How the Internet has changed the Travel Marketplace

Last week we looked at the travel distribution market and how the money flows across players within the industry. This week we are looking at the effect technology has had on the travel marketplace and the downstream impact on the travel agent industry

Let’s get into it.

The internet has revolutionised the travel industry. The two major beneficiaries of the development of the internet are online travel agents and low-cost carriers. Let me explain.

Online Travel Agents

The internet has enabled the rise of online travel agents (OTAs) that can transact business more cost-effectively and reach a far larger audience than their traditional bricks and mortar rivals.

OTAs rose out of the online revolution for a new generation of travellers. A generation raised on devices, who are able to seek information independently from search online engines, and who want information at their fingertips before making their decisions. OTAs, self-service and other online technologies appeal to this generation, but that doesn’t mean that traditional travel agents need to compete.

Online travel agents can transact businesses without all the costs associated with traditional travel agents. While the cost of wholesale travel products is similar for OTAs and traditional travel agents, the operational costs in terms of infrastructure, people, real estate and customer service are significantly lower for OTAs.

Webjet’s growth has been fueled by its online presence. Metasearch engine Skyscanner and booking.com have also had a significant impact on the Australian search results over the past decade compared to traditional bricks and mortar travel agent Flight Centre.

Furthermore, OTAs can reach and service much higher volumes of customers using modern technology frameworks that are designed to scale to demand with little or no reliance on humans. These advantages allow OTAs to buy and sell travel products at margins traditional travel agents cannot compete with. Threatened by the loss of business, traditional travel agents drop their margins to get the sale, resulting in significant losses overall for the traditional travel agents.

As an industry insider, it’s difficult to compare OTAs to traditional travel agents. OTA’s focus on getting traffic to their site and providing a sublime user experience that makes it as easy as possible for customers to book travel products and services without a human having to get involved in the process. Traditional travel agents, on the other hand, rely on customer interaction and high-touch customer services that are often customised to an individual’s specific needs. In other words, their service offerings are poles apart and trying to convince a growing number of tech-savvy consumers to pay for high touch services is becoming a real challenge for the industry.

From Retail to Corporate

While travel agents provide a lot of extra services to their retail customers at much lower margins than before, the extra services afforded to their corporate customers is up to 10x greater for a similar return.

Corporate customers demand much higher levels of services; including point of sale manual data capture, increased data input specific to the organisation’s policies and after-sales services that are often provided free of charge. Moreover, corporate contracts negotiated between customers and suppliers directly cap the travel agents earnings. This limits their ability to earn supplier incentives and additional revenues.

What’s worse is that corporate travel agent mid-office systems developed to integrate GDS data with payment, invoicing and customer profile data, have evolved at about the same pace as the GDS. In other words, they haven’t evolved at all. Travel agent systems are as manual today as they ever have been, even though there is a lot of discussions (read pitch) about how automated systems have become. In most cases, this is simply not true.

Corporate customers do benefit travel agents, mainly because it guarantees high volumes of sales and transactional revenues. But with the rise of the internet and the ongoing digitalisation of the travel industry, sales and revenues are diminishing as corporates look elsewhere for greater value and this is placing immense strain and pressure on traditional travel agents.

Low-Cost Airlines

Low-cost airlines have grown rapidly, and in a lot of markets, accelerated the growth of the aviation industry. One of the key factors of their business model is to use the internet to bypass the traditional GDS booking infrastructure and sell directly to their customers. Bypassing the GDS not only lowers a low-cost airline’s distribution cost but it also provides them with the ability to upsell more services, including extra legroom, aisle seats and extra baggage, to its customers.

Low-cost airlines have also been able to tap into a new generation of travellers, the same ones using the internet to search and book their travel. These travellers are far less worried about the trappings of a full-service airline and more interested in spending the least amount possible to get to their destination.

Over time, low-cost carriers have become more mainstream and the combination of low-cost airfares and a growing network of destinations have made them increasingly more attractive to both leisure and corporate travellers.

Legacy airlines losing market share to more efficient low-cost airlines are needing to reduce their costs. This spells trouble for the travel agent industry. First, the legacy airlines that predominantly sell through travel agents have removed their commissions. Then they started to reduce the amount they paid the GDS companies (which in turn impacted the travel agents segment rebates), and finally, they reduced their volume and market share incentives. Overall this is just more bad news for the travel agent industry.

A Once Thriving Industry

Within a generation, travel agents went from earning good commissions on high-cost airfares, large bonuses geared on predictable growth and healthy GDS segment rebates to, virtually no commissions, non-existent bonuses and no GDS segment rebates.

Travel has evolved into a volume business, the more business a travel agent (or group) transacted, the higher the incentives the suppliers pay in return. Travel agents speak in TTV (total transaction volume) quoting billions of dollars in revenue. In reality, their bankable income is a small percentage of these numbers and profitability is at the mercy of growing their supplier revenues either by winning new corporate accounts or buying smaller travel agencies looking to exit from the race.

Even before COVID-19 decimated the travel industry, the travel agency sector was already in trouble. Increased competition from online travel agents and new distribution channels formed by low-cost airlines are putting the pressure on this industry. Not to mention the removal of supplier incentives have placed the squeeze on many travel agents within the industry. Now with nearly 12 months with significantly reduced revenues, the travel industry is in trouble and a lot needs to go right in the coming months for it to recover.

Software company with a habit of developing applications to help organisations better manage travel in a dynamic and ever changing travel market.