The travel business is booming. So why do travel agents in America and Western Europe worry that they are facing extinction?

LAST year some $170 billion swilled through travel agencies in Europe and America. The World Tourism Organisation predicts that the industry it follows, arguably the world's biggest, will grow in real terms by 3.7% a year until 2010. Most estimates of spending on air travel or leisure are similarly optimistic. So you would think that travel agents should be sitting back and enjoying the ride (and the commission on it). But they aren't. Despite the growth of tourism, their profits are under threat.

The travel-agent business can be divided into three parts. First are the big chains, or "multiples", that dominate the market-firms such as American Express and Britain's Lunn Poly. Next come the independents, which resent the multiples' dominance. Third is a variety of specialists concentrating on cruises, discount travel, and so on. At the edges, there are interlopers: in France, for instance, supermarket chains now sell travel services. In many parts of the business, vertical integration (meaning that tourism operators control the agents that sell their services) is on the rise. The three biggest British travel agencies have 60% of the market; all are tied to, or owned by, operators.

Travel agents make their money from commissions. These differ across products and countries. In Britain, the average for an inclusive tour holiday is 10%, though multiples can demand up to 12%. Other commissions vary a lot: 2% on travellers' cheques, 9% on hotels, up to 30% on insurance. Air-travel commissions are 7% for domestic flights and 9% for international ones. In Britain, nearly three-quarters of a travel agent's turnover comes, on average, from business travel and inclusive tours (see chart). In America, the biggest source of income is booking domestic flights.

Until recently these commissions were thought secure on both sides of the Atlantic. Now they are coming under pressure from customers and suppliers alike. In February (with "all the subtlety of Big Foot", according to one industry observer), America's big airlines, led by Delta, capped the fees travel agents could earn on domestic flights. Instead of earning an unlimited 10% commission, an agent's fee is capped at $25 for a one-way trip and $50 for a two-way.

This change, which seems to have cut the average commission to less than 9%, helped America's airline industry to record the strongest second- quarter results it had seen for years. The country's 33,000 travel agents claim it cost them $1m a day in lost revenues. The American Society of Travel Agents (ASTA) has warned that a third of its members could go bust and has filed an antitrust suit against the airlines.

Customers are proving awkward as well. Corporate clients complain that the commission system offers no incentive for travel agents to find the cheapest deal. Some buyers are switching to fee-based systems, or demanding rebates. In America, the Business Travel Contractors Corporation wants to get rid of commissions entirely. If it attracts enough big companies, it hopes to negotiate air fares direct with airlines, claiming this would save clients up to 20% in travel costs. (The group would still use travel agents to book the deals, but they would be paid fees rather than commissions.)

Even the humble tourist is getting shirty. Increasingly, consumers want to plan their own holiday, not buy one pre-packed. This often involves by-passing travel agents. In Britain about 80% of package tours are booked through travel agents, compared with 60% for independent travel. To meet the demand for trips to an ever-broadening range of destinations travel agents need computers not coloured cards in shop windows. American Express has invested heavily in technology. Groups such as Britain's Thomas Cook are toying with multimedia kiosks in their shops.

However, flashy new technology is a mixed blessing: it can undermine travel agents by allowing sellers to deal directly with buyers. CIC Research, an American travel consultancy, estimates that Internet users spend around $21 billion a year on air fares; before long, many could be using their computers to book their flights. In August United Airlines and Microsoft, a software firm, announced an agreement "to lead travellers into the 21st century" with an on-line service that turns personal computers into "desktop travel systems". The service will enable customers to buy airline tickets, rent cars and book hotels on- line. The plans fail to mention travel agents.

Reinventing the agent

All these threats have made travel agency a more difficult business, but by no means a doomed one. There are limits, for example, to how far travel agents can be pushed around by the airlines-particularly on international business. Despite bluster from European airlines about forcing down commissions, the carriers chose to negotiate with the agents rather than simply impose a cap. This is hardly surprising, given that some 85% of British Airways' seats, for instance, are still sold through travel agents. Even in America, travel agents have clawed back a little of the money they have lost on domestic business by charging slightly higher commissions on international flights.

Also, moves to on-line systems may take longer than many travel agents fear. Many airlines and operators may think twice about going on-line at all. Addison Schonland from CIC Research points out that if airline fares are put on the Internet, the thorny problem of arbitrage could emerge. Someone wanting to fly from Hong Kong to Taipei could find the best deal with a travel agent in, say, Atlanta. If this price were to be transmitted globally, it would become the new floor-price for that flight.

More fundamentally, there will always be a role for an expert to guide the buyer through a mass of choices. But to do this well, travel agents will have to be better informed and better equipped. Both cost money. In 1994 American Express bought Thomas Cook's business-travel arm, and America's Carlson combined its business-travel activities with France's Wagons-lit. More alliances look likely. If travel agents fail to embrace new technology, the boat (booked on-line) could leave without them.

GRAPH: The middlemen--British travel agents, turnover 1994

PHOTO (BLACK & WHITE): Next year we'll book it on the Net

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Source: Economist, 9/23/95, Vol. 336 Issue 7933, p54, 2p, 1 graph, 1bw. Item Number: 9510107615