Viewpoint

Desperate times calls for desperate measures

Vipul Jain CEO & Managing Director Kale Consultants Ltd, India

Early last month I was asked to moderate a panel discussion at the Travel World event in Mumbai, where the topic was "Future of the Airline - Travel Agent Relationship". On the panel, we had the Chairman and Managing Director of Air India as well as some very eminent representatives of the travel trade. A few minutes into the discussion and the enormity of change taking place in the travel industry became very apparent along with the pain and fear that such change inevitably brings.

When air travel started, airlines needed to reach out to customers across the world and the only effective distribution method was to appoint agents across the globe. At the same time, customers needed help in travel planning and the travel agent played a very important advisory role. Air travel was expensive, volumes low and thus a commission of as much as nine per cent or more was justified as the cost of doing business. Competition in the airline industry was limited due to governmental control over licensing of new entrants, bilateral agreements between countries, regulation of fares etc. Travel agents and airlines worked largely within a set of rules agreed upon by all players.

The fallout

This cozy relationship between airlines and travel agencies has been completely disrupted in the last decade and more particularly in the last five years. Airlines have come under severe competition as new airlines have started and a more liberal bilateral regime implemented. In India for example, entrants like Air Deccan, Spice Jet, Kingfisher and Go Air have started operations. The frequency of international flights from airlines like Singapore Airlines, British Airways, Emirates, Qatar Airways have multiplied manifold, while airlines like Jet, bmi, Virgin have entered the Indian market. This increased competition has meant that air fares and yields have dropped in the last few years by as much as 20-30 per cent.

At the same time, the increase in fuel prices has hit airlines very hard. Security and insurance costs have increased over the years due to global terrorism risks. These have added to the pressure on margins and airlines have had to look very hard at how to control their costs. An obvious target is the distribution cost, which traditionally was as much as 14 to 16 per cent. Over the past five years, airlines across the world have reduced and even eliminated commissions in certain markets like US and Europe. India is no exception to this global trend with commissions falling from nine to seven per cent in 2001 and then to five per cent in 2004.

Advent of technology

However, the most silent and disruptive force to affect the traditional airline-travel agent relationship has been the growth of the internet and e-commerce in travel industry. The internet allows an airline to sell directly to end customers across the world. Sitting in his office or home, a customer can plan the travel, evaluate options, shop for lowest prices, pay for the trip and receive the ticket. With adoption of e-tickets, even the need to send tickets by courier service is eliminated. The airline and the customer can transact directly with each other irrespective of where they are located and while doing so, the 'middle man' role of the travel agent risks becoming redundant.

The growth of internet travel sales has been phenomenal - in 2005 an estimated US $113 billion worth of travel products were bought on-line. In the US an estimated 65 per cent of airline domestic sales are done on-line. In Europe, the number is currently 30 per cent but there is no doubt that the numbers will grow. Asia and India are not far behind.

LCCs take the pie

The Low Cost Carriers are the trendsetters, they give zero commission to the travel agents. If the customer goes to a travel agent instead of booking directly on their e-commerce site, then they have to pay a fee to the travel agent for that service. Even in India, the paradigm is here to stay - Air Deccan for example sells nearly 50 per cent of it's travel product directly, the remaining is booked by travel agents, who add a Rs 100 fee to the fare (approx five per cent) for providing their customer the booking service.

Thus, the writing on the wall is clear. Firstly, airline commissions to travel agents will continue to drop and the day of zero commissions is not far away. Secondly, airlines and other suppliers such as hotels will continue to make efforts to attract consumers to buy directly from them. Thirdly, pricing is going to become more transparent and the consumer will be able to do comparisons and shop very easily.

Does this mean the death of travel agents? With declining prices points and commissions and the airlines going to customers directly how will the travel agent survive? Are we beginning to see the end of an industry that includes more than 3,000 IATA recognised travel agents and 40,000 smaller non-IATA travel agencies?

The answer is NO. Yes, the days of earning a large commission for just providing a commoditised booking service are going and will soon be gone. But the travel agency provides much more than a booking service - they provide travel advice, visa facilitation, packaging, consolidation etc. And the Indian travel market is one of the fastest growing markets globally with a Compunded Annual Growth Rate (CAGR) in excess of 20-25 per cent. Thus, the entire market is growing and travel agents too can leverage the internet to reach out to customers.

Need of the hour

However, travel agents need to add more value and become Travel 'Managers not Travel 'Agents'. Simul-taneously they need to reduce their cost structure and become more efficient. In short an opportunity and challenge for the travel industry to reinvent itself. And those who ignore the call for change do so at the risk of their survival.

What will the travel agency of the future look like? One thing that is clear is that a travel agent cannot continue to be all things to all people, but rather will need to take a more market-segmented approach and cater to the specific needs of chosen segments. Secondly, the services will need to be efficient and cost effective because unit costs and prices will continue to drop even as volumes increase. Thirdly, brand and scale will make a big difference as the market attracts new players including international companies.

Let us do some crystal-ball gazing at the shape that the travel industry is likely to take

Online travel agencies

If we look at the western markets, On-line travel agencies have become a very important feature in the travel industry landscape. In the US for example, Expedia, Travelocity and Orbitz between them sell approximately US $18 billion worth of travel products and have an estimated market share of 75 per cent. They cater to the individual traveller looking for a good deal primarily for leisure travel. These OTAs primarily sell flights, hotels and car rentals but now offer 'packages' which include all of these components. They provide very good 'deals', using their buying power to get good prices from airline and other travel content suppliers and technology to keep operational costs low. In India too the OTAs are coming. Makemytrip.com has been around for a while but there are at least three-four new entrants who recently have got venture capital funding and will soon be in the market.

Business travel agencies

Business Travel Agencies (BTA's) cater to the corporate traveler who is looking for convenience and high service levels. They have a good future as India Inc. does well and globalisation of the economy takes place. However, the market is getting more challenging with the falling commissions, influx of more international players and customers demanding more than just booking services. To face these multiple challenges BTA's will need to leverage technology and streamline business processes with particular focus on front office, mid-office and back-office integration and customer data management.

Tour operators

Another fast growth segment is that of Tour operators (TO). Tour operators package flights, hotels, meals, ground transportation and sight-seeing into tour packages. They offer a convenient and cost effective travel product for a leisure customer. All market segments - outbound, inbound and domestic are expected to grow rapidly. Tour operators require very strong operational excellence to deliver a quality experience that involves many different suppliers in the background. Also scale adds to their competitive advantage since they are able to consolidate demand and get good prices from their supplier network. To achieve operational excellence, build scalability and keep costs low, tour operators will need to invest in revamping their business processes and technology.

Retail outlets

As the travel market specialises into online travel agents, business travel agents and tour operators, many of the smaller travel agencies may transform into retail outlets. These retail outlets will give travel advice and facilitate customers to buy travel products from suppliers directly (eg airlines or hotels) or from online travel sites or tour operators. In our country, there will always be the need for facilitating customers that do not have internet access or familiarity with purchasing online. There are value-added services of travel advice, visa facilitation etc.

Travel agent - airline relationship

Airlines too, will need to take a more segmented approach to their customers and the distribution channel. While direct customer purchases will grow, the distribution channel will continue to be very important to airlines. However, the nature of the relationships and power in the channel will change. Airlines will need to match customer segments to distribution channels and consider how to provide value to both their partners and end consumer. The needs of a corporate business traveller are very different from a tour group traveller and so are the distribution channels.

In conclusion, the travel industry is undergoing fundamental changes. In the next five to ten years, there will be a churn in the players and a radical transformation of the industry structure and roles. There is a huge opportunity as never before with the opening up of the civil aviation sector and the growth of the economy creates ripple effects. The winners will be those who embrace change and transform their business quickly.

The author is CEO & MD Kale Consultants Ltd, India