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Travel Agent Cap Flap: Consumers, Get Ready for More Changes

(August 2001)

On August 30, 2001, the American Society of Travel Agents (ASTA), which represents approximately 15,000 U.S. travel agencies (about half of the nation's total), has authorized agencies to participate in "Nationwide Day of Awareness" by closing their offices from 1 p.m. to 3 p.m. in protest of airline commission cuts.

According to Richard Copland, ASTA's president, "The purpose of this action is to raise awareness of the airlines' attempt to deprive consumers of their preferred method of purchasing air transportation." This cause is an indication that the travel industry is again shifting focus, which means that more changes are ahead for the consumer.

The Incredible Shrinking Commission

This action was spurred when American Airlines and TWA announced they would impose a further cap on travel agent commissions, reducing the airlines' previously imposed cap from $50 to $20 on a round-trip domestic ticket. As a competitive response, United, Delta, Northwest, US Airways, America West, Continental, and American Trans Air (ATA) soon followed with their own cap reductions.

Southwest, Alaska Airlines, and National Airlines have said they will not match—at least for now. Low-fare carriers like Southwest, which sell fewer tickets above the cap-affected range, have less incentive to match the cut. "National Airlines will continue with the commission structure that it has followed from its inception in support of travel agents and the valuable service they provide the public," says Michael Conway, National's Chairman and CEO. An Alaska Airlines representative stated, "We don't think the effect on the bottom line is worth it at this point."

Agents cite that the reason for the cutbacks has to do with reduced competition among airlines. According to ASTA, a single carrier dominates approximately 70 percent of all city pairs (the departure and arrival cities on an itinerary). Without a lot of competition, airlines feel they no longer need agents.

ASTA's Copland believes American's move is a result of its merger with TWA. He says:

"This action is evidence of things to come as the U.S. airline industry becomes more and more of an unchecked, anti-consumer cartel. American is paying for the merger by blatantly transferring their costs to the traveler."

Nonetheless, while ASTA maintains that the merger is the catalyst for cuts, many feel the Internet has played a more significant role.

Web of Change

Airlines are urging their customers to buy online, and are offering incentives for doing so. Recently, several airlines offered an extra 20 percent discount for booking through their website. Most airlines also lure customers to their websites with Internet-only discounts and bonus miles. The strategy appears to be working, as consumers spend approximately $14 billion buying tickets online. According to PhoCusWright, a travel industry consulting firm, Internet sales amount to 14 percent of total air travel spending—up from nine percent last year.

Although airlines are conveying a message that booking online makes the customer's job easier with all their new online booking tools, they may in effect be striving to eliminate the commission structure entirely. After all, airlines can reap major financial savings every time someone utilizes a website to book, check flights, or redeem frequent flier awards, which reduces the amount of calls to reservations centers.

Affect on Consumers

The move to cut commissions started in 1995 when Delta Airlines put a $50 cap on its 10 percent commissions. Two years later, the airlines cut the commission rate to eight percent, and then in 1998,they instituted a first-ever $100 commission cap on international tickets. In 1999, the airlines cut domestic and international commissions to five percent. Ever since, hoards of travel agencies have gone out of business.

To compensate for lost commissions, ninety percent of agencies now charge fees for services, especially to provide airline tickets. "The problem with the airlines is they cannot control their own profitability, and there is no way I was going to let them control my profitability," says Lucy Hirleman, CTC and President of Berkshire Travel in Newfoundland, NJ. Like many agencies, Hirleman has shifted business away from air to other more lucrative venues such as cruise vacations and tour packages.

So how do the changes affect consumers? "The affect on the consumer is less choice," says Hirleman. She adds, "As more agencies close, people will have fewer choices because they are losing an unbiased source of information on what the best airline choices are. Basically, the consumer is going to do a lot more work to find a decent fare."

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