By: David J. Wardell

© 1999 By: David J. Wardell.  Reproduction or redistribution in any form without written permission is strictly prohibited.

The real reason travel suppliers of all types feel free to tinker with their distribution systems is more basic and predates "Internet Hysteria" by a number of years.

In general, what I term the "Electronic Free Market" hypothesis for changing travel commissions runs along these lines:

"Airlines must reduce costs, therefore reducing or eliminating agency commissions is inevitable, given the emergence of electronic travel selling as an enabler of direct buying relationships between vendors and customers. Moreover, "shifting the risk" of paying for value added services to the consumer is a natural and inevitable evolution of free markets which, unfortunately destabilizes agencies that are caught in the middle."

This is a simple, rational, and superficially compelling argument. Among my personally most important business maxims is to always "seek simplicity—then distrust it."

In this case that distrust is well-founded and simplicity has lead us astray. Changes to agency compensation structures are neither inevitable nor especially desirable—they are just available. The real world has more variables and cynicism than the Electronic Free Market approach accommodates.

Business is filled with examples of intermediaries whose compensation is enabled by sellers and only indirectly paid for by buyers. The vast majority of real estate sales are handled this way, for instance.

Even in the retail sector distributor margins are built into prices of everything from PCs to groceries. While it can be argued that distributors in these settings assume inventory risk where agents do not, this is not always true.

The most sophisticated retailers successfully shift much, if not all, inventory risk back to the seller in many sectors, including toys, books, and even general merchandise. Sellers tolerate this (even occasionally embrace it enthusiastically) because of the clear value the distributor holds.

Experts have been predicting for at least ten years that agencies which fail to add value will, over time, be displaced. What we are seeing, in part, is the fulfillment of these predictions, at least to the degree that suppliers do not acknowledge that value.

Electronic commerce emboldens some travel suppliers to adopt direct distribution strategies that exclude agencies and are based upon a customer service model that has never been adequately tested or proven. Far from leading to an inevitable result, this is among the most serious business planning deficiencies facing the travel industry.

As often as I've made this statement over the years I've yet to have anyone seriously question it or offer evidence to the contrary.

Neither is cost-cutting the issue. Most travel vendors have a number of areas where fundamental changes could be made that would deliver sustainable lower costs, but these are usually much more difficult than simply cutting commissions.

There is also a very interesting argument to be made that substantial cost areas are frequently overlooked by vendors when alternatives to agency commissions are evaluated.

Even respecting distribution costs, the total amount a travel vendor spends on "distribution" is much larger than simply commissions, yet these are not the areas being cut. Vendors change agency commissions most often because they believe they can do so fairly easily, and unfortunately there is probably more to come.

Agencies have historically been seriously remiss in describing their value to consumers and vendors. The current rapid deterioration of the value chain is

a reaction to this and to what may prove to be an incomplete understanding of the travel customer (electronic and otherwise) and the sustainable role of agency distribution.

Understanding the difference between causes and effects is important. Far from an inevitable response to free markets and new technologies, the current turmoil in the travel industry highlights the imperative to develop better business strategies, operational techniques, and methods of embracing new technology if future perils to both vendors and agents are to be avoided.