TRXperts - Experts in Travel Technology

Blood from a Stone

  

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In the not so distant past, owning a travel agency meant making a very nice living.  Airlines paid commissions, GDS’s paid incentives, and customers got a great service.  The more bookings you gave the airlines, the more money you made (especially on higher fare flights).  Then in 1995, things started to change.  Delta decided to put a $50 cap on commissions.  Two years later United put a cap of 8% on commissions.  A year later, United lead the charge by introducing an international commission cap of $100.  United continued their 3 year run of cuts by reducing commissions to 5%.  Not to be outdone, in 2001, American decided to introduce a commission cap of $20.  Finally, in 2001, Delta trumped everyone by eliminating commissions all together (and, of course, everyone else followed).  Then in 2006, the legacy carriers pushed for the reduction of GDS incentive payments to travel agencies.

So, there you have it.  The airlines effectively said, “Sell our stuff and, oh, by the way, we’re not going to pay you to do it”.  But, as they say, that’s ancient history.  As an agency owner, this is your reality whether you like it or not.  It’s no surprise that, in the last 5 years, the number of travel agencies has been reduced by 40%.

But alas, all is not lost.  There still are thousands of agencies in the United States that manage to not only survive year after year, but make a handsome profit.  Commission income has been replaced by service fee income; charge the customer for the service you provide.  Not a bad thought.  Its how most businesses survive in this country. In addition to the service fee income, agencies still do earn money from the GDS’s and some even receive overrides from airlines.  Unfortunately, the GDS payouts are small and the override programs are meaningless to most small agencies.  So, that really leaves the service fee income.  Most agencies that I speak to charge anywhere from $25 to $50 for an agent assisted booking depending on the type of booking (e.g. domestic versus international) and the type of client (e.g. low volume versus high volume).  For an online booking, those fees drop to $8 to $12 plus touch fees should the traveler contact a live agent.

Yes, I know you are thinking “but agencies make a ton of money off of hotel commissions”.  While this might be true theoretically (making money, not the “ton” part), the fact is the agency must collect these commissions before they add to the bottom line.  That’s a whole other future blog topic which I won’t cover here.  Let’s just stick to the air discussion for now.

So, just to recap the income side of things: 1) agencies used to be paid by the airlines, they really aren’t anymore; and 2) they are now paid service fees by their customers for the services they provide.

Let’s now take a look at the expense side of the house.  You have to pay for a lot of things to run your business.  Salaries, sales and marketing expenses, GDS fees, technology license fees, association fees, “mistake fees” (can you say mis-ticketing and debit memos), and 10 million other expenses and fees every small business has to pay.  And guess what, as your expenses rise, you can’t do what most businesses can: raise your fees.  I mean, you could raise your fees, but chances are your customers would go somewhere else to get the same service (and by “service”, I mean the actual service provided, not the capital “S” kind of service…again, a whole other topic).

Since you can’t raise the fees you charge (and many times, you actually have to end up lowering them to win new business), the only thing you can do is reduce your expenses.  Some things are out of your control.  You can only cut salaries so much.  You can’t really affect the GDS fees.  You can’t change the cost of printer ink (although you can print less, but that’s usually a rounding error).  You can’t change how much you pay for your back office license.

So what can you do?  How can you get “blood from a stone”?  The only answer is to get more efficient.  Rely on technology to do many of the things that you now need people to do.  While there are many examples of travel agencies that use technology to their advantage, it never ceases to amaze me the number of agencies that use no technology; agencies that process tens of thousands of bookings each year, and still do most tasks manually.  Sure, a Greyhound bus can get you from Atlanta to New York, but a plane will get you there much faster.  The reality is, in this day and age an agency must consider some form of automation (i.e. technology) to make themselves more efficient in order to increase the bottom line. 

I talk to many agencies on a daily basis and it shocks me when I hear agency owners, small business owners, say things like “I’ll worry about getting more efficient when I get more business” and in the same conversation say, “I wonder how I can get more business”.  A corporate agency told me the other day that “booking tools aren’t really a big thing in our part of the country.  Huh?  I might expect that from an agency located in a remote part of Alaska, but this agency is located in a large metropolitan area. 

Effectively using technology is not just about saving money it’s also about attracting new business.  You can bet that the “big guys” are all out pitching their technology.  They show customers how they are more efficient than the “little guys”, how they can save their customers more money by effectively using technology.  Look at any agency RFP that is issued and you will see a large section on technology.  A few other ways using technology helps wring more blood out of that stone:

• Needless expense.  People get busy and forget to do things.  Wait too long to ticket and you pay the difference.  Technology can assure that doesn’t happen.
• Fewer errors.  People also make mistakes.  Entering the wrong contract code in an air booking can be very costly!
• Proper allocation.  Let’s say you do have an override program with an airline.  How do you effectively manage the segments required to get the override?  Technology can automate the process, so you don’t have to manage it (thus maximizing your earning potential).
• Reduced people cost.  No one likes letting any employee go.  Unless you are completely heartless, it’s hard to even fire under performing employees much less the dedicated agent who’s been with your agency for years.  However, technology can allow you to do more with less people.  At the very least, technology will allow you to focus resources less on operating (expense) and more on producing (revenue).

I realize that travel agencies are high touch, high service businesses.  The big reason customers choose one agency over another is precisely for the people element.  But just because it is people driven on the front-end, doesn’t mean it has to be labor intensive on the back-end.  In fact, the only way an agency can increase profits as a percentage to expenses is to reduce labor costs.  The only way to reduce labor costs is to use technology to become more efficient.  So, if you are looking to get blood from a stone look no further than your own mid and back office operations.  You’ll be surprised at just exactly what you can squeeze out.