Leisure Travel and the Internet
In the Beginning
International leisure travel before the Second World War was rather the preserve of the elite
class, epitomised by the upper classes' grand tour of Europe, as portrayed in Merchant Ivory
film ‘A Room with a View’. Significant technological and infrastructural advances in aviation
catalysed by the war efforts enabled a post war tourism boom in American visitors to Europe.
(Calder, 2002) Pan Am offered heavily discounted air fares in the newly created economy cabin,
enabling ex-servicemen to return with their families to explore the European continent they had
helped liberate. The emergence of lower cost and more reliable jet aeroplanes such as the
Boeing 707 and the later 747 played an important role in making air travel more accessible on
inter-continental routes.
Intra-European leisure travel can track its development back to 1950 when Vladimir Raitz
founded Horizon with a small office in central London, taking groups on two week all-you-caneat-and-drink trips to Corsica (Calder, 2002).
Having overcome significant governmental
regulation and monopolistic incumbents, the path eventually cleared for the development of the
leisure air travel industry. Tour operators were able to circumvent highly restrictive regulations
by avoiding flag carrier operated business and political destinations in favour of seasonal
routings predominantly in the Mediterranean basin and by offering inclusive tour (IT) products of
accommodation and flights that obscured from travellers the cost of the flight element. These
non-scheduled charter operations grew fast, flying densely seated aircraft hard through the
summer season, on tight schedules. Long operating days and often with little or no back up
contingency capacity led sometimes to long airport delays for holiday makers.
These
efficiencies helped keep average seat costs low, but impacted customer convenience. Blocks
of seats were sold to tour operators who committed to pay for all the seats whether they were
sold or not. This practise encouraged last minute deep discounting of perishable stock, with
savvy holidaymakers learning to book late for bargain prices and stoking strong price
competition in the sector. Contemporary European brand examples would include TUI, Kuoni,
Club Med and Grupo Viajes. (Horner and Swarbrooke, 2005)
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The Emergence of the High Street Travel Agent
In the mid and late twentieth Century the challenge for the leisure air travel industry was how to
get the product to the mass market. The complexity of transaction (select, book and pay for a
holiday package) often required a face-to-face interaction, best undertaken in a High Street
travel shop. The travel agent’s product involved bundling services from a variety of suppliers
that may have also included hire car, excursions, tickets, insurance and foreign currency
(Horner and Swarbrooke, 2005). Various branded regional and national chains of travel shops
emerged, with many smaller local businesses able to set up because of relatively low barriers to
entry. A desk, telephone and paper schedule of flights and hotel space was often all that was
required by a tenacious entrepreneur with reasonable customer service skills.
IATA
(International Air Transport Association) accreditation required agents to provide a minimum
service level and a significant financial guarantee, which provided a certain level of reassurance
to suppliers and travelling customers. A number of high profile tour operator business failures
resulted in, sometimes literally, penniless holiday makers being stranded in remote
Mediterranean resorts.
Scared by the threat of imposed governmental regulation, industry
associations such as ABTA (Association of British Travel Agents) facilitated programmes to
provide financial guarantees to help support consumer confidence (ABTA.com).
Third party agent commissions developed, with scheduled airlines typically paying 9% as
standard on international routes and tour operators sharing as much as a quarter of the sale
price with their intermediary. Additional incentives, known as overrides or kick back payments,
were sometimes paid by airlines to travel agents based on sales performance, perhaps up to
5% on top. Shaw (2004) suggests that profligate, untargeted agent incentivisation of agents
gave rise to high levels of airline commission costs. This approach may have helped encourage
agents to grow and in many European markets it became typical for a small number of large
‘chains’ to account for large market share, using their size to leverage wider margins and more
favourable terms. However, with fewer, large customers controlling distribution (airlines might
have sold 10% of their seats via airport ticket desks, travel shops and call centres) some agency
chains began to flex their muscles and sought to trade off suppliers against each other, to push
up their margins.
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From CRS to GDS
Airlines, early pioneers in global communications networks, having already developed their own
in-house electronic booking systems, identified the need for a computer reservations system
(CRS) to link travel agents in real time to pricing and seat availability data.
System
development costs were significant and while one or two airlines often spearheaded
developments they usually sought to share costs and enhance the systems attractiveness by
including partner airlines. (Shaw, 2004) Over time two large CRS organisations emerged in
USA (SABRE and Worldspan) and two in Europe (Amadeus and Galileo) with a more
fragmented national carrier aligned market in Asia. In the three decades after the Second World
War the airlines were heavily regulated, resulting in rather limited competition, a contextual
consideration that is important to note when appreciating the evolution of travel distribution.
Over time the CRS product range extended to include hotels, car hire, train journeys and cruise
holidays, enabling travel agents to offer their customers a one-stop shop for all their significant
travel needs. Further CRS diversification was delivered via IT consultancy, scheduling and
reservation system hosting, in an apparent leverage of a technology capability and an
understanding of the aviation industry.
(Hanlon, 2007)
To reflect this development the
organisations became known as Global Distribution Systems (GDS), rather than the more
narrow CRS. While diversifying, GDSs also sought to grow their core business by offering
agents incentives for increased bookings in return for free computer terminals or cash
payments. Charging $3 or more per booking (Doganis, 2001), the big four GDS companies in
2004 took 1.2 billion bookings, splitting market share; Amadeus 33%, Sabre 29%, Galileo 21%,
and Worldspan 16%. With little real competition and GDS access a must have for travel agents
the big four were able to earn their (predominantly airline) owners handsome returns, pushing
charges to airlines up to absorb cost increases. (Hanlon, 2007) Many of the larger legacy
carriers were little concerned about paying increased GDS charges as these were offset by
profit dividends from their highly profitable GDS businesses.
In 2002 Worldspan explicitly recognised an inherent flaw in its business model that saw airlines
pay the GDS charge, yet incentivised travel agents to boost transactional volumes, where
unscrupulous agents were known to create a variety of bookings (passive, multiple, duplicate,
speculative) that would trigger GDS incentives, putting additional costs on the airlines without a
related revenue stream. (Holloway, 2003)
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Online booking engines developed, some out of GDSs e.g. Travelocity from Sabre and Expedia
from Worldspan (with Microsoft) while a number of airlines joined together to create Obitz
(USA), Opodo (Europe) and Tabini and Zuji (Asia).
(Horner and Swarbrooke, 2005)
The
auction online player Priceline and late availability specialist Lastminute emerged to provide
distribution for excess capacity, a role traditionally taken by bricks and mortar consolidators,
who could ensure short notice, volume sales into lower profile price sensitive market segments
such as students and diaspora communities. A number of price comparison websites also
emerged such as sidestep and kayak who were able to offer comparisons that included low cost
carriers, a point of competitive advantage over GDS dependent Travelocity and Expedia.
(Holloway, 2003)
Distribution technology cost transparency
Low cost carrier lead in fares were often considerably lower than those of traditional airlines
because they bypassed the GDS network in favour of cheaper call centres (easyJet painted
their telephone number on the side of their aircraft) and later by using the web. An IATA study
in 2006 showed that distribution costs split: 18% agency commissions, 30% on reservations and
ticketing and 7% on GDS fees. GDS charged a flat fee per ticket, resulting in a very high
proportion charge on shorter, economy class fares, while on longer and premium cabin fares the
cost was negligible. (Hanlon, 2007)
It was not purely the development of airline web site booking engines that changed the face of
travel distribution, but this had to be partnered with remote payment capability, internet-wide
penetration and a significant shift in customer behaviour to feel comfortable making their travel
arrangements using a computer. Early experiments offering customers choice in the distribution
channel saw rather limited take up of new, costly web developments. Contractual agreements
with GDS companies and banks often inhibited the use of pricing differentials (e.g. web only
fares), but surcharges of the order £5-£20 were gradually applied to the more expensive human
intervention channel choices. Price sensitive customers, particularly those purchasing relatively
uncomplicated short-haul trips, quickly became accustomed with the online booking and
payment process and low cost carriers were boasting 95% web distribution quite quickly.
Traditional carriers, who had more complex contractual arrangements to carefully work through,
followed behind.
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Payment
Historically, airline agent travel intermediaries were able to pass on the 2-5% credit card
commission cost and risk from fraud to the airlines, who had often signed deals with the credit
card companies that did not permit them to discriminate pricing according to payment method.
Thus, travellers had no incentive to use cash or a cheque (with perhaps a 1% cost) rather than
4% average credit and charge cards, which often offered their customers additional individual
benefits such as deferred payment, bankruptcy protection and perhaps even travel insurance.
(Doganis, 2002) As competition intensified further, more focus was put on the cost of payment
and particularly credit card charges. The result of changes to long standing agreements saw
averaged credit card surcharges routinely applied in a very transparent manner by airlines,
which gave consumers visibility of the costs of different payment methods and enabled
consumer choice for each transaction.
Irish carrier Ryanair, the self-styled lowest cost European airline, took this ‘a la carte’ approach
further, introducing drip charges for airport rather than online check-in, and hold luggage. This
approach enabled the airline to offer lead-in fares at £9.99, 99p and even ‘free’, a highly
attractive promotional approach that simultaneously reinforced a strong value for money image
and generated prospective customer hits on ryanair.com. (Creaton, 2004)
Disintermediation
New entrant low cost carriers (LCC) took the opportunity presented initially by call centres and
then by the internet to bypass (or take out the intermediary) travel agent distribution, which
represented a high percentage cost on the lower fares they typically charged. (Shaw, 2004)
LCCs had to be more dependent on advertising, notably press, to offset the absence of travel
agents and to drive customers direct to the airline. (Doganis, 2001) Merrill Lynch calculated in
1999 that it cost US domestic airline America West $23 to sell a ticket through a traditional
travel agency, $20 via an online travel agent, $13 from its own call centres and $6 on its own
website. (Holloway, 2003)
Price sensitive leisure travellers would likely switch carriers for a
$17 fare differential, even when this entailed using unknown airline brands, pay for drinks and
food on board and travel via less developed airports.
Historically, airline customers were
presented with the same selling price regardless of differentials in the costs of the distribution,
with retail customers often unaware of the commissions being earned by travel agents. The
percentage commission approach was brought under scrutiny, perceived to perhaps be too rich
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on high fares and insufficient reward for the work involved in selling lower fares. (Doganis,
2002)
Agents were increasingly squeezed out of straightforward, low cost travel sales as
customers voted with their feet, unwilling to pay the increasingly transparent cost of a travel
agent and ever more confident of using internet booking engines. Many LCC’s began to offer
from their websites products and services that travel agents used to bundle, such as insurance,
accommodation, car hire even ski and boot rental and lift passes, often providing significant
commission revenue streams at little cost to the airlines.
Conclusion
The internet combined with airline industry liberalisation and deregulation has enabled new
entrants to innovate air travel distribution, putting competitive pressure on incumbents to revisit
their distribution channel strategy, resulting in significant industry-wide, structural change.
Providing consumers with the information to appreciate differential channel costs has seen air
travellers switch towards lower cost methods, particularly when required to pay more for more
expensive choices.
Traditional travel agents, who historically enjoyed a major role as intermediaries linking air travel
buyers to leisure suppliers, have experienced a significant change in their business, have been
forced to make their service for money proposition more transparent and have been squeezed
out of simple mass market transactions. Other intermediaries, such as credit card companies
and GDSs have also experienced change as more intense market competition forced cost
scrutiny on the entire leisure travel distribution model.
Questions
1. Why did incumbent airlines not use the threat of GDS and travel agent bypass to drive
distribution cost savings earlier ?
2. Are travel agents passé? What useful role might they fill?
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Reference List
Calder, S. (2002) No frills: The truth behind the low cost revolution in the skies. London: Virgin
Books
Creaton, S. (2004) Ryanair: How a small Irish airline conquered Europe. London: Aurum Press
Doganis, R. (2001) The airline business in the 21st Century, Routledge: Oxford, UK
Doganis, R. (2002) Flying off course: The economics of international airlines 3rd Ed.
Oxford:Harper Collins
Hanlon, P. (2007) Global airlines: competition in a transnational industry, 3rd Ed. ButterworthHeinemann/Elsevier: Netherlands
Holloway, S. (2003) Straight and level: practical airline economics, 2nd Ed. Aldershot, Hants,
UK: Ashgate
Horner, S. and Swarbrooke, J. (2005) Leisure marketing: a global perspective. Oxford: Elsevier
Butterworth Heineman
Shaw (2004) Airline marketing and management. 5th Ed. UK:Ashgate
This case was prepared by Justin O’Brien, Teaching Fellow in the School of Management at
Royal Holloway, University of London
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