Industry Close Up: Travel Agencies

BOSTON (06/15/2000) - Years ago, Chicago-based McCord Travel Management oversaw travel policies for its 2,000 corporate clients from a network of call centers. Business travelers who needed to know if their plans complied with their company's policy had to submit requests by fax, and agents wouldn't respond for 24 to 48 hours. Clients found this waiting period annoying, says Paul Craft, McCord's vice president of technology, and they pleaded for improvement.

Today, to the delight of its customers, McCord's policy analysis process takes mere minutes. By combining third-party and proprietary technologies, the company has launched a Web application that queries a client's travel policy as the traveler is booking a trip. If the proposed itinerary adheres to the policy, the traveler can go ahead and book a ticket; if an itinerary is no good, the application will suggest alternatives that work and then wait for a reply. Craft says that with the help of a data-mining tool, corporate travel managers can also use the application to generate reports about travel expenses for individual employees, departments or the whole company.

"There's no reason for any of our clients to wait to receive this kind of information," says Craft. "You want these reports? Now you can have them whenever you want them. It's our way of saying that we, as an agency, understand things have to change."

Welcome to the new world of travel sales, where historically low-tech travel agencies are realizing that change is the key to survival. Internet companies, as well as airlines and other travel suppliers that offer online booking services, are pushing them out of the market. In 1999 alone, corporate travelers dropped more than US$7 billion on travel expenses online, according to PhoCusWright, a Sherman, Connecticut-based research company that specializes in the online travel industry; the company released a study last winter that predicts the online travel market will reach $20 billion by 2001.

These numbers present a formidable challenge for shops that have existed offline for years. Since 1995, the number of travel agencies in the United States has dropped from 47,000 to just over 43,000 today, according to Airlines Reporting, an independent travel research company in Arlington, Virginia.

Stephanie Kenyon, vice president of industry affairs and travel technology for the Alexandria, Virginia-based American Society of Travel Agents, says that her organization has seen its overall membership, which includes travel agencies, suppliers and other industry representatives, grow in the past five years, but the number of agencies in the group has shrunk. Kenyon says the two-pronged menace of dwindling commissions from airlines and the proliferation of Internet competition has forced travel agencies to ask themselves if they've outlived their usefulness. "Travel agencies had dominated this space for so long that the change took a lot of people by surprise," she says. "Many people aren't sure where to go from here, and I think a lot of them suspect technology is the answer. Is it? I don't know. There are still a lot of things a travel agent does for a customer that can't be done on the Web. It's up to our agencies to figure out what those things are."

Travel agencies are responding to the threat of disintermediation with solutions ranging from high-tech to no tech at all. Some have embraced IT, developing proprietary applications and partnering with Web-based entities to procure more sophisticated booking software. Others, generally smaller companies, have eschewed technology altogether, opting instead to provide fee-based specialty services such as ecotours, gay- and lesbian-oriented travel programs and adventure vacations that they hope will make them viable niche players. Still others have tried to do both, bolstering their online and offline offerings in an attempt to keep customers satisfied wherever they might go.

REVERSAL OF FORTUNES Technology transformed the travel industry once before.

In the late 1950s, airline technologists realized that the batch-oriented processing systems they had used to organize reservations couldn't keep up with rising demand. The industry developed an application, dubbed the Transaction Processing Facility (TPF), that could track reservation data in real-time, transmitting as many as 7,700 messages per second. Other travel suppliers, such as hotels, cruise lines and rental car companies, soon followed suit.

By the early 1970s, suppliers had rewritten many TPFs for travel agents and renamed them Global Distribution Systems (GDSs). For a small monthly fee, suppliers gave agents unlimited access to these booking systems, counterbalancing the fee by offering them a 10 percent commission for every sale they made. This was a cash cow for travel agencies; some earned hundreds of thousands of dollars every week in commissions alone.

Then in the early 1990s, the landscape changed forever. To contain costs, travel suppliers divested their GDS applications and took a chunk out of agency commissions. From 1994 to 1998, average commission rates dropped to 5 percent and lower, cutting the amount agencies earned per sale from as much as $80 to as little as $5. Soon agents were paying for GDS service per transaction instead of per month, leaving many fighting to stay in business. Desperate for revenue, some charged their customers processing fees; others resolved to operate at a loss.

Meanwhile, Travelocity broke onto the scene in 1995, and Microsoft Corp.'s Expedia followed one year later. Both offered customers direct access to a bevy of GDSs, circumventing intermediary fees and thereby lowering prices.

PhoCusWright statistics show that by the beginning of 1997, more than 2 million travelers were regularly paying for trips online.

"I'm not going to lie--the situation was pretty dire," says Kenyon. "All of a sudden, agencies turned around to find their revenue streams severely threatened. For some--especially the smaller ones--it was a real struggle."

THE SEARCH FOR SOLUTIONS To increase revenue, New York City-based American Express Travel Related Services, the travel arm of the credit-card giant, turned to technology. In late 1997, the company replaced its phone-based reservation system for corporate clients and launched Corporate Travel Online, customizable mining software that queries different databases, finds the cheapest rates available, then lists them on the Web. Agents in any of the company's 1,700 offices worldwide can access the system, as can individual corporate travelers. Henry Blinder, vice president of interactive technology, says the system has quadrupled the number of bookings agents can take in a day.

And because the site presents clients with a list of the cheapest travel options, they can save an average of 20 percent.

One of those clients is Dallas-based semiconductor company Texas Instruments (TI). Travel Technologies Manager Melissa Lopez says TI signed up for the service right after it debuted, and the results have been encouraging. Major deals and new business have increased TI employee travel volume by 33 percent.

At the same time, TI's travel department hasn't had to expand and, as Blinder predicted, the company has shaved nearly $2 million off its $15 million annual travel budget. That has freed up money for an internal marketing effort to get more travelers booking online.

Corporate travel comprises only half of American Express's travel business. In 1998, the company revamped the technology that drives the other half: leisure travel. Blinder says this new system, which he calls the American Express Travel and Entertainment Hub, offers online booking to a more general audience.

Travelers can use it to book flights, reserve hotel rooms, check out vacation packages and buy tickets to sporting or cultural events. In contrast, the services one might find at the company's storefront locations seem...well, old-fashioned.

"Even the best travel agents in the world aren't going to be able to scroll through 25 booking options," Blinder says. "We think this is where the future of travel will be."

Farther down the East Coast, technologists at Philadelphia-based corporate travel company Rosenbluth International are taking a similar approach. On the leisure side, says CIO Don Otterbein, the company recently purchased Biztravel.com, a Web-based travel agency geared toward small businesses, independent businesspeople and frequent travelers. Among other features, Biztravel.com keeps track of customers' frequent flyer miles and calls or pages them when their flights are behind schedule.

In the area of corporate travel, the company's Web-based @Rosenbluth product uses a homegrown application to help clients find inexpensive flights. On the front end, the program applies the spendthrift principles of airline revenue management to save money for corporate clients. Dubbed Discount Analysis Containing Optimal Decision Algorithms (DACODA), the application advertises good deals, facilitates favorable contracts and helps corporate travel managers decipher complex pricing rules. On the back end, @Rosenbluth is an end-to-end enterprise resource planning (ERP) solution, linking client travel plans to preexisting expense reporting software, HR systems and payroll. Corporate travel managers can use this feature to figure out how much money each employee has spent on travel throughout the year.

"This whole process used to involve meetings and phone calls, and generally took weeks and months," Otterbein says. "Now, travel managers can set up a corporate account and feel confident they're getting the best deal in a matter of hours. Our technology has revolutionized the way our clients do business."

Rosenbluth's statistics support this claim--overall sales have nearly tripled in the past two years, according to Otterbein.

STAYING THE COURSE In Wallingford, Connecticut, A&S Travel has succeeded by doing what it's always done. The regional agency's CEO, Eric Ardolino, has his own strategy: eschewing the Internet. A sign hanging on the window of A&S's main office reads "We fix Internet problems," and this slogan gets to the heart of Ardolino's antipathy toward the Web. When customers buy online, he says, there's no sense of expertise, no one to assuage their concerns. Sometimes, he says, even the most sophisticated technology can't replace the human touch. For example, Ardolino's specialty is Australia, and he insists there's no way he can share this expertise in virtual space.

"If you're getting married and you want to see Australia on your honeymoon, are you going to book your trip on some website, or are you going to ask me?" he says. "If you want good, quality information and you want to pick good, quality trips, you need to interact with good, quality people. Not machines, not databases, not any of that. You need people. Period."

Sure, the agency offers corporate and leisure travelers an online booking engine, but when clients book trips on the Web, Ardolino calls and encourages them to come in and discuss their travel plans. He defends his approach as simple economics. If A&S customers purchase tickets online, the company facilitating the booking engine gets the commission. If customers come in to buy tickets or if Ardolino submits the purchase himself, the commissions go to him.

Ardolino's commitment to personal service has paid off: He pulled in $9 million last year and says he's already ahead of that pace this year. Still, he hasn't made his money on commissions alone. Like most travel agents, he charges a $10 to $20 transaction fee per ticket, money he retains as direct profit. Though this fee inflates the cost of most travel, it is usually balanced by the bargain-basement prices Ardolino uses his expertise to procure. A customer recently paid Ardolino $700 for a three-day trip to San Francisco; online, the same trip would have cost roughly $1,400. With deals like this, Ardolino insists he can get by on the business he has.

Not everyone believes that, however. Marc David Seidel, a professor of organizational behavior and strategic implementation at the University of Texas in Austin and the founder of Airlines of the Web, the first index of travel sites online, is skeptical that agencies will succeed without using the Web in some way. "You can no longer ignore [the Internet]," says Seidel. "Not in this industry."

In that vein, some agencies have combined Web endeavors with a renewed commitment to personalized customer service. Dave Zitur, CIO of Minneapolis-based Carlson Companies, says the new slogan for leisure travel at subsidiary Carlson Wagonlit Travel is "Click, Walk and Talk," which means customers will get the same level of service whether they book online, at an agency or by phone. To show employees they should send this message to customers, Carlson invested in a password-protected Extranet at the beginning of last year that Zitur says offers agents marketing information, Web-based training, travel brochures and the latest company news, which they use to get customers the best and cheapest deals. He adds that Carlson encourages its 1,200 agencies to log on every day and provides monetary incentives to those who log on most consistently. The Extranet also has eliminated the need for paper communication among the company's offices.

Later this summer, Zitur says, the company will roll out a new proprietary customer relationship management (CRM) system to make the booking experience more personal. Based on previous travel choices collected and stored in an Oracle database, the system will offer discounts, special deals and other services to repeat customers. When they log on, the offers will pop up on their computer screen. When they call or stop by, a flashing message will notify agents of any special promotions. "I don't know of any other agencies that do something like this, and we believe it is something that can give us a distinct advantage," Zitur says. "If you purchase a golf vacation from us, we're going to offer you others every chance we get."

NEW KIDS ON THE BLOCK In many cases IT is helping agencies, but it poses a constant threat as well. A number of well-funded Web-based agencies have broken into the travel space over the past few years, picking fights with the agencies of old, making the field increasingly competitive. They use strategies that some brick-and-mortar agencies can only dream about.

Based on sheer volume, perhaps the hands-down leader is Menlo Park, California-based GetThere.com, which started as an online booking engine in 1996 and changed to an online booking service last year. The difference, though subtle, is important. At first, GetThere linked travelers with independent TPF operators who charge suppliers (and therefore, indirectly, consumers) per transaction. Today, the company uses proprietary Unix-based software to link customers directly to suppliers, eliminating the middlemen and giving travelers access to fares they've never seen before. The result? Savings, savings and more savings. Despite charging suppliers a small transaction fee of its own, GetThere lets them save by keeping more of what they sell. Consumers save money, too, because without transaction fees on their end, tickets are usually 20 percent to 30 percent cheaper than they are from the supplier directly.

"We save you a hell of a lot more than we charge you," explains Dan Whaley, the company's cofounder and CTO. "That's not our official motto, but it works. If you go to the United Airlines website, you'll find our service, and you can use it to get cheaper fares than the ones you'd find on, say, Travelocity or somewhere else."

UT Austin's Seidel says the GetThere model could eliminate travel agencies altogether. Other companies already have adopted similar business plans. Oracle subsidiary e-Travel, for example, has incorporated Extensible Markup Language to develop a bargain-basement interface called e-Traveler that works on just about any platform--PC, cellular phone or PDA. The product links customers directly to travel suppliers as well, so they can change flights on the way to the airport, reserve rental cars from the air, even book hotel rooms from the beach. Vice President of Application Development Rick Lifsitz says that with this technology and the company's network of suppliers, he eventually expects to shave as much as $65 off the price of ordinary business-class plane tickets.

These are exactly the kinds of savings that Donna Muhlhausen says she's seen as supervisor of travel operations for New York City-based Philip Morris Management, one of the world's largest manufacturers of consumer packaged goods. Muhlhausen signed up for e-Travel last year and says the technology has transformed the company's booking process. In the past, she says, when employees wanted to travel, they had to call the company's travel headquarters in Omaha, Neb. Today, however, Philip Morris employees can book trips without leaving their offices. By relying on e-Travel instead of travel suppliers or contract agencies, Muhlhausen has been able to negotiate lower transaction fees across the board. By year's end, she expects to cut at least $1 million out of her $17 million travel budget.

Englewood Cliffs, New Jersey-based Etravnet.com has tried to center its approach on unified messaging technology, the art of combining fax, voice and data into one medium. Through a system called Hagglewithus.com, a telephony program translates digital price inquiries from client websites into voice prompts, then calls travel suppliers and asks them to approve bids in real-time. Sound like Priceline.com? CEO Michael Brent insists it's different, because his service lets customers bid not just once but as many as three times per call.

While unified messaging is a novel approach, Henry Harteveldt, a senior analyst with Forrester Research in Cambridge, Massachusetts, says technology for technology's sake won't last long in the competitive world of online travel.

Insisting that all IT efforts must have well-defined goals, Harteveldt hails GetThere and e-Travel as companies to watch because of the way they contract directly with suppliers. He predicts they will become two of the biggest players, giving headaches to behemoths such as Travelocity, Expedia and T2, the soon-to-be-launched site sponsored by 27 airlines.

"These companies are the ones that are really changing the industry," Harteveldt says. "But by linking to suppliers, e-Travel and GetThere could eventually eliminate the need for organizations like Travelocity and Expedia.

Those sites are front men for private TPFs. Take away those TPFs, and they're not much better off than most brick-and-mortar [agencies]."

ON THE HORIZON As these internecine conflicts play out, technology may be the only hope for brick-and-mortar agencies, at least in terms of corporate travel and particularly among larger agencies. But in the area of leisure travel, among small and midsize agencies, there may be another choice, one that doesn't involve much sophisticated IT at all: specialization.

Seidel says startup companies and those such as GetThere may one day control travel technology, while airlines and hotels monopolize distribution on the Web. If that happens, he says, brick-and-mortar travel agencies will most likely get by with minimal technology so long as they use it to promote expertise rather than airfares. The name of this game is selling experience, not travel. In Seidel's world, the industry would work something like this: A traveler goes online to purchase tickets, and if the traveler wants to talk to a travel consultant about, say, Ireland, he or she would visit that agent's website and initiate a real-time chat. For a personal touch, the agent could fire up a Web camera so the traveler could see who's on the other end or encourage the traveler to call directly or even stop by.

"Things have got to change," Seidel says. "I'm not saying travel agents have to run out and set up booking engines, but instead, I'm saying this is no time for agencies to get defensive and say, 'We'll be OK.'" McCord's Craft agrees: "I don't think you can say categorically, 'This is how to survive.' There are a lot of good agencies out there. With technology or without, I'm sure the best ones will figure out how to adapt their businesses."

New York City-based writer Matt Villano always asks for a seat in the exit row.

He can be reached at mjv@whalehead.com.

TIME TRAVEL Travel technology has come a long way since the days of the reservation book 1950s Travel technology begins with the advent of IBM's transaction processing facility (TPF), an Assembler-based application capable of transmitting as many as 7,700 messages per second from intake terminals to databases and back.

1960s American Airlines improves upon original TPF design, building a Global Distribution System (GDS) called SABRE, capable of transmitting 8,700 messages per second. The system was used for reservations, and transmitted messages regarding seats available on future flights.

1970s Early 1970s--Other major airlines develop proprietary GDSs. United builds Apollo, TWA and Northwest collaborate on Worldspan, and Continental hatches Amadeus.

Late 1970s--Hotels, rental car companies and other travel operations build GDSs.

1980s Early 1980s--Agencies start using GDSs, achieving access to every supplier in the market.

Mid-1980s--Travel suppliers use yield management systems to charge different prices at different times in an effort to minimize risk and maximize profit.

1990s Early 1990s--To cut costs, suppliers raise commissions and divest GDSs.

Mid-1990s--The Internet explodes on the scene, and sites such as Travelocity and Expedia revolutionize the industry with online booking engines.

2000 Brick-and-mortar agencies must decide whether to face the online competition or concentrate on serving niche markets. -M. Villano LANGUAGE LESSONS Travel technologists ponder standards in XML It's easier to learn than a foreign language. It's cheap to maintain. Best of all, it's something almost anyone can understand.

No, it's not love. It's Extensible Markup Language (XML), and travel industry technologists hope that it will eventually be the language their systems speak most frequently. The language represents a common framework for creating Internet-compatible messages, providing a standard approach for describing, capturing, processing and publishing information. It is, in short, the one language every computer system can understand.

With that in mind, travel technologists banded together last summer and formed the Open Travel Alliance (OTA) to promote XML across the industry. After months of research, the group released specifications for customer profiles in February, recommending a common vocabulary so that customers only have to enter their basic data and travel preferences once, no matter how many travel suppliers and intermediaries are involved in a trip.

"We want to be able to speak the same language," says Alan Kotok, the organization's standards manager. "If you go to a hotel, you're called a guest.

If you rent a car, you're called a renter. If you fly on a plane, you're called a passenger. We want to simplify our terms and terminology, and XML presents the best opportunity to do it."

The travel industry isn't the first to extol the merits of XML. Health-care technologists have been contemplating XML standards for years, and other industries have considered the switch as well. What makes this language so special? According to Kotok, XML takes communication down to the individual data element level and allows two parties to exchange individual data elements in any order or quantity they wish. This means that with XML, airlines could share passenger data with hotels, frequent-flyer information with car rental companies and seating charts with one another.

As it exists today, XML is quite a leap from ResTeletype and UN/Edifact, the two languages prevalent in the industry. While ResTeletype operates on sentences containing a minimal set of data in a particular order, UN/Edifact requires participating parties to agree on the messages they plan to exchange before they exchange them. Kotok says both languages are slow and that because they're sentence-based, both require unanimity at the highest level in order to create a new message or change a message standard. In other words, the systems are only as strong as their weakest links.

"[These systems] have already defined messages, so if they're trying to communicate with a system that doesn't understand, they're simply out of luck," says Kotok. "I'm not trying to put them down, but by the nature of the technologies, those systems can only go so far. XML is a totally different story. It's flexible. It's classy. It's exciting."

The OTA plans to release its next set of specifications by the end of June, according to Kotok. The group hopes to have its entire set of guidelines finished by the summer of 2001, at which point it will submit them to the American National Standards Institute for approval. For more information about the organization and XML, visit www.opentravel.org. -M. Villano

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