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CRS dramatic

impact on
airline industry
Control of fares
and yields
Airline reservation systems
in the USA
CRS, agency dealerships and the ttgolden handcuff"
The development of computer reservation systems has been one of the most dramatiC
events in the US a1rline industry over the last ten years. Spurred by deregulation, which
outlawed fare fixing and standard agency ticket distribution systems, the carriers have used
CRS as a vital tool for spearheading sales control m the travel agencies. These dealershipS
have provided some mutual advantages to agency and earner but, increasingly, the agency
is locked into restrictive agreements and excessive dependence on the CRS vendor, a type
of "golden handcuff". New forms of direct selling, bypassing the agent, and including direct
agency ownership by carriers, will pose increasing threats to agencies in the medium term.
Apart from deregulation the development of computer reservation systems (CRS)
has had, arguably, the greatest impact on the US airline industry for the last ten
years. Developed as simple, relatively inexpensive internal booking processes,
these have evolved into highly sophisticated data systems vital to market power and
competitive success.
The airlines were among the first industries to use computers on a larger scale, to
handle the millions of daily reservations messages as well as for the administrative
and financial uses familiar in other businesses. The International Air Transport
Association (lATA) estimates that at the end of 1984 the industry had invested
some $4 bn in hardware and software, roughly 10 per cent of its assets. This
investment is growing at an annual rate of 16 to 20 per cent. The advent of cheap
microcomputers linked through networks has enabled the enormous expansion of
systems in recent years.
The increasing automation of activities such as reservations, ticketing, schedule
planning, pricing and distribution is helping airlines to cut costs and improve
productivity. Many carriers have installed sophisticated programs to allow fine
tuning of inventory, product mix and yield. Industry databases are being
constructed for tariff information, schedules, statistics, interline billing and revenue
accounting. The information gained from its CRS was instrumental in enabling
American Airlines to establish the first frequent flyer programme. Automatic
issuing of tickets and boarding passes, and for interface with airport systems, are
now operational.
The principal growth area for automated systems is sales distribution, with airlines
competing furiously to link travel agencies into their computer networks. What
started out as programmes to place visual display screens in agency outlets have
The author, David Wardell, is vice president of technical services for travel
management consultants Sontag, Annis & Associates, Maryland, USA, and a
specialist on travel industry automation
Travel & Tourism Analyst, January 1987 The Economist Publications Limited 45
Airline reservation systems in the USA
Battle for
agency control
Regulated agency
distribution
system
Five principal
systems in
operation
46
developed into a battle for market control. Display screens have evolved into micro
systems giving access to information such as schedules, seat selection, reservations,
fare display and calculation. ticketing. hotel and car rental bookings. Agents
produce more than 60 per cent of total sales revenues on a worldwide basis, so the
stakes are high.
This battle for agency placing through CRS is cited routinely as representing
significant competitive barriers to domestic US and international carriers operating
within the USA (as well as in other areas) when, in reality, market leverage is
gained through much more subtle and effective means. This report looks at
competitive strategies, tied to agency computerisation and otherwise, currently
employed by the major US carriers through CRS. These experiences in the USA
increasingly are of a broad international interest. They are indicative of experiences
in a deregulated environment and also have direct consequences as expansion by
US carriers in other countries, both on routes and into agency distribution,
becomes more aggressive.
DEREGULATION: THE CATALYST FOR CHANGE
Retailing of air tickets in the USA prior to deregulation was a relatively
straightforward business: airlines, through what amounted to cartels such as the Air
Traffic Conference (A TC) and the International Air Transport Association
(IA T A), set policies controlling their collective dealings with agents. Agents
agreed to represent all carriers participating in, or agreeing to, this policy making
process. This system kept business orderly, assured stable profits for
carriers and a consistent cash flow for agents (effectively "fixing" prices for
travellers), and guaranteed an agency distribution system representing all
participating carriers more or less equally.
Among the provisions of the Airline Deregulation Act of 1978 was elimination of J
the Civil Aeronautics Board (CAB). This legislation provided for the phased .J
abolition of regulation of route entry and tariffs. Most of the CAB's authority to
1
regulate domestic routes expired at the end of 1981; its authority to control fares j
expired at the beginning of 1983 and the final "sunset" of the regulatory authority
came about on December 31, 1984. At that time the CAB's residual functions were
transferred to other federal agencies. mainly the Department of Transportation.
The CAB had granted the A TC and lATA immunitv from Federal law so that
member airlines could cooperate in setting consistent fares and routes, as well as
in travel agency administration and certain other areas.
With the CAB no longer in existence. this immunity was no longer available. Apart
from the dramatic effect deregulation immediately had on airline operational
activity. deregulation also meant that carriers had to build marketing relationships
with individual agencies for their own benefit, wholly apart from the interests or
direct influence of other airlines. This complex process has involved many different
and interrelated programmes, but the most visible has been the development and
selling of computerised reservation systems by the airlines to US travel agents.
There are five principal CRS vendors in the USA. These are American Airlines,
with its Sabre system, Delta Air Lines with Datas II, Eastern Airlines with Soda.
TWA with Pars, and United Airlines with Apollo. An independent reservation
network, Marsplus, was active for several years and supported several hundred
agencies. Initially owned by ITT, it was later purchased by Tymnet; its subscribers
have now been converted to Soda. Although other carriers (Alaska Air Lines, Pan
Am, USAir and Western Airlines) have maintained small CRS networks, these
have been mostly eclipsed by the five majors.
Travel & Tourism Analyst, January 1987 The Economist Publications Limited
Commission
levels low
Agency costs
easier to control
Airline reservation systems in the USA
All of these carriers have individually invested hundreds of millions of dollars in
building up data bases and automating travel agencies to ensure competitive
presence in the sales arena. Initially these developments were for purely sales
reasons. However, recently the CRS vendors have begun to view data processing
and automation as revenue centres independent of airline marketing benefits
accruing to the sponsoring carrier. All the US CRS vendors, except Delta. now
have created independent computer subsidiaries not only to provide automation
services to the airline but also to exploit data processing opportunities in other
industry fields. American Airlines' parent company, AMR. has pursued this path
most vigorously. In 1985 its information services, still largely based on Sabre
developments, contributed about one third of the compan{s ~ e t earnings and it
forecasts this could increase further to around 40 per cent.
DEVELOPMENT OF CRS IN THE AGENCY
In the mid-1970s, prior to any extensive travel agency automation. ticket
preparation and distribution usually were performed more cost effectively by travel
agencies than by carriers directly. Estimated average reservation processing costs
for airline ticket offices were estimated at about 16.2 per cent of total ticket costs.
whereas agency commissions were paid at only 7 per cent. Overall distribution costs
could be reduced further if a carrier's agency volume increased, particularly
regarding largely point-to-point business air tickets.
The figure of 16.2 per cent for airline costs refers specifically to airline city ticket
offices (CTOs), which are store-front locations handling ticket sales much as a
retail travel agency. Airport processing costs were somewhat less. Ticket-by-mail
programmes. never universally adopted by airlines, have consistently represented
the most cost-effective distribution mechanism but cannot meet the needs of
high-volume business accounts and are also unattractive as some risk must be
assumed where tickets are sent through the post.
Following deregulation, carriers have been free to determine commission levels
independently. General practice. with some exceptions, has held base commissions
to 10 per cent of net air ticket value (the total price less the 8 per cent Federal
transportation tax), for an effective commission cost of 9.26 per cent to the carrier.
(At a 7 per cent commission level prior to deregulation, when the 8 per cent tax
was also in effect, the effective rate was 6.48 per cent.)
Prior to deregulation there were other strong incentives to direct more sales to
agencies, among them the need to control steadily increasing costs which a
regulated environment did not permit the traveller to bear fully. While distribution
(or agency) costs can be influenced directly, costs of fuel, for example. had
increased dramatically during the 1970s, over which carriers had little direct
control. The US airline industry also expanded greatly during the 1970s and needed
a broad, relatively economical, distribution system.
As manual processing methods did not permit the increase in booking transactions
required, automated systems were made available to the agencies by the airlines as
a tool to raise booking levels and document preparation. The almost concurrent
development of so-called "front room" (CRS) and "back room" (agency
accounting systems) automation made possible for the first time the development
of large regionally-based agency chains. Although large agency networks existed
before, mega agencies with sales counted in hundreds of millions of dollars were
impossible without automation, especially CRS.
Travel & Tourism Analyst, January 1987 The Economist Publications Limited
47
Airline reservation systems in the USA
Front and back
room
automation
Chasing
incremental
passengers
Issue of screen
bias
48
In turn, the CRS, because of their impact on agency operation, size and
competitiveness, have become vital to the carriers. The CRS vendors see significant
opportunities to control agent loyalty through access to these tools. Where the
vendor can provide comprehensive automation to the agency, front and back room,
the mutual dependence between the two is strengthened further. Certainly
sophisticated tools are expensive for even a large agency, making conversions from
one CRS to another much more difficult because of outright costs and retraining
expenses.
The important of "tying up" backroom agency automation has been pursued
aggressively by some airlines, to the extent that it is not possible for agencies using
backroom automation products distributed by TWA or United. for example. to use
other CRS as their primary reservations tool. (In the case of United, this refers only
to the new Enterprise software or to United's Apollo Business System (ABS);
United's recent acquisition of Travel System 2000 did not affect that system's ability
to be used in conjunction with other products.) American and Delta do not impose
similar restrictions, although agency support is usually stronger for those using
front and back room automation from the same supplier as opposed to "mixed"
installations from different vendors.
AIRLINE ECONOMICS AND CRS BIAS
The principle of incremental volume or critical mass is essential to airline financial
viability, as in any high fixed-cost business. A small increase in passenger load can
drastically affect overall carrier profitability; equally, relatively small negative
passenger shifts result in large losses. most of which cannot be compensated for
through cost-cutting. Small passenger shifts gained at the expense of a competitor
produce substantial profits, so much that the carrier may be willing to make
significant investments in agency "loyalty" programmes, tied to CRS or otherwise,
or indulge in sales activities which otherwise may be perceived to be economically
questionable.
As travel agency automation progressed. it became clear that manipulating screen
displays results in incremental bookings for one carrier at the expense of another,
depending upon how the screen display is influenced. Surveys show that between
70 and 90 per cent of airline flights booked bv a travel agent are reserved from the
first CRS availability screen displayed the initial availability
request was accurate), with 50 per cent of flights being booked from the first line
of the first screen. In a competitive industry. where product differentiation often
is tenuous, some CRS vendors elected activelv to influence agent flight selection
based solely upon screen management.
So called "screen bias" in the Apollo and Sabre reservation systems (by far the
largest CRS networks in the USA) has received wide publicity in the press in the
USA and also overseas as a result of complaints of discrimination by foreign
carriers operating into the USA. Pars and Soda have been less "overt" in their
display bias. Datas II in the past has used its "unbiased nature" as a selling point.
Screen bias of CRS displays has been practised for several years, to the benefit of
the CRS vendor-carrier (the 'host") and, to a lesser degree, other carriers willing
to pay fees in return for preferential displays (so-called "co-hosts"). The co-host
issue has been debated heavily. It is generally understood that co-host fees secured
parity in screen display but that overall benefits remained greater for the host. Each
CRS vendor has unique co-host programmes that change from year to year.
Travel & Tourism Analyst. January 1987 The Economist Publications Limited
j
l
I
'
J
1
I
,
"Free access"
bylaw
The CRS "halo
effect"
Information
updates have
time lag
Airline resenation systems in the USA
precise financial impact on carrier loads (and therefore revenues) is
difficult to. it is generally accepted that the carriers without CRS
representation 1n travel agencies lose out substantially. Many airlines have objected
strenuously to the degree of control the CRS vendors exercise over the distribution
system, as did some (but not all) travel agency groups. These culminated in a 1984
US Federal Government regulatory decision that overt CRS bias should be
eliminated and that certain standard practices guaranteeing airlines without CRS
generally "free access" to the major CRS networks should be adopted.
There continue to be complaints regarding CRS displays and timeliness of system
updates. A major complaint was lodged by Delta Air Lines against American
Airlines in June 1986. Its premise was that American had used the Sabre system's
programmatic display logic unfairly to its advantage. Delta claimed that by
changing elapse times of some American flights so that the time in flight was shown
to be (unrealistically) less than for Delta flights operating over the same routes.
Sabre's display logic (permitted under the 1984 CRS rules) gave preference of
display (first lines of the first screen) to American. These charges have yet to be
resolved fully. However in general the focus is shifting from overt screen
favouritism to a more subtle process of agency incentives. market support and
strategic affiliations. which are tied only partly to CRS practices.
THE "HALO EFFECT"
The principal method by which carriers can encourage incremental bookings via
their CRS is the so called "halo effect''. A travel agent, using any CRS. has a
natural tendency to book the flights of the carrier providing the system. This
behaviour has been well-documented and is accepted by CRS vendors, although
the precise mechanism causing incremental bookings to accrue is complex and not
dependent upop any single factor. The travel agent tends to have increased
confidence that the information available about the CRS vendor's services. fares
and availability are accurate. as opposed to those of off-line carriers that may
participate in the CRS. Wishing to avoid customer dissatisfaction through offering
inaccurate information, the agent tends to favour a carrier for which the best
information is available.
Generally, the functional range of the CRS's own computer is greater than others
because no computer-to-computer communications are involved and no "nuances"
of interpretation between the command structure of differing machines. Customer
requests such as a special meal, seating or boarding passes are easier for the agent
to provide. Airline computer communications, whether using ARINC, Sita (ALC
and SLC command structures) or through direct communications links (which may
employ industry-standard protocols or the same ALC/SLC technology) typically
are primitive by current communications standards and do not permit advanced
queries or information exchanges. There are several extensive modernisation
efforts under way, principally by American and United. that will enhance
communications between airlines as well as between other travel suppliers (such as
hotels) also using CRS.
Equally, the nature of the airline computer does not encourage timely updates or
accurate information. Availability is not usually real- time, with an "OK" or "not
OK to sell" being displayed; true seat inventory is not maintained for off-line
carriers. Tariff updates are also inconsistent as most CRS use limited sources for
these data, such as ATPCO and the Official Airline Guides, and not the off-line
carrier itself, with changes often lagging severely from the time they become
effective until the updated information is available to a user.
Travel & Tourism Analyst, January 1987 The Economist Publications Limited 49
Airline reservation systems in the USA
10%
incremental
booking effect
Data processing
revenues
Bonding carrier
and agency
50
The successful launch of a CRS-agency dealership is partly dependent on contact
with the agent, so that confidence in information access and reliability is reinforced.
CRS gives the carrier a cost-effective vehicle to maintain agent contact both on a
personal level and through electronic messages. Many agents believe a CRS carrier
somehow deserves booking loyalty when other more immediate factors, such as
client preference or cost, do not intervene.
Successfully quantifying the "halo effect" is limited due to the number of factors
that may influence agency carrier selection and the inability to isolate CRS
placement. Research conducted by Sontag, Annis & Associates Inc, in Maryland,
shows that about a 10 per cent incremental effect is realistic under certain typical
circumstances (although some estimates go much higher), as follows:
1 That the agency uses one CRS as its principal reservations booking
tool. Incremental volume is far more difficult to realise where
bookings are split between two or more systems.
2 That the incremental effect is to be realised by replacing one CRS
with another. Introducing CRS into an agency for the first time
brings a wholly different set of booking patterns into play which
may or may not benefit the CRS vendor.
3 That the CRS being placed in the agency enjoys general functional
equivalency with the one it is replacing. It is not necessary,
contrary to popular belief, to replace one CRS only with a
functionally superior one. Many alternatives will be acceptable to
the agency, apart from purely CRS considerations. given the right
set of circumstances and a sufficiently lucrative support
programme. Any system will generate incremental bookings
provided the basic elements necessary for the agency to do
business are present.
4 That the agency does not book trips exclusively or largely over
routes that the CRS vendor does not fly. This does not necessarily
limit productive CRS conversions to agencies located in the CRS
vendor's on-line cities. as most agencies, particularly those with
large commercial accounts. will do business over many routes.
Apart from encouraging incremental passenger bookings. there are other
important benefits to a CRS vendor from installing the system in as many agencies
as possible. Under CRS regulations. vendors are permitted to charge participating
carriers for reservations made through the systems. These fees are usually $1.95 per
travel segment booked (not dependent upon actual passengers flown).
This financial incentive. irrespective of the halo effect. means that installing a CRS
in a large agency where the CRS vendor does not enjoy a large share of passenger
traffic can he more directly profitable (from a data processing perspective) than
placing the same system in one of the carrier's own best agencies. Booking fees in
such a case could amount to hundreds of thousands of dollars annually for the
vendor. directly at the expense of competitors. General estimates place the benefit
of having a travel agent using a particular CRS at about $35.000 annually per
reservation terminal in booking fees alone.
ENFRANCHISEMENT OF DEALERSHIPS
The use of modern CRS and related automation is inseparably tied to the most
successful agency management strategies now employed. They are also the most
tangible representation of a carrier-agency dealership. However it would be a
mistake to consider. as some carriers have done. that CRS define the full extent of
Travel & Tourism Anal\'st. .lanuan 1987 The Econnmi<;f PnhlicHtinn" Limited
I
I
I
Sabre and
Apollo dominate
market
Figure 1
Airline reservation systems in the USA
the dealership. Its influence exerted over the distribution system greatly exceeds
that possible before CRS bias was practised but it is only one of several factors that
bond together carrier and agency.
In manufacturing, the concept of "captive" distributors has long been employed.
Airline dealerships are more subtle and, for the carrier, more effective. Agents are
not exclusive distributors but rather remain representative agents for a number of
carriers while being enfranchised by one primary vendor. Effectively this gives
carriers, via the agents, the ability to redirect passengers from their competitors,
by accessing the competitor's own distribution network, which it could not do if it
operated a captive distributor system.
While CRS serve as the most visible dealership link between carriers and agencies.
often there are other links that are informal, such as the common travel agent
perception that an agency using Apollo is a "United" agency. More
relationships are created where the CRS vendor introduces other sales
programmes. incentives or back-up facilities. It is estimated that the two largest
CRS vendors, American and United. collectively enfranchise. in a formal or
informal sense, 19.000 agency locations in the USA. This is about 61 per cent of
the total agency market but comprises the largest and most important agencies. The
other major systems are largely installed in smaller "secondary'' agencies.
Figure f illustrates CRS market share controlled by each of the vendors. The
importance of increasing market share is reflected in the intense competition for
system "conversions" particularly between the two major CRS vendors.
AGENCY INSTALLATIONS
AND MARKET SHARE OF
THE FIVE MAJOR CAS
VENDORS IN THE USA
3000 DATAS II
Market share,%
Number of installations, 1985
3700 PARS
5500 SODA
9000 APOLLO
11000 SABRE
Travel & Tourism Analyst, January 1987 The Economist Publications Limited 51
Airline reservation systems in the USA
"Big two" in
larger agencies
Three types of
agency
dealerships
Carrier control
almost absolute
52
Agencies may be grouped into several broad categories, although usually they are
characterised by size, particularly by airlines, in assessing their importance as
dealerships. Table 1 shows the number of locations within each band of sales
volume based upon 1985 ARC data. the most current year available. These data
indicate numbers of agencies by ownership as distinct from locations; thus one
national agency system with hundreds of outlets appears only once in the table. As
can be seen, the largest and most powerful agencies, with sales volumes over $5
mn. account for only 4 per cent of agency companies but about 38 per cent of total
agency sales volumes. Agency sales percentages vary by carrier, but generally run
in excess of 60 per cent for all airlines, and virtually 100 per cent for some.
Table 1: US travel agency statistics, 1985
Average
value of Average
Volume of Number of %of agency volume of % of total
sales agencies total ($ mn) sales($ mn)
Less than $5 mn 20.427 96.50 927 18.945
$5-15 mn 587 2.77 7.918 4,648
$15-40mn 111 0 52 22.295 2.475
More than $40 mn 42 0.20 103,247 4,336
Source A1rl1ne Report1ng CorporatiOn, 1985
Note a 1nd1cates number ot agenc1es by ownersh1p as d1st1nct from locations, thus one nat1onal
agency system w1th hundreds ot outlets appears only once 1n the table
sales
62.31
15.29
8.14
14.26
There are three forms of dealerships between carrier and travel agencies in the
USA. National agency systems have locations throughout the USA but. as they
usually do not dominate local markets. they are unable to exert any significant
influence in getting better deals with individual vendors. Furthermore. due to their
diversity of markets it is usually impractical for them to favour a single vendor.
Contrary to much received wisdom. their negotiating position is in fact often
weakened rather than strengthened by their large size.
Regionally dominant agencies usually are the leading booking source and
distributor within a specific region and so tend to enjoy far more leverage with any
single vendor ( CRS otherwise) than other agencies. Large local agencies typically
han: grown by capturing accounts from regional and other local competitors. They
have insufficient influence in the market to influence carrier margins. but tend to
be used by carriers to provide blocks of volume that can be influ;nced by general
dealerships.
Although the development of CRS is the focal point. the need to maintain access
and domination over as large a block of data as possible, for planning and
intelligence-gathering purposes. has meant that major carrier marketing strategies
are being increasingly defined by their approach to agency marketing. The
information base developed for ticket sales purposes permits the carrier to
dominate and reap incremental benefits not only from the broad mass of smaller
agencies through the halo effects associated with CRS. but also to exercise tighter
and more specific control over key distributors in rna jor markets.
Since the five CRS vendors individually constitute the largest carriers in the USA
as well as the most aggressive marketeers. they are impossible to avoid should an
agency want to sell away from them. They have major presences in most markets,
Travel & Tourism Analyst, January 1987 The Economist Puhlications Limited
Targeting
major agencies
Capitalising on
agency cash
difficulties
Airline reservation systems in the USA
even those in which they are not dominant. The financial and market support
programmes available through association with these major airlines are too great
to be disregarded and smaller carrier could not offer similar benefits in any case.
Major market presence is not the only ingredient to a successful dealership
programme. Successfully motivating and controlling critical agencies or groups of
agencies within the market is far more significant. However. since agency
behaviour can be categorised for marketing purposes within general size ranges.
and the small number of exceptions dealt with individually, programmes may be
structured that are attractive to many agencies and are also financially effective for
the carrier as well as strategically efficient to administer and control.
By targeting major agencies - those which may be able to provide significant
numbers of incremental passengers - the carriers' objective is to extend as much
control as possible over the "accepted" distribution process. gaining preferential
treatment at the expense of competitors without the risk and associated expense of
owning a direct distribution channel itself. The agency's general sales stream
therefore may be tapped without inviting overt retaliation by competitors which
might refuse to deal with an exclusive distribution system (no agency could operate
in the USA without the ability to represent all carriers).
DEPENDENCY AND THE "GOLDEN HANDCUFF"
In spite of the mutual benefits that many agency-carrier relations can bring, the
balance is shifting in favour of the carrier as excessive dependency is being created
among the agencies. Many travel agencies are financially precarious at best.
Inflexibility in adapting to the needs of a deregulated environment, with price
instability and rising costs, has seriously weakened many and brought some to the
point of bankr)Jptcy. A well-financed carrier. whose air sales can account for 60 per
cent or more of an agency's total volume, can offer an agency a dealership that is
absolutely vital to its viability. Many carriers capitalise on this agency "cash crisis"
and create such a financial dependency that the agency may have no choice but to
support its sponsor. Many large agencies have costs in excess of 9.2 per cent per
ticket and therefore are unprofitable without some vendor support apart from
normal commissions.
Through front and back room automation, the carrier can create excessive
dependency. Long term CRS and other automation contracts, now usually
specifying levels of minimum usage, can lock agencies in for years. They often have
large "liquidated damage" clauses that impose penalties if a systems conversion was
undertaken, to the value of the revenue that would be lost by the current CRS
vendor. (It must be noted that not all CRS vendors use these restrictive contracts.)
Dependency is also fostered through financial measures tied to bookings or other
incentives.
Financial support is provided in two direct and many indirect ways. Many agencies
receive override commissions. While these can be nothing more than percentage
payments on gross sales volume. some are based on complex systems of
compensation tied to exceeding a minimum production target related to the
carrier's overall share of the market as well its average ticket sales by all agencies.
This can require extraordinary commitment on the part of the agency in order for
it to realise any substantive payment. If agencies are so dependent upon their
sponsor, they will redirect passengers using whatever means are necessary in order
to achieve their revenue targets.
Travel & Tourism Analyst, January 1987 The Economist Publications Limited 53
Airline reservation systems in the USA
Excessive
dependency
created
Move to direct
sales
Direct ticketing
possibilities
This can include misrepresenting the facts about a competing carrier's flights.
However this high degree of dependency often is built without sufficient support
being offered to the agency by the carrier. This is especially true with the outright
agency cash payments, usually associated with CRS contracts, which infuse large
sums into the agency but do nothing to improve its overall market position. These
payments to change system affiliation can involve, as mentioned, restrictive long
term contracts and, while occasionally these payments accompany long term
dealership commitments and sales support programmes, often the carrier has no
long term interest in the success of the agency, as a competing agency will fulfill the
same purpose once the initial payment is recovered.
Thus, agencies often are provided with "golden handcuffs" by the CRS vendors to
a degree not experienced in most industries. Most agencies fail to recognise or
accept the implications of these airline dealerships by continuing to assert their
independence and customer orientation while accepting the most restrictive of
business environments.
BYPASSING THE TRAVEL AGENT
Dealerships, as they now exist, are in the process of change: control of ticket
distribution is likely to move fully from agency to CRS vendor. Although precise
timing varies within individual carriers, with ''have not" airlines lagging
significantly behind the more technologically sophisticated CRS vendors,
dealerships in their present form are not long term phenomena.
Airlines and travel agents are fully aware the possibilities offered to the carriers
by direct selling to the passenger, via the CRS. For airlines. the cost of agency
distribution is high, officially around the 8 to 10 per cent commission levels but. in
practice, involving overrides as high as 30 per cent in highly competitive markets.
Airlines are also forced to pay out larger and larger sums to agencies to effect
conversions to their CRS- amounts of up to $500.000 to major agents have been
reported.
Although CRS give the carriers ultimate control over their marketing. automatic
ticketing machi;es allow direct sales at other. more remote. locations. bypassing
the agent. While these automatic ticketers so far have been fairly rudimentary,
issuing just tickets and boarding passes, and so useful to only a certain category of
traveller. they are becoming increasingly sophisticated. To date. airlines have paid
commission on tickets issued automaticallv if the agents have made the reservation.
However American s automatic machines now make reservations in
advance. the greatest threat so far to the
The agents also are under threat from whole new developments in the distribution
system such as banks. supermarkets. mail order firms and schedule publishers such
as the Official Air!ineG.wdn and ABC selling direct to the customer. Direct selling
has not had the success first anticipated for it. partlv because of the complexity of
air fares and travel options available and the advantage to the passenger in using
travel agent services to assure the best deal. If there is continued concentration in
the airline industry, there may be a move back towards more st;:mdardised fare
levels. and so encourage passengers to purchase directly from the carriers without
using the travel agent. It is unlikely that the revenue slashing fare wars of early
1986, when fare changes were taking place almost minute by minute, will be
repeated.
TraHI &. Tourism Analyst. January 1987 The Economist Puhlications Limited
Display bias not
a solution
Move to two
types of
dealerships
Carriers to own
agencies
Airline reservarion s_vstems tn the
FUTURE AGENCY-CARRIER RELATIONS
Overt screen manipulation, although by many still exist. need be a
fundamental part of the incremental bookmg process. With the to
affect agency carrier selection m so many ways, and w1_th
services overall profitable ventures m their own nght, Improper display tactiCS
make little sense for a sophisticated vendor.
The most successful agency distribution programmes. contrary to the great body of
academic speculation, currently are not technology-driven. Technology is the
cohesive element that ties the relationship between carrier and agency together and
creates the halo effect by its existence. but CRS could not, in isolation, create the
dominant market positions enjoyed by the most successful vendors. Only a
combination of well-designed programmes. together with an airline that naturally
is dominant by virtue of its structure, can occupy the pre-eminent positions enjoyed
by the CRS vendors in the USA.
Internationally. where most of the CRS vendors have strategic expansion plans.
this presents both a challenge and an opportunity for competing carriers.
Technology creates an effective competitive barrier because it is time consuming,
difficult and expensive to replicate. Given sufficient resources. however,
technological advantage will be insufficient to unseat many European or Asian
carriers from the pre-eminent market positions they enjoy, if effective steps are
taken in the near term to compete directly, with CRS developments in a dealership
environment.
Dealership in the USA probably will increasingly be divided into two distinct
categories, as follows:
1 The largest portion of the market of small travel agencies may be
influenced indirectly, using the halo effect, and through CRS as a
principal contact point between carrier and agency. The small size
of these agencies (and therefore their overall sophistication)
precludes the carrier from embarking on a binding dealership
programme, and limits their ability to affect carrier market share
positively or negatively in any dramatic fashion. The best and most
cost-effective programmes for these agencies are probably those
informal preference strategies based upon CRS placement.
2 Segmentation of the market permits the vendor effectively to
address the larger and more sophisticated agencies with more
advanced programmes. As only a few businesses are involved,
which collectively produce significant volume, these can be
approached and managed individually, with CRS serving as one
tool among many. Carriers also approach the larger regional and
national agencies differently. often offering better programmes to
regionally-dominant agencies who have a significant and definable
market presence, rather than the so-called nationals which cannot
be relied upon to concentrate their sales or management efforts in
specific areas materially to impact the vendor's business.
Carriers will continue to pursue their various approaches to dominate agencies,
while the latter still are responsible for such a large proportion of total revenue.
Nevertheless, as agency services become less cost effective for certain types of
tickets, new methods of selling, via CRS, are likely to be explored. In the medium
term these could include direct agency ownership for some carriers.
Travel & Tourism Analyst, January 1987 The Economist Publications Limited 55
Airline reservation systems in the USA
Non-CRS
carriers
spearhead new
sales methods
56
Certainly for major commercial or business travel accounts, the agency serves few
purposes apart from order-taker and document-preparer. A large carrier
reservation centre can process orders for only a few dollars each, far less than
agency commissions. Technology will provide more opportunities to distribute
documents (among the most effectively automated functions within the travel
industry) directly to the customer. Future developments may render tickets per se,
and therefore the ticket-issue, unnecessary- a concept already tried experimentally
by some carriers. Although agency services are necessary for some functions, for
certain transactions agency processing is already superfluous. The essence of
dealership creationn - the control of the distribution channel by a vendor -
provides the carrier with significant opportunities to eliminate the dealer where
appropriate, something the agency can do little to mitigate.
Equally, carriers without rna jor CRS systems will find dependence upon
dealership-controlled distribution increasingly unacceptable, driving them much
more rapidly towards non-agency distribution systems wherever possible. While
many of these will be technology-driven, they will be the first to implement direct
"dealing" (discounting to major purchasers). Traditionally the CRS vendors have
used dealerships to pass along customer discounts for a variety of strategic reasons,
among them the desire to mask discounting (and therefore minimise it) as much as
possible. Other, non-CRS, vendors will prefer to lock in distribution using this
method that the CRS vendors will be reluctant to employ.
Non-CRS vendors will also be the first to explore agency ownership as well as
non-agency distribution in a major way, perhaps following the model of SAS in
Scandinavia. Using this strategy, SAS now controls about 50 per cent of all IAT A
sales in Sweden. 21.5 per cent in Norway and 12 per cent in Denmark. The long
term corporate objective of the company has been set at 30 to 40 per cent market
share in these areas within two years. Non-US airlines may also choose to use their
own market leverage to create dealerships and thus circumvent market intrusion
not only by aggressive US CRS vendors but also by other local or regional
competitors.
Tra,el & Tourism Analyst, J a n u a r ~ 1987 The Econ9mist Publicatiom Limited
David J.
Wardell
Digitally signed by David J.
Wardell
DN: cn=David J. Wardell,
o=Technical Reality, ou,
email=david@wardell.org, c=US
Date: 2012.07.06 15:20:22
-04'00'