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Travel Agencies are here to Stay

Posted on: 27 March '11

As the “Global Distribution System vs. Airline Direct Connect” tussle seems to have subdued a bit and has been off the media headlines for the past couple of months, I thought of sharing my views on the same. The thought process was triggered by Meeta’s insightful blog “Shaken or stirred – Are you connected?” and Vinod’s comments on it.

To begin with, international travel is a complicated affair when compared to domestic return journeys. In a domestic return journey, the end traveler, including the corporate customer, looks for the best value for money – the cheapest fare with a good service. He or she can also go to the airline site and book the tickets.

But in an international journey, it’s a lot more complicated: multiple leg flights, immigration port formalities, travel/health insurance, baggage allowance provided by various airlines for each travel segment and add to that, the travel package which includes car, hotel and tour operator bookings, it simply becomes more complex for the traveler, be it leisure or corporate.

Wherever there is complexity, we need middlemen to reduce the complexity for the consumer. Also, the products need international reach (distribution), otherwise they will not get sold in the global market.

Though the internet seems to be eliminating the role of the middlemen (read agencies), the complex nature of the products will never allow this to happen. Direct Connect by suppliers (be it airline, hotel, car) is not the solution for this problem for the end customers. Any supplier who looks at tapping the international market needs to have access to the sales and more importantly, service channels. Where ever there is a physical product or necessity to provide physical service (not electronic service), the suppliers/manufacturers will need the distribution system which would include trained travel agencies.

The same will be applicable for the Airline Direct Connect solution as well. From the end user perspective, the end travelers need,

  • Single channel to access multiple supplier inventories
  • Competitive pricing information comparison
  • Comparison services being offered either a la carte or packaged (merchandising)
  • Dynamic bundling in terms of hotel, car, air, insurance and tourist products

From the travel agencies’ perspective,

  • Travel agencies need incentives from either the distributor or airline for their survival/profit margins
  • Travel agencies get sign on bonus from distributors (from GDS) which lowers the entry barrier for their business, in turn good for the end consumers
  • The travel agencies get more revenue depending on the sales volume slabs (from the GDS contracts) which increases sales for any supplier
  • Depending on the size of the agency, they can provide service at the point of sale or through call center (human touch points which is important for repeat business) or at the place of destination through other partner agencies.

I do not think that Direct Connect is here to solve any of the above needs. Its primary goal is cutting costs for the supplier at the cost of future sales. In my personal experience with one of the full service carriers in India, the airline call center rates were cheaper than the airline website fares! Now, thinking about the direct connect complexity and the much debated “full content availability” across multiple sites, online travel agency (OTA) sites, travel agencies, etc., it is going to be much more complex and confusing for the end users to hunt for their value for money deals!

On the contrary, it is interesting to note that even some of the Low Cost Carriers have started looking at other sales channels – travel agencies and distributors – to increase their revenue by giving accessibility of the product to multiple markets. Any supplier who needs multiple market reach, with multiple customer segment access, cannot continuously avoid distribution and sales channels.

If the supplier needs market reach with reduced complexity, the chain needs a distributor and its agencies. Another point that I have seen put forward as an argument, is that, GDS technology is dated and it has difficulty in supporting merchandising capabilities, fair break up, etc. (I read somewhere that a huge percentage of air bookings touch upon Mainframe transactions till date!).

I think GDS will wake up to this call and update their technology to support the same. Note that CRS/GDS are the founding fathers of the travel e-booking, which, dates back to the late sixties. As time went by, during the last decade or so, GDS has responded with OTA solutions, having modified contracts with the suppliers to accommodate ‘debatable’ full content, coming up with corporate booking tools and geography specific point of sale solutions.

Still, one third of the US Total Travel Market Share (Gross Bookings) is through GDS, which is almost 100 billion USD. Most of the GDS are already working on improving the financial models and technological solutions. Either they need to invest now and continue to be the distributor, or some other player like Google/ITA with lot of capability (read finance) will substitute them in due course.

In essence, for another decade at least, the travel distributors and agencies are here to stay. People who respond to the market needs will survive or we will see new players taking up those roles.

  • Sudhir

    Nice Article Jas 🙂

    OTA might change forms, but will stay ON.

  • Naresh Prabhu R

    I agree with most of your thought process.
    Travel agency business model has changed a lot when compared a decade a ago. Distribution has evolved over a period of time.They started to sell air tickets, but now they sell more than that. They have realized their revenue model cannot depend on airline revenue alone. They need to do something more. That is hotel, car and packages. They also thrive on both leisure and corporate business. Most of the consolidators now are previously a travel agency or a tour operator. However, again this has no comparison to direct connects.
    Direct connects are required by suppliers to have their inventory exposed to the end users. It is one more channel. Their primary goal is to not only reduce cost but also have their choice of determining the price and have alternatives to run their business. I have witnessed in Middle east market where travel agencies joined together to demand or boycott a particular airline for a period. One should not forget what the GDS fee was in 80’s when they were monopoly and what is now. Therefore, competition is required. Consumers are given choice to either book a ticket in supplier site or go to travel agency.
    Travel is one trade where the end consumer knows what the travel agency gets as a commission (9 % for GSA and 3% for sub-agents). When zero commission policy and service fee were introduced by airlines, there was whole lot of discussion in the travel agency market. Big Travel agencies were telling the small ones to follow while small ones were telling the big ones to give up the credit policy.
    Those days are gone now. They are looking for adjacent business areas. Travel agencies give a lot of value addition to the airline ticket.
    World is flat and big. Everybody has his or her own quota of business. So both travel agency and direct connects are to stay.