roll in, without running up huge fixed expenses that eat into margins. No agency can just add agents and office space and computers unless it can produce a corresponding amount of revenues 40 hours a week.
Messenger's solution: Why rely on highly trained agents? Why 40 hours a week? Why not independent contractors working out of their homes -- agents who would pay for the privilege of affiliating with a well-known agency?
Bingo. Since December 1994, Capitol Prestige has been setting people up in the travel business in their own homes. The home-based contractors -- who live in places as far away as Florida and Hawaii -- pony up $7,800 apiece. In return they get a computer; software that connects them to Sabre, a large nationwide computerized reservation system; and a hookup to a Capitol Prestige phone line, which channels calls to them. They also get training -- eight days' worth. "They don't need to know everything a regular travel agent does," says vice-president Daniela Devitt, "because they don't handle the paperwork."
In fact, Capitol Prestige takes care of all the marketing and all the backup, including handling the tickets, collecting the money, and providing a help line for home agents who run into problems. It pays the home agents commissions ranging from 35% to 70% of the agency's commission. In the past year Messenger has signed up 80 contractors, nearly all of them with no industry experience -- and he's ecstatic about how it has worked out. "They're nonindustry people, but their sales reflect those of people who have been in the industry two, three years," he says.
The business model? Simple: Turn fixed costs into variable costs, thus permitting large-scale marketing. Make sure your systems and training procedures are sufficient to ensure quality. Oh, yes -- you can also sell the special phone system to travel agencies and other businesses that might welcome a home-based sales force. Messenger and Devitt have recently set up a company called Home Service Bureau Inc. to do just that.* * *
THE WEB DENIZEN
Location: Raleigh, N.C.
Number of employees: 20
CEO: George Newsom
Strategy: Create a new electronic distribution channel
Back in 1993 George Newsom was doing well with a national 800-number reservation service. Too well, in fact: he couldn't hire enough agents to handle the volume it generated, and he felt he didn't have the management infrastructure to support so large an operation. So he headed off in a new direction, starting an on-line booking system under the name PCTravel, and sold the 800 operation. First he set up a modem service for booking tickets, then an all-text service on the Internet.
Today PCTravel has its own home page on the World Wide Web and claims 70,000 registered users. Customers navigate to the Web page anytime of the day or night. They select a reservation -- fares and schedules are updated in real time, through an interface with Apollo, another nationwide computerized reservation system -- and enter a credit-card number. A ticket is in the mail the next day.
For now PCTravel's business model is pretty simple. Marketing costs are virtually nil. The company has spent nothing on advertising, relying instead on "search engines" and partnership arrangements that guide Web browsers to its services. Since the customer does much of the work, PCTravel can handle more business with its eight agents than a conventional agency can with two dozen. On the other hand, it took the company a sizable amount of time and money -- eight years and "well into seven figures," says Newsom -- to learn the intricacies of on-line selling. ("We zigged when we should have zagged," acknowledges marketing vice-president David Lea.) And competitors are already cruising the same branches of the information highway.
Can Newsom, Lea, and company fend them off? They're counting on having been there first -- and on improving their service while competitors stumble over the hurdles PCTravel has already cleared. "If a small-town gas station is the first to get a prominent location on a busy corner, it will always have an outsized share of the market," says Lea. "We are establishing that corner position."
THE NICHE PLAYER
Company: Aspen Travel
Location: Jackson Hole, Wyo.
Number of employees: 15
Owners: Randle Feagin and Andy Spiegel
Strategy: Specialize in one service-intensive niche
A few years ago Aspen Travel was your generic agency: a little corporate travel, a little leisure travel, a little market. The customer base seemed to end at the craggy peaks and boundless plains that hem in isolated Jackson Hole. Wyoming seemed a poor locale for building a strong corporate clientele. Then a film-production company from Los Angeles did a shoot in Jackson -- and Aspen did such a great job handling its travel that the company retained the agency for trips to other locations. Owners Randle Feagin and Andy Spiegel decided they had found the niche that would get them beyond their solitary mountain village.
Today the partners do 85% of their work for production companies in cities such as Los Angeles, New York, and Miami. The business has roughly tripled in size, to 15 agents; word of mouth in the close-knit world of film production does Aspen's marketing for it. Faxes and remote ticket printers allow the agency to operate at a distance. Aspen's growing expertise allows it to outperform would-be competitors -- or so Feagin and Spiegel hope.
It is, after all, not your ordinary niche. Aspen's agents must know things like how to get an AT&T phone booth to a location in Belize -- or how to transport penguins to Moab, Utah, without having them collapse from heatstroke. They must cater to the whims and egos of directors who call from London at 3 a.m. to make sure their limo will be stocked with Pepsi rather than Coke. They must know how to track down video equipment in Thailand or accommodate a last-minute destination change for a crew of 20.
The business model is based on such hard-to-acquire expertise. "We try to know what the customer is going to need and do it before they ask us for it," says Spiegel. "We don't sit back as order takers ready to write tickets."* * *
Company: Travelogue Inc.
Location: Washington, D.C.
Number of employees: 150
CEO: Osman Siddique
Strategy: Boost productivity and service through new distribution technology
ATMs -- airline ticketing machines, in this case -- "just won't work," says one travel agent. "The one thing agents can't afford now is one more bite out of their ever-decreasing commissions." Osman Siddique begs to differ. His agency happily pays a company called Docunet $4 for every ticket printed on one of Docunet's 50 (and soon to be 150) remote printers in the capital region.
Until recently, Travelogue was an ordinary successful agency, serving a mix of corporate and leisure clients from 42 retail offices and 20 on-site placements. Then along came Docunet, announcing its intention to install automated ticketing machines in corporate offices, office-building lobbies, even Giant food stores. The $4 fee charged by the company would be less than delivery by Federal Express and not much more than the cost of delivery by regular mail. It would also be one heck of a lot quicker and more flexible. Siddique signed up.
Today, Travelogue sells leisure-time travel over the phone but allows clients to pick up their tickets at a nearby Docunet machine anytime of the day or night. Employees such as David Coffman are stationed in the offices of large corporate clients with a Docunet machine and custom software at their disposal. "A lot of travel agents do see this technology as a precursor to their demise," says a Docunet spokesperson.
Not Siddique -- and not Coffman, who works out of the offices of Fila USA, the big sportswear company. "Fila does a lot of last-minute and after-hours work," Coffman explains, which would make a traditional ticketing system too cumbersome to use. Coffman alone handles an annual travel volume of more than $3 million, enough to keep three conventional agents busy. With the machine, he says, the agent becomes less of a service deliverer and more of a consultant, kept on retainer to ensure quality control and generate data such as cost reports.
The business model: use technology not only to boost productivity but to increase flexibility. A ticket that's printed at the last minute can be changed right up to the last minute, without messy paperwork. Both Siddique and Docunet confidently predict that this type of ATM will one day be as ubiquitous as the other kind we know so well.* * *
THE BUYER'S AGENT
Company: Premier Travel Partners
Number of employees: 152
CEO: H. Gene Nau
Strategy: Collect revenues from a different customer
Funny thing about travel agents: like real estate agents, they're expected to serve both buyer and seller, but they're traditionally paid entirely by the seller. Conflict of interest? Customers sometimes wonder, particularly because agents can earn hefty bonuses by steering passengers to particular airlines. Still, agents were never willing to charge travelers for their services as long as other agents were delivering them free -- until the commission cap. "I was always considered an amusing eccentric," says industry consultant and longtime advocate of fee-for-service agenting Robert Joselyn, until the arrival of the cap. "That day I was a prophet by dinnertime."
In the past year, many agencies have begun charging fees for some of their services. Nearly all have occupied a sort of middle ground, assessing modest service charges while still collecting commissions from suppliers. One exception to that rule is Premier Travel Partners, an agency that has created a new business model by redefining who its customer is.
Premier, which serves mainly corporate clients, gives clients all the commissions (and most of the overrides) it earns on their accounts. The client pays for the cost of an on-site agent. In addition, some clients pay separate fees for every travel transaction, while others merely pay Premier a fixed monthly rate. The result: the agency's revenues come from the client, not the supplier.
How does Premier set the fees? When negotiating terms with a client, Premier opens its books to show what its costs are. "We say, 'Look, we're not in the travel business to lose money, but we're not out to gouge you,' " says chief financial officer Steve Goden. If profits on an account turn out to be too small, Premier will raise the fees. And it will lower them if earnings are bigger than expected. Customers can audit Premier's books anytime they want to. Some have.
Premier now offers services such as sophisticated management reports and information-systems work that it couldn't offer when the customer got everything "free." Customers, says Goden, are happy with the setup. "Clients finally feel that the travel agent is working for them, not for the airlines or the hotel companies. The umbilical cord between the client and the travel agent is tight, and it's our responsibility to focus on serving the account as best we can."