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Airline - travel agent relations: an evaluation of remuneration schemes 1979

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AIB1INE - TRAVEL AGENT BELAllCSS: AN EVALUATION OF REMUNERATION SCHEMES by ROBIN JOHN ERICEL B-A., The University of Washington, 1976 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOE THE DEGREE OF MASTER OF SCIENCE in BUSINESS ADMINISTRATION i n THE FACULTY. OF GRADUATE STUDIES ' i n the Faculty of Commerce and Business Administration We accept t h i s thesis as conforming to the required standard The University of B r i t i s h Columbia September, 1978 (_) Robin John E t i c e l , 1978 In presenting th i s thesis in pa r t i a l fu l f i lment of the requirements for an advanced degree at the Univers i ty of B r i t i s h Columbia, I agree that the L ibrary shal l make it f ree ly ava i l ab le for reference and study. I further agree that permission for extensive copying of th i s thesis for scho lar ly purposes may be granted by the Head of my Department or by his representat ives. It is understood that copying or pub l i ca t ion of this thesis for f inanc ia l gain sha l l not be allowed without my written permission. Department of cowineace AM& &n*.we** ̂ WIIMIWITIOIJ /TRANSPORTATION The Univers i ty of B r i t i s h Columbia 2075 Wesbrook P l a c e Vancouver, Canada V6T 1W5 Date ix M»«. i < m i i Abstract t r a v e l agents provide an e s s e n t i a l range of a i r t r a v e l marketing services which r e s u l t i n large commission expenses f o r a i r c a r r i e r s . Commission expenses have r i s e n to such an extent that a i r transport analysts and others i n Canada have openly c r i t i c i z e d remuneration p o l i c i e s noa i n practice- They have questioned sihether the-.-trave.Uinq public' i s receiving a f u l l value f o r the commissions which t r a v e l agents receive; they have cited r i s i n g commission expenses as evidence of economic i n e f f i c i e n c y within the a i r t r a v e l marketing system. The role which the t r a v e l agent plays i n the a i r l i n e industry i s described taking i n t o consideration t r a v e l agents, a i r c a r r i e r s and a i r passengers. Eelevant background information related to the travel agent remuneration issue i s presented by describing issues a f f e c t i n g the a b i l i t y of independent agencies tc provide t r a v e l services. This thesis approaches the t r a v e l agent remuneration problem using policy analysis to select a remuneration scheme which w i l l best s a t i s f y a se l e c t l i s t of objectives. The objectives used i n the evaluation of remuneration schemes include service objectives such as retaining travel agent i m p a r t i a l i t y , economic objectives such as implementing the "user pay" philosophy, p o l i t i c a l objectives such as avoiding obvious cross subsidization of d i f f e r e n t user groups and "regional development" objectives such as providing adequate service l e v e l s to small communities. Description of developments i n issue areas including t r a v e l agent industry entry requirements, competition f o r market i i i segments and the introduction of electronic reservations systems to trave l agents i s presented i n order to t e t t e r understand the li k e l i h o o d of remuneration schemes achieving objectives. Three basic types of remuneration a l t e r n a t i v e s , net fare, uniform commission and incentive commission are considered. 8 3 Both regulated and unregulated incentive commissions are analyzed since their impacts vary s i g n i f i c a n t l y . The regulated incentive commission a l t e r n a t i v e i s selected as the optimal t r a v e l agent remuneration scheme. The s e l e c t i o n of t h i s alternative r e s u l t s i n a compromise between the f u l l achievement of the various objectives. Under t h i s a l t e r n a t i v e , the benefits and costs of regulatory involvement i n the setting of remuneration l e v e l s are assured- 8 3The net fare remuneration a l t e r n a t i v e may be defined as a marketing scheme where t r a v e l agents receive no commission on t i c k e t sales instead, a service fee i s charged. Under a uniform ccnmission : payment scheme, a l l t r a v e l agents receive t i e same percentage commission payment. Incentive commissions offe r travel agents f i n a n c i a l incentives for high volume sales or for sales to p a r t i c u l a r destinations- i v Table of Contents 1 X N T HO D UCX XO N • • •» — • * 1 1- 0 I n t r o d u c t i o n ................:....».....--..• 1 1.1 T h e s i s O b j e c t i v e . . w . . . . ^ . . . . . . . . . . . . . . . 2 1.2 L i m i t a t i o n s and assumptions ............ 3 1.3 B e n e f i t s and Costs from T r a v e l Agent S e r v i c e s ................................ 4 B e n e f i t s and C o s t s f o r the Consumers ... 4 B e n e f i t s and Costs f o r the A i r l i n e s .... 5 B e n e f i t s and Costs f o r the Agents ....... 6 1.4 O u t l i n e of Remaining Chapters 8 2 TRAVEL AGENT REMUNERATION APPROACHES 9 2.-0 Domestic Commissions ................... 9 2.1 I n t e r n a t i o n a l Commissions .............. 12 Conference T i c k e t C l e a r i n g ' P r o c e d u r e s - . 1 2 LATA Bank Settlement P l a n . 4 , , „ . 13 2- 2 Open Rate Commissions 14 2.3 Impact on Industry S t r u c t u r e ........... 20 2-4 A l t e r n a t i v e Compensation Schemes ------- 29 Net Pare Remuneration A l t e r n a t i v e ...... 30 Uniform Commission Rate A l t e r n a t i v e .... 33 I n c e n t i v e Coamission A l t e r n a t i v e ....... 35 R e g i o n a l Development Commission A l t e r n a t i v e ...-----»'.....--.----..'--.-.- 40 3 INDUSTRY REGULATION . . . . . . . . . . . . i . . - 44 3.0 The Process of Entry ................... 44 3.1 A i r l i n e Conference Re c o g n i t i o n 45 3.2 Causes o f Agency F a i l u r e s 49 3.3 T r a v e l Agent Industry R e g u l a t i o n ....... , 52 3.4 consumer P r o t e c t i o n from the Risk of Bankruptcy . . i . . . . . . . . . . . . . . • • . ' ... 60 4 COMPETITION FOR MARKET SEGEMENTS ....... ......... 62 4.0 A i r l i n e R e l i a n c e upon Travel, Agents .... 62 4.1. E t h n i c Markets ................. 64 Chinese T r a v e l Agencies i n Vancouver ... 65 S p e c i a l E t h n i c S e r v i c e s 66 4.2 E t h n i c T r a v e l Agent Marketing S t r a t e g i e s ............................. 68 4.3 C o - o p e r a t i o n Among E t h n i c Agencies ..... 69 4.4 D i v e r s i f i c a t i o n of E t h n i c Agencies ..... 74 4.5 T r a v e l Agents vs. C i t y Sales O f f i c e s ... 77 C i t y S a les O f f i c e s as A l t e r n a t i v e Channels of D i s t r i b u t i o n ... 77 D i f f e r e n c e s Among S e r v i c e C h a r a c t e r i s t i c s ........................ 77 Importance of T r a v e l , A g e n c i e s f o r the C i t y S a l e s O f f i c e ................... 78 V 5 ACCESS TO ELECTRONIC RESERVATIONS SYSTEMS 81 5.0 I n t r o d u c t i o n c f Computer Based Info r m a t i o n Systems to Agencies ......... 81 5.1 A i r l i n e Competition f o r T r a v e l Agent Bookings ............................... 82 I n t r o d u c i n g E l e c t r o n i c R e s e r v a t i o n s Systems to T r a v e l Agencies ............. 82 E l e c t r o n i c R e s e r v a t i o n s Systems i n 0. S. T r a v e l Agencies .................. 84 Marketing Advantages through Automation 85 5.2 B e n e f i t s and Costs of System I n s t a l l a t i o n f o r the T r a v e l Agent ................... 86 5.3 B e n e f i t s and Costs of System I n s t a l l a t i o n f o r the A i r l i n e s ....................... 89 5.4 B e n e f i t s and Costs of System I n s t a l l a t i o n f o r the Consumer 91 5.5 Long-term I m p l i c a t i o n s ................. 91 6 EVALUATION OF TRAVEL AGENT REMUNERATION ALTE RN AT IV ES ................. - ... i - - - - . - - - - - ------- 95 6.0 Methods of E v a l u a t i o n .................. 95 6.1 S e r v i c e A t t r i b u t e s ...... . . . v - . - - i v-.... 95 6.2 C r i t e r i a f o r E v a l u a t i o n 97 6.3 E v a l u a t i o n o f A l t e r n a t i v e s . - - i - . 100 Net Fare Remuneration A l t e r n a t i v e ...... 100 S e r v i c e L e v e l O b j e c t i v e s . - - - i - . - - - - - - - - 100 Economic O b j e c t i v e s ........ ............. 102 P o l i t i c a l O b j e c t i v e s 102 Regional Development O b j e c t i v e s .^...--.103 Uniform Commission A l t e r n a t i v e .......... 103 S e r v i c e L e v e l O b j e c t i v e s 103 Economic O b j e c t i v e s »«...;,..-•--..•.«....-.- 105 P o l i t i c a l o b j e c t i v e s 106 Regi o n a l Development O b j e c t i v e s . . . . . . i . . . 108 I n c e n t i v e Commission A l t e r n a t i v e s ...... 106 Unregulated I n c e n t i v e Commission A l t e r n a t i v e . . . . . . ....----». - • . - ... ...... 107 S e r v i c e L e v e l O b j e c t i v e s 107 Economic O b j e c t i v e s 109 P o l i t i c a l O b j e c t i v e s ................... 110 Regional Development O b j e c t i v e s ........111 Regulated I n c e n t i v e Commission A l t e r n a t i v e ..>..........-- - - ........... .. 111 S e r v i c e L e v e l O b j e c t i v e s ............... 110 Economic O b j e c t i v e s .................... 112 P o l i t i c a l O b j e c t i v e s ................... 112 Regional Development O b j e c t i v e s ........ 112 Summary of O b j e c t i v e Achievement ....... 113 6.4 C o n c l u s i o n ............................. 113 7 SUMMARY 7 . 0 Summary Bibliography Appendix 1 Appendix 2 . i i a posted v i i l i s t of E x h i b i t s 1- United S t a t e s T r a v e l Agent S a l e s per l o c a t i o n . . „ . . . , 7 2. CP A i r - Domestic Schedule of Commissions f o r A i r T r a v e l O r i g i n a t i n g i n the United S t a t e s ........ 13 3. S e l e c t e d I n t e r n a t i o n a l Commission L e v e l s 22 4. I n t e r n a t i o n a l T r a v e l Agent Commissions P a i d by United S t a t e s A i r l i n e s - 1974-1976 . . . . i 2 7 5- T r a v e l Agent Commission Paid by Scheduled Canadian C a r r i e r s - 1970-1S76 ............................... 28 6. Passenger Commissions as a Percent of Revenues ( I n t e r n a t i o n a l Trunk C a r r i e r s ) ..................... 39 7. Chinese T r a v e l Agencies i n Greater Vancouver ....... 71 8. Summary of Remuneration Scheme O b j e c t i v e Achievement ...........................^............ 115 s Acknowledgements I would l i k e to express my appreciation to the members of my Thesis Committee, Dr. Karl M. Euppenthal, Dr- Trevor D. Heaver, and Dr- James B. Stephenson for t h e i r assistance i n the writing of t h i s thesis- Special appreciation i s also expressed to passenger marketing managers of Ai r Canada and CP A i r and to the t r a v e l agents who were instrumental i n providing useful information related to my thesis topic. 1 CHAPTER 1 INTRODUCTION 1.0 Introduction There i s l i t t l e doubt that travel agents play an e s s e n t i a l role i n the a i r l i n e industry by providing services to a i r t r a v e l l e r s . The a i r l i n e industry has r e l i e d upon the services offered by the t r a v e l agent industry because of the numerous advantages which an independent channel of d i s t r i b u t i o n has i n comparison with airline-owned channels of d i s t r i b u t i o n . The t r a v e l l e r contemplating f l y i n g from New York City to Chicago i s faced with choosing from among 6 d i f f e r e n t c a r r i e r s and 75 dire c t f l i g h t s as well as numerous connecting f l i g h t s . 1 Individual c a r r i e r ' s c i t y t i c k e t o f f i c e s tend to a large extent to emphasize the sale of t h e i r own a i r transportation product while deemphasizing the sale of competing c a r r i e r s . Tbe resu l t f o r the passenger may be a longer t r a v e l time than i s necessary because a c a r r i e r »ith an i n d i r e c t routing i s selected. Therefore, a lower l e v e l of customer service r e s u l t s . In t h i s s i t u a t i o n , the unbiased consulting services provided by the t r a v e l agent can eliminate delays and provide a i r travel services i n a more convenient manner. *0ff i c i a l A i r l i n e Guide-North American Edi t i o n , Oak Brook, I l l i n o i s , Reuben H- Donnelley, November 15, 1977, p. 274. 2 Travel agent services are p a r t i c u l a r l y important i n the i n t e r n a t i o n a l sector where t r a v e l l e r s are generally l e s s f a m i l i a r with the variety of transportation, accommodation and other t r a v e l services offered. Consider, for example, the case of the family t r a v e l l i n g abroad on a limited budget. The i n d i v i d u a l t r a v e l agent i s much more l i k e l y to present low-cost alternatives to the t r a v e l l e r than would an a i r l i n e s e l l i n g i t s own services. S i m i l a r l y , the t r a v e l agent w i l l most l i k e l y be f a m i l i a r with alternate modes of transport providing a d i f f e r e n t range of services but frequently deemphasized i n a i r l i n e sales o f f i c e s . Thorughout the analysis of problems confronting the travel agent industry presented in t h i s thesis, one should bear i n mind that t r a v e l agents, i n the context of the a i r l i n e industry are by d e f i n i t i o n appointed sales representatives which serve as channels of d i s t r i b u t i o n ; they do not produce transportation services per se, but rather, serve as sales intermediaries, receiving a commission for the services which they provide their c l i e n t s . 1.1 Thesis Objective As a general frame of reference, a multi-facetted approach bringing into consideration consumers, t r a v e l agents, a i r c a r r i e r s and government regulatory agencies i s taken i n examining the changing role of the t r a v e l agent i n the a i r transportation industry. More s p e c i f i c a l l y , the objective of the pages which follow i s to select a t r a v e l agent remuneration policy for Canadian t r a v e l agents which i s i n the long-run best 3 i n t e r e s t of the t r a v e l l i n g public. A subsidiary objective i s to evaluate the need fo r regulation of the travel agent industry i n order to retain desirable a t t r i b u t e s associated with the t r a v e l agent industry. In order to achieve t h i s , present a i r l i n e - t r a v e l agent remuneration p o l i c i e s are described; alternatives are generated; and analysis of the costs and benefits and the impact of each alte r n a t i v e i s studied. F i n a l l y , an alternative i s selected and presented as a suggested policy change for iaplenentation by the Canadian Transport Commission. 1.2 Limitations And Assumptions There are primarly two major l i m i t a t i o n s t c the degree of comprehensiveness of t h i s thesis. F i r s t , the analysis of problems l i m i t s i t s e l f to considering the usefulness of t r a v e l agents i n the a i r l i n e industry. Although the non-air modes play a s i g n i f i c a n t role i n the t r a v e l agent industry, a recent study revealed that 37 percent of the t o t a l dollar volume of t r a v e l agent sales was derived from non-air mode s a l e s . 2 Second, the focus of attention of the analysis presented i s upon r e t a i l as opposed to wholesale t r a v e l agents. The involvement of a i r l i n e s i n tour wholesaling through the ownership or control cf wholesale t r a v e l agencies i s dealt with i n a tangential fashion. It i s assumed that the impact of r i s i n g commission levels i n Canada s h a l l be s i m i l a r to the changes which have resulted i n 2 Louis Harris and Associates, The Character- and; v Viol urne of - the - United States Travel Agency Market, New Xork, N.Y., Ziff-Davis Publications, A p r i l 1977, p. 1 0 . 4 the United S t a t e s . However, due to d i f f e n c e s i n c h a r a c t e r i s t i c s of both the t r a v e l agent and a i r l i n e i n d u s t r i e s , p r i m a r i l y r e l a t e d to s i z e d i f f e r e n c e s , t h i s i s not n e c e s s a r i l y t r u e i n a l l r e s p e c t s . One should bear t h i s i n mind t h a t t h i s t h e s i s c o n s i d e r s p o l i c y a l t e r n a t i v e s i n a Canadian s e t t i n g . 1.3 B e n e f i t s and Costs From T r a v e l Agent S e r v i c e s B e n e f i t s And Costs For .The Consumers As of 1977, there were more than 2,000 to u r o p e r a t o r s and t r a v e l agents p r o v i d i n g convenient l o c a t i o n s t c c l i e n t s i n most Canadian communities- 3 . Convenience i n l o c a t i o n and the a s s o c i a t e d one step shopping are two a t t r a c t i v e f e a t u r e s shich t r a v e l agencies as s m a l l businesses o f f e r the t r a v e l l i n g p u b l i c . Uniform commission s t r u c t u r e s have been developed i n order to ensure;the unbiasedness of the t r a v e l agent i n the s e l e c t i o n of c a r r i e r s . For example, under the 1977-78 commission s t r u c t u r e p r e v a i l i n g i n Canada, a 7.5 per cent commission paid on domestic t i c k e t s a l e s by both A i r Canada and CP A i r , i t was i n the best i n t e r e s t of the agent to s e l e c t the f l i g h t which i s most convenient f o r the customer. As s m a l l b u s i n e s s concerns, t r a v e l a g e n c i e s are i n a h e t t e r p o s i t i o n than a i r l i n e owned c i t y t i c k e t o f f i c e s t o provide c l i e n t s with p e r s o n a l i z e d t r a v e l c o n s u l t i n g s e r v i c e s which 3 l h e number of t r a v e l f i r m s i n Canada during 197 7 i s drawn from "The Big Business of T r a v e l , " The F i n a n c i a l Post» March 26, 1977, p.T-1- 5 extend much further than merely becking a seat on a f l i g h t or making a hotel reservation- Consumers of a i r t r a v e l services benefit from the s p e c i a l i z a t i o n of t r a v e l agents into various market segments such as the commercial t r a v e l or the ethnic market segments. Of course, the service benefits obtained by consumers from t r a v e l agents are not obtained without incurring a cost. However, providing a precise answer to the question, "Who pays for the services performed by the t r a v e l agent?" i s not easy to do. Ihe impact of t r a v e l agent costs depends upon the bargaining power of the participants i n the a i r f a r e commission determination process. If c a r r i e r conferences succeed i s passing the cost of high commission rates along to users i n the form of higher a i r f a r e s , then i t i s clear that the services offered by t r a v e l agents are not, in f a c t "free" from the consumer's point of view. On the other hand, i f commission levels r i s e but a strong regulatory body i s able to r e s t r i c t increases in a i r f a r e s , then, c e t e r i s paribus, a i r l i n e s w i l l for the most part earn lower p r o f i t s . S i m i l a r l y , assuming that the cost of providing services would be greater without the t r a v e l agent, there i s no r e a l cost associated with the use of t r a v e l agents. Benefits and Costs for the a i r l i n e s Another key benefactor from the services performed by t r a v e l agents i s the a i r c a r r i e r . The rationale underlying the reliance upon t r a v e l agencies i s e s s e n t i a l l y fonnded upon the b e l i e f that i t costs the c a r r i e r l e s s to market i t s product through an appointed agent than what i t would through c i t y sales 6 o f f i c e s . C l e a r l y , i t would be economically, i n e f f i c i e n t f o r each c a r r i e r to establish as many t i c k e t outlets as there are r e t a i l t r a v e l agencies. Even i f each a i r l i n e established only a modest f r a c t i o n of the over 14,000 agencies presently approved by United States c a r r i e r s , marketing costs would be much greater than commissions which are presently paid.* The f a c t that a i r l i n e managers are highly concerned with minimizing t r a v e l agent commission expenses while at the same time providing adequate customer service l e v e l s should also be kept i n mind when analyzing the remuneration alternatives presented i n t h i s t h e s i s . Benefits and Costs f o r the Owners o f T r a v e l Agencies The most obvious b e n e f i c i a r i e s from the services offered by t r a v e l agents are the shareholders and proprietors of i n d i v i d u a l business enterprises. lecent Air T r a f f i c Conference s t a t i s t i c s reveal that in the United States, sales per location rose at a compound rate of approximately 8% during the period from 1969 to 1974, a period when the number of trave l agency locations was i n c r e a s i n g . 5 Evidence of the increase in t r a v e l agent sales per location i s revealed in Exhibit 1. It should be kept i n mind wnen evaluating t h i s data that t r a v e l agencies are generally composed of a number of sales outlets, hence t o t a l firm earnings would be * M Travel Agent Commissions Reach $1.44 B i l l i o n i n 1976," • Air - Transport World. October 1977, p.32. s A i r T r a f f i c Conference of America, "Travel Agent Commission Structure," Washington D.C., 1974, p.3. 7 greater than sales per outlet. i : ~ I J Exhibit 1 I I United States Travel Agent Sales Per Location I | Source; A i r T r a f f i c Conference Of America, "Travel J Agent Commission Structure", Washington D.C., 1974, J P-3. i I i . Thousands Year - Of Cellars Index 1969 299 100. 0 1970 318 106. 4 197 1 330 110.4 1972 358 119.7 1973 368 123. 1 1974 432 144. 4 lecent data drawn from a Canadian setting indicates that the average agency produces $900,000 to $1 mi l l i o n i n sales annually with net earnings varying widely from 0 tc aboct 4 percent of gross revenues, the average being around 1 percent. 6 Fringe benefits such as i n s t r u c t i o n a l tours and reduced transportation fares att r a c t many individuals to the t r a v e l agent industry, an industry which has generally been characterized as having long working hours and r e l a t i v e l y low pay. The fringe benefits which t r a v e l agents receive are frequently untaxed (and thus all-the-more a t t r a c t i v e ) , r e f l e c t a r e l a t i v e l y low cost to the a i r l i n e industry i n comparison with 8 commission expenses. 1.4 Outline Of Remaining Chapters Chapter 2 describes e x i s t i n g commission remuneration procedures, generates alternative compensation schemes and presents the advantages and disadvantages to interested parties of the various a l t e r n a t i v e s . The three chapters immediately following Chapter 2 are concerned with separate problems facing the t r a v e l agent industry r e s u l t i n g from environmental changes. Chapter 3 reviews the history of travel . agent l e g i s l a t i o n and evaluates i t s impact upon c a r r i e r s , travel agents and t i e public. Chapter.4 considers unique services offered by travel agents to p a r t i c u l a r segments of the t r a v e l industry such as the ethnic and commercial t r a v e l markets. The following chapter. Chapter 5, considers the impact of technolocical changes upon the r e t a i l t r a v e l agent industry. In p a r t i c u l a r , the advantages and disadvantages f o r consumers, c a r r i e r s and t r a v e l agents of the introduction of e l e c t r o n i c reservations terminals to the industry i s dealt with. In Chapter 6, the impacts of t i e various remuneration alternatives upon travel agents, c a r r i e r s and the t r a v e l l i n g public are evaluated and one remuneration scheme i s selected as the most desirable given a s e l e c t set of objectives. The method of selecting these objectives plays an i n t e g r a l role i n analysis of the commission issue presented i n t h i s chapter. ^"licensed l e i s u r e " , The Financial Post. Canadian t r a v e l industry, Harch 26, 1977, p. Supple nsent T-2- the 9 CHAPTER 2 TRAVEL AGENT REMUNERATION APPROACHES 2-0 Domestic Commissions In the United S t a t e s , the f e d e r a l agency which r e g u l a t e s the commissions which t r a v e l agents r e c e i v e on t i c k e t s a l e s i s the C i v i l A e r onautics Eoard (C.A.B-). T h i s r e g u l a t o r y body r e g u i r e s that a l l commission s t r u c t u r e s f o r s a l e s of a i r t r a v e l s e r v i c e s o r i g i n a t i n g i n the United S t a t e s be f i l e d with the Board. Under t h i s system, c a r r i e r s a re f r e e to pay t r a v e l agents whatever commission they f e e l w i l l maximize p r o f i t s provided that i t i s f i l e d with the government agency. In Canada, the r e g u l a t o r y s i t u a t i o n concerning commissions i s somewhat d i f f e r e n t . The Canadian Tr a n s p o r t Commission's A i r Committee i s not r e g u i r e d t o approve commission s t r u c t u r e s even though i t rese r v e s the r i g h t t o disapprove of commission s t r u c t u r e changes which may, i n i t s view, be d e t r i m e n t a l to the s u r v i v a l of the a i r l i n e i n d u s t r y - An example of the e x e r t i n g of the r e g u l a t o r y power of t h i s body occurred i n 1977 when Pan American World Airways attempted to i n t r o d u c e i n c e n t i v e commissions to Canadian agents but was p r o h i b i t e d from doing sc. 7 The r e s u l t of t h i s s i t u a t i o n has been t h a t the two major "Pan Am Cannot O f f e r I n c e n t i v e s t o Agents Here", Canadian T r a v e l C o u r i e r , October 7, 1976, p. 1. 10 Canadian c a r r i e r s , A i r Canada and CP A i r , as well as the regional c a r r i e r s have followed the commission structure established f o r O.S. c a r r i e r s with respect to domestic and transborder t r a v e l ; the l a t t e r of which i s generally defined as t r a v e l between Canada and the United States. Aside from reasons of competition, the major reason for t h i s i s the requirement of the A i r T r a f f i c Conference of America JATC), that member a i r l i n e s follow the same commission structure. One should note at t h i s point that Air Canada and CP A i r are associate members of the AIC. As of A p r i l , 1978, domestic commission structures were the same for both Air Canada and CP Air. This commission structure which i s shown i n Exhibit 2 provides agents with a monetary incentive to s e l l transportation services incorporating services i n addition to a i r transportation from point A tc point B. One must d i f f e r e n t i a t e between the various tours which pay diff e r e n t commissions. The ATC defines four d i f f e r e n t tours; advertised a i r tours, convention a i r tours, independent a i r touts and incentive a i r tours. e As of A p r i l , 1978, advertised and independent a i r tours offered t r a v e l agents an 11 percent commission whereas incentive and convention tours offered only a 10 percent commission. Advertised and convention a i r tours are package tours and must include a i r transportation as well as one additional travel related component such as ground transportation, hotel 8 A i r T r a f f i c Conference of America, Trader Practice aanua1* Resolution No, 80.15, December 31, 1975, p. 19. 11 accommodation or a sightseeing tour. Independent a i r tours are prepaid tours including t r a v e l to two non-contiguous North- American: c i t i e s or l o c a l i t i e s . The agent must advertise and make promotional e f f o r t s in-order to qualify f o r the independent tour commission. Incentive tours are comprised of c i r c l e t r i p s as well as other accommodations and t o u r i s t related a c t i v i t i e s . In order to qu a l i f y f o r incentive commission rates, such tours must be promoted with printed promotional l i t e r a t u r e . The rationale underlying d i f f e r e n t i a l commissions for the various tours stems from the b e l i e f of the conference that agents should receive greater compensation for sales which are more expensive to service. Due to the economic incentive for t r a v e l agents to seek to increase the r a t i o of revenues retained over . t o t a l sales revenues, the tendency to claim that t i c k e t sales qualify for higher tour commissions was reported to have increased r a p i d l y 9 e s p e c i a l l y before the widespread use of d i f f e r e n t i a l commissions i n the international market. This could be expected as the revenue a l t e r i n g variables which r e t a i l t r a v e l agents may a l t e r are rather l i m i t e d . Moreover, from the i n d i v i d u a l firm's point of view* there i s a substantial difference between the previous commission l e v e l of 7 percent and one of 10 or 11 percent. Commission l e v e l s for domestic a i r transportation i n Canada and the United States have remained r e l a t i v e l y nan-competitive over the l a s t decade because of the strength of the ATC and i n t e r v i e w with P h i l l i p Morgan, CP Air IATA representative, March 15, 1977. 12 because tbe appropriate regulatory bodies have not rejected commission rates f i l e d with them. Some concern has been expressed by the domestic c a r r i e r s that the commission rate phenomenon which has developed for in t e r n a t i o n a l commissions w i l l spread to include domestic commissions as well, thereby p r e c i p i t a t i n g increased marketing costs to the domestic a i r l i n e s . The s i m i l a r i t i e s between an open rate s i t u a t i o n for domestic commissions and an open rate s i t u a t i o n f o r inte r n a t i o n a l commissions are s i g n i f i c a n t . Indeed, i f the open rate were allowed to spread, the p r o f i t a b i l i t y of domestic c a r r i e r s would most l i k e l y be reduced given the high v a r i a b i l i t y of commission expenses as a percent of the t o t a l operating expenses. 1 0 The costs and benefits of the open rate commission s i t u a t i o n as well as a view as to whether regulatory control of commissions i s i n the public's i n t e r e s t s h a l l be presented i n the l a t t e r part of th i s chapter. 2.1 Commissions On International Air Transportation Conference Ticket Clearing Procedures The International Air Transport Associaton <IATA) has designed a set of procedures which i t c a l l s the Agency Programme in order to ensure that a l l agency outlets are "competent and ^©Evidence of the r e l a t i v e importance of increasing commissions to the ATC member c a r r i e r s i s revealed i n 1977 A i r Transport Association of America s t a t i s t i c s . Over the period from 1S75 to 19.76 passenger t r a f f i c commisions representing 4.9% of operating expenses increased by 17.7 percent while labour costs increased by only 10.4 percent- Aviation Daily, January 10, 1977, p.63. 13 e t h i c a l organizations capable of providing accurate and dependable service to the p u b l i c " . 1 3 i : : 1 I i E x h i b i t 2 I J CP A i r j Domestic schedule Of Commissions For Air Transportation j Originating In The United States J Commission On Domestic C a n a d i a n And j J T r a n s b o r d e r T r a n s p o r t a t i o n j j . — _ _ _ . + • , __| • I I J C h a r t e r C l a s s H a w a i i J 10 % I f a r e s j j C h a r t e r C l a s s Canada j 8 % J F a r e s j | F a m i l y P l a n F a r e s I 8 % J 7/30 Bay E x c u r s i o n J 8 % I F a r e s J 1 30 Day E x c u r s i o n F a r e s J 8 % | D i s c o v e r America 1 8 % I E x c u r s i o n F a r e s ) | E x t r a t e r r i t o r i a l T r i p s | 7 % | Group F a r e T r a v e l I 7 % I D i s c o u n t 2 0 - A i r T r a v e l i 7 % | North America I J 111 Other Domestic/ I 7 % | T r a n s b o r d e r F a r e s J I C h a r t e r s I 5 % I A d v e r t i s e d / I n d e p e n d e n t J 11 % \ A i r Tours J | I n c e n t i v e / C o n v e n t i o n 1 10 % i A i r Tours | J I j - . 1_ . _ Source: CP A i r , M a r k e t i n g Department, A p r i l 1978. The s p e c i f i c r e q u i r e m e n t s of IAIA c o n c e r n i n g agency e n t r y 1 1 J . B r a n c k e r , IATA and What I t Does, Leyden, The N e t h e r l a n d s , 1S77, p. 60. 14 requirements s h a l l be examined i n Chapter .3 which i s concerned with industry regulation- One of the primary reasons for the founding of the Agency Programme was to prevent agencies from discounting from established t i c k e t price by s p l i t t i n g their commissions with customers- The c a r r i e r s f e l t that i n the long-run, i t would be in the i n t e r e s t of the public to establish regulations shich fo r b i d member c a r r i e r s from paying commissions to non-IATA approved t r a v e l agencies. E f f o r t s on the part of IATA to fester an industry characterized as f i n a n c i a l l y stable and professional i n character have been thsarted to a certain extent by agents who lend their ticket stock to non-IATA approved agencies- The 1ATA Bank Settlement Plan - A payment settlement plan created by IATA establishes a central c l e a r i n g house for payments of IATA approved travel agents to member c a r r i e r s . These clearing houses (which are t y p i c a l l y commercial banks) al l o c a t e the receipts to the appropriate a i r l i n e s . The u t i l i z a t i o n of f i n a n c i a l intermediaries i s more e f f i c i e n t than a system ahich would c a l l for each c a r r i e r to remit payments to each of a number of c a r r i e r s . Tbe advantages of t h i s system which accrue to the t r a v e l agent include s i m p l i f i e d reporting and remitting procedures and the centralized issuance and control of a l l sales documentation and the automatic replenishment of t i c k e t stocks. S i m i l a r l y , the a i r c a r r i e r s benefit from the lower cost of the system as compared with what would be the case under a system which 15 c o l l e c t e d from each t r a v e l agent s e p a r a t e l y . Annual t i c k e t s a l e s handled by the system reached $1.1 b i l l i o n i n 1977. 1 2 The I n t e r n a t i o n a l T r a v e l Agent Bemuneration Conflj-ct- T r a d i t i o n a l l y , IATA has played an i n s t r u m e n t a l r o l e i n the est a b l i s h m e n t of agreed upon commission s t r u c t u r e s f o r i n t e r n a t i o n a l a i r t r a n s p o r t a t i o n . I n t e r n a t i o n a l commissions have g e n e r a l l y been somewhat h i g h e r than those paid cn domestic t i c k e t s a l e s . 1 3 The primary reason f o r t h i s stems from the conference b e l i e f t h a t t r a v e l agents devote more time and e f f o r t i n a s s i s t i n g and planning an i n d i v i d u a l ' s journey abroad than i s r e q u i r e d f o r a s h o r t e r domestic journey, which i s an a l l e g e d l y l e s s complicated matter. Although t h i s r e a s o n i n g was q u i t e v a l i d i n the e a r l i e r days i n i n t e r n a t i o n a l a i r t r a n s p o r t a t i o n when only the a f f l u e n t c o u l d a f f o r d ; t h e luxury of i n t e r n a t i o n a l a i r t r a v e l , one sonders whether the d i f f e r e n c e between i n t e r n a t i o n a l and domestic commissions, at l e a s t before 1975, was not a ve s t i g e from the pas t . fiith the r i s e o f the e x c u r s i o n f a r e and the emergence of c h a r t e r f l i g h t s , e s p e c i a l l y on the North A t l a n t i c , and the i n c r e a s e d freguency of t r a v e l i n t h a t market and more im p o r t a n t l y the i n c r e a s e d a c c e s s to i n t e r n a t i o n a l a i r t r a v e l to a wide c r o s s s e c t i o n of the p u b l i c , the argument f c r a d i f f e r e n c e between i n t e r n a t i o n a l and domestic commissions no i ^ X b i d . , p. 63. 1 3 A g e n t s do not r e c e i v e i n t e r n a t i o n a l commission r a t e s f o r s a l e s on ^ t r a n s b o r d e r f l i g h t s between Canada and the U.S. Such s a l e s r e c e i v e remunerationat a s p e c i a l transborder commission l e v e l . 16 longer i s very convincing. There appears to be no i n d i c a t i o n that the industry s h a l l adopt a Blanket or uniform commission l e v e l . Indeed, the opposite appears to be the trend taking hold. The i n t e r n a t i o n a l commission structure prevailing, up u n t i l A p r i l of 1S75 offered t r a v e l agents i n Canada and the United States 7 percent on i n t e r n a t i o n a l point^to-pcint t i c k e t sales and 10 percent on the sale of inclusive tours. However, t h i s s i t u a t i o n could not endure forever. Following the pheneiriinal growth patters of the a i r l i n e industry i n the 1960*s and the introduction of numerous technological advancements to the industry, most c a r r i e r s were prepared for continued s t r i d e s forward i n the 1970*s. Industry economists and management faced grave d i f f i c u l t i e s i a meeting the demands on t h e i r organizations i n f l i c t e d by environmental changes such as s p i r i l i n g :•; i n f l a t i o n , the "energy c r i s i s " and a l e v e l i n g o f f of demand for a i r travel i n many markets- One should also r e c a l l that these changes came about at a time when most c a r r i e r s had expanded capacity by entering the wide-body era i n a n t i c i p a t i o n of future t r a f f i c growth- The upshot of t h i s s i t u a t i o n was that i n d i v i d u a l c a r r i e r s became tempted to a l t e r commissions, oj;e of the marketing mix variables not d i r e c t l y regulated by government agencies. The practice of rebating passenger fares to agents and o f f e r i n g commissions higher than those agreed upon by conference regulations became widespread in the early 1970's due to the short-term benefit of increased t r a f f i c . The wide variety of compensation schemes and overrides offered by c a r r i e r s to agents were not required to be f i l e d with the C i v i l Aeronautics Board at that time. Thus, from a competive 17 point of view, i t became exceedingly d i f f i c u l t for the in d i v i d u a l i n t e r n a t i o n a l c a r r i e r to keep track of the commissions offered by each competitor on each route- The s i t u a t i o n progressed i n such a manner u n t i l Pan American World Airways announced i n A p r i l of 1975 that i t would no longer abide by IA2A rules concerning commissions because other c a r r i e r s were offering i l l e g a l discounts, rebates and kickbacks. Instead of following the clandestine course which much of the industry had taken. Pan American developed the volume incentive commission plan and began openly paying a 3 percent override f o r a l l sales i n excess of 90 percent of the business each agent supplied Pan American i n the comparable month of the previous y e a r . 1 4 The rationale underlying the denunciation cf the IATA commissions i s found i n exerpts from a l e t t e r by William T. Seawell, Chairman of the Board of Pan American to the Director General of IATA. Pan Am's actions touched off an open rate commission s i t u a t i o n which has had s i g n i f i c a n t ramifications f o r a i r l i n e - t r a v e l agent r e l a t i o n s . The course of action Pan Am chose to take as well as the reasons underlying the major inte r n a t i o n a l c a r r i e r ' s decision are evident i n the following communique^15 *•"Agent Commissions S t i r Concern", Aviation Week-and Space - Technology, A p r i l 14, 1S75, p. 25. 18 It i s common knowledge that IATA commission resolution are being widely ignored. Business controlled by agents has bee erne,, to a s i g n i f i c a n t extent, the subject of competitive-bidding of various a i r l i n e s . .The. problem has become most serious in recent weeks as t r a f f i c l e v e l s have declined and as c a r r i e r s have sought to f i l l empty seat capacity. Violators have found comfort i n the fact that IATA does not or cannot enforce i t s resolutions... fhe present v i o l a t i o n s discriminate against those a i r l i n e s and agents who have sought tc observe re s o l u t i o n . The impact on Pan Am has become most serious.... We can no longer explain to our stockholders, c r e d i t o r s , and employees why Pan fin's position should be eroded through adherence to standards that others successfully ignore. Given the fact that Pan Am cannot afford to observe resolutions that no longer e x i s t i n practice. Pan Am must choose between joining secr e t l y others i n v i o l a t i n g these resolution or of meeting the s i t u a t i o n p u b l i c l y and honestly. Be are convinced that i t i s best for the t r a v e l l i n g public, and t r a v e l industry and IATA to bring t h i s matter into the open and to deal with i t d i r e c t l y . We have concluded that the soundest and l e a s t disruptive course of action l i e s i n denouncing the agency resolutions... The commission resolutions are toeing breached consistently and extensively by an increasing number of subscribing c a r r i e r s who are u n f a i r l y p r o f i t i n g from Pan Am*s good f a i t h adherence. IATA, which i s charged with enforcement, i s unable or unwilling to carrry out i t s assignment. Given these facts, there i s no reason why Pan Am should continue to regard i t s e l f as bound. Management at Pan American succeeded in achieving the objective of drawing attention to the badly needed reform of the J-sunited States, C i v i l Aeronautics Board, Concerning Agency Matters—Uniform Commission 28672, March 15, 1978. pp. 3-4. "IATA Sates", Agreements Docket No. 19 IATa•commission r e s o l u t i o n . Moreover, they were s u c c e s s f u l i n exposing the weakness of the conference's compliance procedures which are supposed to be designed to e l i m i n a t e c a r r i e r and t r a v e l agency v i o l a t i o n s of XATA r e s o l u t i o n s , The a c t i o n s of one c a r r i e r could not, of course, go unnoticed, o t h e r c a r r i e r s i n c l u d i n g CP A i r , B r i t i s h Airways and Trans world A i r l i n e s f o l l o w e d s u i t and gave n o t i c e of r e s c i s s i o n of agency commission r e s o l u t i o n s ; s h o r t l y t h e r e a f t e r , they announced new v a r i a t i o n s t o t h e i r own commission s t r u c t u r e s . C a r r i e r s r e a c t e d i n a v a r i e t y of ways. E r i t i s h Airways was reported to have o f f e r e d U.S. agents a s t r a i g h t cash bones f o r any t i c k e t s o l d i n c o r p o r a t i n g i t s route network. I b e r i a , the Spanish n a t i o n a l c a r r i e r , i n c r e a s e d i t s commissions to 10 percent on a l l s a l e s . 1 6 Trans World A i r l i n e s announced an 8.5 percent commission on c e r t a i n r o u t e s . 1ATA responded to the Pan Am p r o p o s a l by augmenting the o v e r a l l l e v e l f o r i n t e r n a t i o n a l p o i n t - t o - p o i n t s a l e s from 7 percent to 7.5 percent. One must bear i n mind the estimate by t r a v e l agency o r g a n i z a t i o n s t h a t a 1 percent i n c r e a s e i n commissions would c o s t a i r l i n e s approximately $165 m i l l i o n a nnually on a world wide b a s i s . * 7 B u l i n g s of the U. S. C i v i l A e r o n a u t i c s Board concerning 1 6 B . K. E l i n g s w o r t h , "Pan Am I n f l e x i b l e on Agent Fee Reform", A v i a t i o n Week and Space Technology. June 23, 1975. p. 23. * 7A survey of 27 c a r r i e r s r e p r e s e n t i n g 51 percent of s o r l d a i r l i n e passenger t r a f f i c r e v e a l e d t h a t agents generated some 55% of a l l passenger revenues. Assuming world, a i r l i n e revenues of $30 b i l l i o n , a 1 % i n c r e a s e i n commissions would c o s t world a i r l i n e s approximately $165 m i l l i o n a n n u a l l y . Op. C i t . , A i r Transport World October. 1977, p. 32. 20 commission l e v e l s have had a s i g n i f i c a n t impact upon the a i r l i n e industry and i n p a r t i c u l a r upon the re l a t i o n s h i p between travel agents and a i r c a r r i e r s - Subsequent to Pan American's notice of re s c i s s i o n of IATA commission resolutions, the C.A.E. issued a notice reguiring a l l c a r r i e r s , both American and. foreign, to maintain a f i l i n g f o r public disclosure, reports of a l l ccmaissions and other compensations paid t r a v e l agents for services rendered. The agency also established regulations which fo r b i d c a r r i e r s from compensating t r a v e l agents and tour wholesalers at leve l s not on f i l e with the Board- Although t h i s move f a c i l i t a t e d the e f f o r t s of c a r r i e r s to keep track of competitive commission l e v e l s , i t did not result i n the Board's acceptance of a conference commission structure agreement. 2-2 Open Hate Commissions An open rate s i t u a t i o n has prevailed on commissions received by U.S. t r a v e l agents f o r international t r a v e l originating in the United States since the abandonment of IATA commission resolutions by Pan American . Canadian c a r r i e r s which serve international markets have, to some extent, been able to i s o l a t e themselves frcm the escalating commission l e v e l s i n the United States. The threat of the diversion of t r a f f i c to U.S. c a r r i e r s has been suppressed by the prohibition maintained by the Canadian Transport Commission regarding the payment of higher commissions to Canadian travel agents. For example, i n October . of 19 76, Pan American was reported to have been prohibited from paying commissions above the 8 percent/11 percent l e v e l which A i r Canada and C ? Air 21 maintained as t h e i r i n t e r n a t i o n a l commission s t r u c t u r e - 1 8 Nevertheless, i t i s apparent from i n t e r v i e w s with t r a v e l agents and r e p o r t s i n i n d u s t r y p u b l i c a t i o n s that agents have dev i s e d methods of circumventing C.T.C. r e g u l a t i o n s i n t h i s regard- One approach u t i l i z e d i n o b t a i n i n g h i g h e r commissions i s f c r the Canadian agency t o make s a l e s cn the i n t e r n a t i o n a l t i c k e t stock of an a f f i l i a t e agency i n the United S t a t e s , another approach which has r e c e n t l y developed, i s the payment of i l l e g a l o v e r r i d e s i n the form of a d d i t i o n a l t i c k e t s cn c a r r i e r s f o r which no payment i s made to the i s s u i n g c a r r i e r . T h i s form of o v e r r i d e payment came t o the a t t e n t i o n of Revenue Canada i n s p e c t o r s who were concerned t h a t agents were not r e p o r t i n g t i c k e t s as income.*? The above s i t u a t i o n s exemplify the s i g n i f i c a n t e x t r a t e r r i t o r i a l impact o f 0-S- r e g u l a t o r y agency d e c i s i o n s upon the a i r t r a n s p o r t i n d u s t r y i n Canada. The open commission r a t e s i t u a t i o n has a t t r a c t e d a great d e a l of a t t e n t i o n both w i t h i n the t r a v e l i n d u s t r y and from the p u b l i c as w e l l . One might a t t r i b u t e t h i s i n t e r e s t t o the dramatic change i n commission l e v e l s over the past f i v e years, where p r i o r t o 1975 agents were ear n i n g 10 percent commissions cn s a l e s of group t i c k e t s on the North A t l a n t i c as opposed to the 25 percent l e v e l of commissions which B r i t i s h Airways was rep o r t e d to be paying i n February o f 1977. E x h i b i t 3 i n d i c a t e s the h e t e r o g e n e i t y of commission r a t e s p r e v a i l i n g f o r U.S. t r a v e l i a « g a a am i n c e n t i v e s P r o h i b i t e d " , Canadia-n T r a v e l Co c r i e r . October 7, 1976, p. 13. 1 9"Revenue Canada I n v e s t i g a t e I l l e g a l Rebates", Canadian T r a v e l C o u r i e r , March 9, 1978, p.1 22 agents s e l l i n g i n t e r n a t i o n a l a i r transportation at the same time that the 25 percent B r i t i s h remuneration l e v e l was reported. r _ . : , , ^ 1 1 I Exhibit 3 \ J I | Selected International Commission Levels-Petruary 1977 i j. + . ; 1 i I i I A i r l i n e ] Commission Level ] J i I | Aerolineas J Basic Rate 10 To 11 Percent J I Argentenias | j I Air New Zealand | Group Overrides To Selected Agents J I i Of Between 10 And 15 Percent J | A i r Siam I 30 % On Individual Tickets; 41 % Cn I I J Group Sales I | A l i t a l i a } 23 % For Milan Or Home Bookings; J I | 3 % Override For Tours I I B r i t i s h Airways | Override Of Between 3 % And 17 % To | J I Selected Agents | i E l Al j Incentive Payments To $60 On J 1 i Individual Payments I I KIM 1 Overrides Of Between 2 % And 8 % I I Pan American I 23 % Commission On Certain Routes J 1 ISA | Paying A Variety Of "developmental" | I I Commissions J J I 1 f _ _ _ _ J ; ; J I I I Source; R. K. Eliingsworth, "Agent Commissions S t i r Concern",} J A v 1 a t ion •<• Week A a d S pac e Te c h no 1 eg v » February 14, 1977, P. 23.) I i L : : ; 1 The open commission si t u a t i o n has aptly been teraed a "commission war" by industry observers because of the dramatic increases i n sales which are possible in markets with a high proportion of sales through t r a v e l agents. The United States-Italy market i s a case i n point., At the beginning of 1977, A l i t a l i a , the state-owned I t a l i a n f l a g c a r r i e r , introduced higher commissions on the North A t l a n t i c . .23 The a i r l i n e offered to pay agents an additional 15 percent over and above the standard 8 percent offered by most c a r r i e r s - 2 0 Moreover, an additional incentive override of 3 percent was offered for i t i n e r a r i e s including tours. For the t r a v e l agent deciding upon a c a r r i e r for a New York-Borne passenger, the $348.22 commission offered by A l i t a l i a on a $1,514 round-trip f i r s t class t i c k e t was more a t t r a c t i v e than the $148.69 commission offered by ISA. Although t h i s i s an extreme example, i t does point out the e f f e c t upon the i m p a r t i a l i t y t r a d i t i o n a l l y associated with the travel agent. A summary of competitive c a r r i e r passenger commission f i l i n g s with the U.S. C i v i l Aeronautics Board i s presented i n Appendix 1. From t h i s data, one observes not only the wide di v e r s i t y of group overrides and volume incentives, but also the type of performance and sales patterns which i n d i v i d u a l c a r r i e r s are attempting to foster. Average commission l e v e l s have increased s u b s t a n t i a l l y since the introduction of open commission structures- Although conference regulations forbid the discounting of a i r l i n e t i c k e t prices by sales intermediaries, higher commissions on highly competitive routes have resulted i n increased temptation for t r a v e l agents to indulge i n i l l e g a l fare discounting i n order to remain competitive. The passing on of lower t i c k e t prices to end users i s an economic phenomenon which one would expect under conditions t y p i f i e d as having a great deal of competition and 2 0 " A i r l i n e Commissions Go Sky High", Business Beek, February 7, 1977, p.31 24 limited government or conference control. In Japan, where the Japanese government eventually stepped i n , the commission s i t u a t i o n developed to a point where a i r l i n e s were reported to be keeping as l i t t l e as half of the published t i c k e t p r i c e . 2 i Travellers were able to shop around among travel agents for the lowest price. 2.3 The Impact Of Rising Commissions On Industry Structure Open rate commissions have had a s i g n i f i c a n t • impact upon the t r a v e l agent industry, upon the way the t r a v e l l i n g public views the industry and upon the industry's r e l a t i o n s h i p with the a i r l i n e s . , Evidence of r i s i n g commission expenses facing OVS. c a r r i e r s providing i n t e r n a t i o n a l service i s presented i a Exhibit 4 . The period, 1 9 7 4 - 1 8 7 6 coincides with the deterioration of the IATA commission resolution previously refered t c . Important changes which are revealed include the following: I D From 1974 to 1976 commissions paid by O.S. c a r r i e r s for sales of international transportation soared 6 5 . 9 percent from $ 1 3 3 - 9 m i l l i o n to $ 2 2 2 . 2 million.2 2 i2) The recent augmentation i n i n t e r n a t i o n a l commission expenses i s revealed by the f a c t that the two year increase was $88 m i l l i o n while the increase from 1960 to 1974 was only $87 m i l l i o n . zi«How Discounts Bleed the A i r l i n e s " , Busiriess Week. June 2 3 , 1975, p. 1 1 6 . 22 Air: Transport World, o p . c i t . , Oct. 1 9 7 7 . 25 (3) The r a t i o of i n t e r n a t i o n a l commissions over passenger revenues i n c r e a s e d d r a m a t i c a l l y from 6.31 percent i n 1974 t o 9.22 percent i n 1S76. S i s i n g commission c o s t s have c o n t r i b u t e d t o the lower a f t e r tax e a r n i n g s of major a i r c a r r i e r s as have higher f u e l and labour c o s t s . Operating s t a t i s t i c s presented i n E x h i b i t 5 f o r a l l s e r v i c e s of Canadian c a r r i e r s r e v e a l a dramatic i n c r e a s e i n t r a f f i c commissions from 1974 to 1976. B i s i n g marketing c o s t s such as these have undoubtedly c o n t r i b u t e d to the poor p r o f i t a b i l i t y p i c t u r e of the two Canadian c a r r i e r s during t h i s p e r i o d . IaTfl o f f i c i a l s have argued that open commissions and p r i c e c o m p e t i t i o n i n general r e s u l t i n the d e t e r i o r a t i o n of the image of the a i r • t r a v e l i n d u s t r y . , However, one would net expect support f o r i n c r e a s e d marketing c o s t s from the o r g a n i z a t i o n r e p r e s e n t i n g the a i r c a r r i e r s . With regard to changes i n the s t r u c t u r e of the t r a v e l agent i n d u s t r y , under an open commission s t r u c t u r e i t appears h i g h l y p l a u s i b l e t h a t i n c r e a s e d c o n c e n t r a t i o n would r e s u l t because of the economic a t t r a c t i o n of o f f e r i n g l a r g e volume agencies more advantageous arrangements. In the past the i n d u s t r y has been c h a r a c t e r i z e d by easy e n t r y and steady growth. An on-going study of the t r a v e l agent i n d u s t r y r e v e a l e d t h a t at the end of 1976, there were approximately 12,240 conference-appointed agencies i n the United S t a t e s , an i n c r e a s e of 83 percent over 1S70. Moreover, the annual d o l l a r volumes o f s a l e s i n c r e a s e d a t a s u b s t a n t i a l l y more r a p i d pace, r i s i n g 198 percent frcm 1970 to 1976, an i n c r e a s e of 26 $9.9 b i l l i o n , from $5.0 to 14.9 b i l l i o n . 2 3 However, other s t a t i s t i c s tend to indicate an increased market share being captured by the larger agencies. Over the same period of time, the growth cf small t r a v e l agencies was only 19 percent while medium sized agencies increased 136 percent and large agencies 114 percent- 2 4 She same study also indicated that the d o l l a r volume of sales for i n d i v i d u a l small agencies actually declined between 1970 and 1976- This too i s i n d i c a t i v e of the trend toward concentration of sales i n the larger agencies One must, however, be c a r e f u l not to draw hasty conclusions regarding the cause of industry concentration at the top- Open rate and incentive commissions are not the sole causal factors contributing to the dominance of the large agencies. Indeed, revenues earned from i n t e r n a t i o n a l a i r t r a v e l commissions only account f o r approximately 25 percent of the sales volume which a tr a v e l agency produces. 2 3 Louis Harris and Associates, The-Character and Volume of the the 0* S. Travel Agency Market, S i f f - D a v i s , Mea York, A p r i l 1S77. 2 4£mall agencies are defined for an a l y t i c purposes as those having annual sales of less than $500,000; medium sized agencies have sales between $500,000 and $ 1 m i l l i o n ; large agencies have annual sales greater than $ 1 m i l l i o n . Ex-hifcit 4 I n t e r n a t i o n a l T r a v e l Agent Commissions Paid By United S t a t e s A i r l i n e s 1974-1S76 I 1 I 1 9 7 4 1975 1S76 a 2 3 * 5 6 A meric- 7. 86 6-111 10. 35 6. .62* 15. 21 7 .52% B r a n i f f 6. 05 5.89 7. 98 7. 60 9- 23 7 .97 Eastern 13. 43 5-72 15. 41 5. 96 16. 87 6 .14 N.West 6. 50 4. .63 13. 11 8. 42 36. 12 18 .81 Pan Am 68. 27 6. .97 83- 60 8. 27 101 -8 9 .82 T«A 28. 27 6. .36 31- 91 7. 1.5 37. 6 6 7 .73 Western 1. 45 4. 17 2- 13 6. 03 2. 41 6 .68 T o t a l 133 -91 6. .31% 166 .72 7. 49% 222 .25 9. 22% *, 3 , 5,"Commissions Paid To T r a v e l Agents I n Smillions. J I 2, *, 6"Commissions As A Percent Of A i r l i n e Revenues. } J Source; United S t a t e s C i v i l A e r o n a u t i c s Board In J "U.S. A i r l i n e Commissions Jump In 1976", J A i r T r a n s p o r t World. October, 1977, P.34. 1 28 i 1 Exhibit 5 i Travel Agent Commissions j "Paid By Scheduled Canadian C a r r i e r s 1 1970-1576 j. : . ; J T r a f f i c Commissions {$Millions}- I 1 1970 24-93 ) 1971 26. 16 i 1972 32.26 | 1973 37.00 I 1974 48-79 | 1975 5 6.S7 I 1976 68.17 i I : '• — A i i j Source: S t a t i s t i c s Canada, - Ai r C a r r i e r } F i n a n c i a l Statements, Catalogue | 51-20 6, 1970-1S76. I i i A l o g i c a l argument concerning the loss of the i m p a r t i a l i t y which i s c h a r a c t e r i s t i c of the t r a v e l agent has been put forth by opponents of open commission structures <the primary members being the a i r c a r r i e r s ) . They argue that when non-uniform commissions and incentive payment schemes develop, t r a v e l agents no longer off e r impartial advice to t r a v e l l e r s v i s — a - v i s c a r r i e r choice. Moreover, by acting as agents of t h e i r p r i n c i p a l s , the a i r c a r r i e r s , proponents of uniform commissions, have argued that t r a v e l agents have an e t h i c a l obligation to represent each of the pri n c i p a l s on an egual basis; under non-uniform rates t r a v e l agents, motivated by the economic incentive, d i r e c t 29 t r a f f i c to those c a r r i e r s o f f e r i n g the higher commission. Alternatively, suboptimal booking, {i.e., s e l l i n g space on a c a r r i e r which does not necessarily provide the passenger with the optimal service c h a r a c t e r i s t i c s available from the market), would not necessarily cccur because the short-term additional revenues earned from diverting t r a f f i c to c a r r i e r s paying nigher commissions might not he as great as the goodwill loss caused by suboptimal bookings. Nevertheless, the reliance upon the advice of the travel agent i s p a r t i c u l a r l y important in the case of international a i r t r a v e l l e r s who are l e s s f a m i l i a r than their domestic counterparts i n the choice of c a r r i e r s and gateway c i t i e s . The deterioration of the previously homogeneous int e r n a t i o n a l commission structure and the subsequent development of an open commission s i t u a t i o n have caused regulatory o f f i c i a l s , c a r r i e r management and t r a v e l agents to search for a remuneration scheme which i s generally acceptable. 2.4 Alternative Compensation Schemes A marked need i n the a i r l i n e industry e x i s t s which c a l l s for the commitment of the int e r n a t i o n a l a i r l i n e community to a well established compensation scheme. I f l e f t untouched, escalating commission expenses could result i n a dramatic a l t e r a t i o n i n the marketing practices of the i n t e r n a t i o n a l a i r l i n e industry which may or may not be i n the public's best i n t e r e s t . Indeed, concern over t h i s matter on the part of a i r l i n e management formed the impetus behind an extensive C.A.B. investigation into a i r l i n e remuneration procedures. 3 0 For the purpose of outlining s i g n i f i c a n t advantages and disadvantages of remuneration scheme alternatives, the following three alternatives; net far e , uniform and incentive commission structures s h a l l be analyzed. The regional development incentive commission which i s e s s e n t i a l l y a regulated version of the incentive commission alternative i s also considered- The Net Fare Remuneration Alternative Under a "net fare" approach, t r a v e l agents would not earn a commission from the c a r r i e r s per se, instead, they would charge passengers outright for their services. Such a system would only be viable as a means of reducing o v e r a l l a i r l i n e marketing costs provided that c a r r i e r s reached an agreement excluding the p o s s i b i l i t y of unathorized commission payment..If:this were not the case, a highly compefive commission payment s i t u a t i o n ssould emerge under which competitive pressures would force most c a r r i e r s to pay some commissions. In theory, the net fare concept appears to be quite a t t r a c t i v e from a public policy point of view as well as from the point of view of the c a r r i e r s . The primary advantage to t h i s approach which i s frequently c i t e d by a i r l i n e conference o f f i c i a l s , l i e s with i t s reliance upon the market mechanism i . e . , the demand by consumers for agents' services, i n determining the value of the service performed by the agent. 2 5 l i t h fares set exclusive of commissions, the passenger Mould 2 S " A i r f a r e Commissions May Go-IATA Considers Net Fare Policy", Canadian Travel Courier. May 5, 1977., 31 have the choice of purchasing h i s t i c k e t either from the c a r r i e r or frcm an agent at a somewhat higher price depending upon prevailing market conditions. The impact of introducing such a d i s t i n c t l y d i f f e r e n t remuneration method would most l i k e l y have a s i g n i f i c a n t impact upon the structure of the t r a v e l agent industry. One could anticipate observing larger firms with higher volumes capturing a larger market share while some smaller firms with lower volumes would probably drop out of the industry. The reason for t h i s stems from the lower charge earned per t i c k e t sold i n comparison with the previous standing "closed" commission structure. Another contributing factor to the demise of the "corner" t r a v e l agent i s i t s high overhead r e l a t i v e to sales volume. One might argue that since economies of scale are s i g n i f i c a n t for the r e t a i l t r a v e l agent industry, i t would be in the public's best i n t e r e s t i f the l e s s e f f i c i e n t small firms were gradually weeded out and average firm s i z e increased. However i t i s not e n t i r e l y clear that small firms are indeed i n e f f i c i e n t i n performing a l l tasks reguired of t r a v e l agents. In order for small agencies t c prove tc be economically viable business concerns, they would have to s p e c i a l i z e in a p a r t i c u l a r range of 'services which are not as r e a d i l y provided by the large agencies. An example of such a spec i a l i z e d service i s found i n the Canada-Hong Kong tr a v e l market. In t h i s market, ethnic t r a v e l agents provide a unique range of t r a v e l services; an ethnic t r a v e l l e r from Canada may fi n d i t to his advantage to seek the advice of a s p e c i a l i s t i n t h i s f i e l d . 3 2 The impact of the net fare concept could he more comprehensive than i s evident at f i r s t glance- I f the a i r l i n e conferences were successful i n implementing such a procedure, other modes of passenger transportation would be faced with the decision of whether to fellow s u i t or not. By retaining commissions, other c a r r i e r s could obtain a competitive advantage due to the incentive to promote the services of the c a r r i e r offering a higher monetary incentive. Nevertheless, with regard to passenger services, inter-modal competition i s severely limited especially in the area of commercial or business t r a v e l ; a trans-Atlantic cruise offers the hurried businessman a poor substitute to a trans-Atlantic f l i g h t - Alternatively, i f tour, oceanliner, r a i l and bus companies were to follow the net fare concept established by the a i r l i n e s , established agencies would be exposed to a greater degree of r i s k . Agencies would immediately f i n d themselves without a guaranteed commission rate and instead, exposed to the competitive pressures of a marketplace characterized by price competition. The effect upon some agencies, p a r t i c u l a r l y upon those located i n urban core areas in close proximity to a i r l i n e operated c i t y sales o f f i c e s could prove to be disasterous. Many t r a v e l l e r s , p a r t i c u l a r l y those from the business community, would be attracted to a i r l i n e owned and operated c i t y sales o f f i c e s o f f e r i n g the same transportation services and s i m i l a r marketing conveniences. 33 The Uniform Commission Rate Alter nati-ve- From the time the C.A.B. found that the f i x i n g of agents* commissions was not adverse to the public's i n t e r e s t i n 1947, 2 6 to the recent r e j e c t i o n of the International A i r Transport Association's request for an increase i n commission l e v e l s in 1974, commission lev e l s have been the same for a l l c a r r i e r s i n the market- This has meant that unless under-the-table dealings were taking place, conference member c a r r i e r s have agreed to pay agents the same rates of commission for the various types of services sold such as domestic point-to-point, i n t e r n a t i o n a l point-to-point and i n c l u s i v e tours. For the purpose of analyzing the various remuneration alternatives, the p o s s i b i l i t y of returning to a uniform commission l e v e l should be considered- One of the major advantages of requiring a l l c a r r i e r s to provide agents with the same l e v e l of remuneration which accrues to the c a r r i e r s i s the s t a b i l i t y of sales revenue due to the lack of f l u c t u a t i o n i n commission levels- Uniform commissions which are closed and not subject to change over a period of time have, since their introduction i n 1947, received the support of the a i r l i n e conferences- Moreover, p o l l s have revealed that t r a v e l agents i n the United States favour uniform rates of commission for domestic as well as in t e r n a t i o n a l a i r transportation- In May of 1975, a p o l l of A.S-T-A- members with 689 respondents resulted i n an affirmation of single commission s t r u c t u r e s : 2 7 2 6 United States, C i v i l Aeronautics Board, op- c i t . , p. 1, 27I.bid., p- 97- 3 4 From an economic and marketing point of view, do you believe that s i n g l e , or d i f f f e r e n t i a l commission structures and l e v e l s should apply to the sale of domestic versus i n t e r n a t i o n a l a i r transportation? Single 67 % Separate 33 % One should be aware of the difference between higher commission rates and open commission rates. Although i t has been argued that the c a r r i e r s w i l l incur higher commission expenses nnder open commissions {i.e. , 'under conditions where c a r r i e r s are free to set the commissions they are w i l l i n g to pay agents), i t i s conceivable that closed commission expenses for the industry as a whole could be greater ; than open commission expenses even though some c a r r i e r s , e s p e c i a l l y those offering incentive commissions, would incur higher commission expenses under open commission rates. Another s i g n i f i c a n t advantage attributed to uniform commission l e v e l s concerns the maintenance of the i m p a r t i a l i t y of the agent i n i t s f u d i c i a r y r e l a t i o n to the p r i n c i p a l . Travel agents are not immune from being swayed by the economic incentive which d i f f e r e n t i a l commissions offer. One of the.major reasons shy t r a v e l agents are able to maneuver passengers to the c a r r i e r paying the highest commission i s that most passengers rely upon the advice of t r a v e l agents with regard to c a r r i e r , h o t e l , tour package and frequently ground arrangement choice. Indeed, according to a survey of t r a v e l agents i n the United States, 72 percent of the personal pleasure t r a v e l l e r s and 55 percent of the business t r a v e l c l i e n t s r e l y upon travel agents 35 in the sel e c t i o n of c a r r i e r s - 2 8 As the present "commission war" has shown, some agencies have a l t e r e d t h e i r sales patterns i n accordance with the higher commissions offered by par t i c u l a r c a r r i e r s i n particular markets- It has been argued by opponents to non-uniform commissions that the public i s at no disadvantage and passengers are not i l l - s e r v e d by non-uniform commissions- The argument runs along the l i n e s that i f passengers are ignorant of the e f f e c t s of distorted incentives upon services received, what they de not know cannot hurt them. Katherine Kent, Administrative Law Judge, in ;hearings concerning uniform commission payments to tr a v e l agents has rejected t h i s argument i n arguing that; --.when a passenger consults an agent because of hi s own lack of information as to c a r r i e r s and schedules and has confidence that the agent w i l l deal with him f a i r l y and impartially and the agent does not f u l f i l l his obligations, the passenger i s disserved whether he knows i t or not. By retaining the i m p a r t i a l i t y of the agent, the in d i v i d u a l a i r t r a v e l l e r , who may very well be ignorant of a l l of the t r a v e l options ava i l a b l e to him, benefits from a higher l e v e l of customer service. Another compensation scheme which should be considered by regulatory agencies as a viable alternative i s the incentive commission. The most u t i l i z e d forms of incentive commissions are volume and destination incentives. Under the former, c a r r i e r s o f f e r agents higher commissions for sales volumes exceeding 2 a l o u i s Harris and Associates, op. c i t . , A p r i l 1973, p. 19- 3 6 c e r t a i n preestablished passenger t r a f f i c l e v e l s . Preestablished schedules of commission payment are based either on passenger volume levels or on sales revenue l e v e l s with i n d i v i d u a l c a r r i e r s . Under the l a t t e r , c a r r i e r s offer agents higher commission payments for booking to certain locations shich, for one reason or another,:the c a r r i e r i s attempting to promote. One of the major advantages to incentive commissions rests with the f l e x i b i l i t y which a i r l i n e management obtains from the active manipulation of t h i s marketing variable. This f a c i l i t a t e s the stimulation of i n d i v i d u a l market segment demand. For example, by employing a destination incentive on a p a r t i c u l a r route, marketing e f f o r t s can be directed toward stimulating increased t r a f f i c on routes where competitive r e t a l i a t i o n would not be s i g n i f i c a n t . However,; t h i s "micro" view i s i n need of a broadening of scope; the impact of incentive commissions upon the a i r l i n e industry has proven to be substantial as has been shown i n Exhibits 4 and 5. Appendix 1 presents samples of competitive passenger commission f i l i n g s i n the United States. In i t are shown a multitude of volume and destination incentives as well as bonuses offered American travel agents i n March of 1978. 2 9 One should note the vast differences i n incentive schemes as well as the large number which c a r r i e r s must be aware of i n order to maintain t h e i r competitive positions i n the marketplace. The issue of <whether the public should have access to rates 2ssugmarv of Competitive Passenger Commission E i l i n g s in' the USA* CP Air, Industry A f f a i r s , March 1S78, p. 1. 37 of commission paid middlemen has r e c e i v e d some a t t e n t i o n i n the U.S. i n recent years. In f a c t , a p o l i c y statement by the Ford a d m i n i s t r a t i o n i n the United S t a t e s c l e a r l y expressed the need f o r p u b l i c i n f o r m a t i o n on t h i s s u b j e c t . The p o l i c y statement reasoned t h a t i n order to "help ensure consumer awareness and to permit the C. A.fi. t o take commission c o s t s i n t o account i n determining t o t a l c a r r i e r c o s t s as a b a s i s f o r f a r e d e c i s i o n s , c a r r i e r commission s t r u c t u r e s should be f i l e d • f o r p u b l i c i n s p e c t i o n a t the B o a r d . " 3 0 The C. A. E ordered c a r r i e r s t o begin f i l i n g d e t a i l e d r e p o r t s of a l l commissions and other compensation p a i d t r a v e l agents and tour o p e r a t o r s i n e a r l y 1976. The r a t i o n a l e u n d e r l y i n g the Board's order i s e s s e n t i a l l y t h a t because commissions are p a r t of a i r t i c k e t p r i c e s , the p u b l i c should be made aware of the r a t e of commission which middlemen earn. Aside from i n c r e a s e d a i r l i n e management c o n t r o l over the p r i c i n g d e c i s i o n v a r i a b l e , i n c e n t i v e commissions r e q u i r e management to maintain a constant s u r v e i l l a n c e of changes i n commission l e v e l s and i n d i v i d u a l a i r l i n e i n c e n t i v e schemes. From an i n d u s t r y - w i d e p e r s p e c t i v e , a d d i t i o n a l emphasis upon s e t t i n g a p p r o p r i a t e commission l e v e l s e n t a i l s an i n c r e a s e i n marketing c o s t s which may e v e n t u a l l y be s h i f t e d to the consumer- T r a v e l agent a s s o c i a t i o n o f f i c i a l s have argued t h a t the higher r a t e of commission earned from i n c e n t i v e commissions can be used to the p u b l i c ' s b e n e f i t by p r o v i d i n g a d d i t i o n a l promotional a c t i v i t i e s - Moreover, one might argue t h a t p u b l i c 3°United S t a t e s , Ford A d m i n i s t r a t i o n , I n t e r n a t i o n a l A i r T r a n s p o r t a t i o n P o l i c y o f the United S t a t e s , September 1976, p. 26. 38 policy objectives could better be achieved, i f government regulatory bodies directed commission structures i n such a manner that c e r t a i n groups of t r a v e l l e r s received a d d i t i o n a l promotional benefits. However, a muchv more v i s i b l e approach, that of a l t e r i n g prices, i s a more e f f i c i e n t means of implementing price discrimination and the subsidization of one group by another. One reason for t h i s l i e s with the f a c t that d i f f e r e n t groups depend upon t r a v e l agents more than others. For example, i t i s generally accepted that pleasure^travellers rely more heavily upon the services of travel agents than do businessmen. Incentive commissions which off e r agents higher commissions for booking to certain destinations or f o r sales volumes which exceed certain preestablished l e v e l s should not be confused with the "open" commission a l t e r n a t i v e compensation scheme considered in t h i s thesis i . e . , such, would be the case with the t o t a l deregulation of commissions paid by c a r r i e r s to middlemen: an open commission s i t u a t i o n i s not necessary for incentive commissions to be offered. Incentive commissions might be regulated so that marketing costs to the a i r l i n e s would not increase s u b s t a n t i a l l y or at l e a s t not as much as they have since the development of open commissions as documented in the previous section. Further insight into the e f f e c t which incentive commissions have had on the in t e r n a t i o n a l trunk c a r r i e r s i s revealed i n Exhibit 6 . As shown i n the ex h i b i t , passenger commissions as a percent of revenues for international c a r r i e r s increased from 5-81 percent i n the f i r s t quarter of 1975 to 8-47 percent in the 3 9 t h i r d q u arter of 1977- N e v e r t h e l e s s , t h i s i n c r e a s e i n average commission r a t e s has been augmenting a t a d e c l i n i n g r a t e . E x h i b i t 6 Passenger Commissions as a Percent o f Revenues ( I n t e r n a t i o n a l Trunk C a r r i e r s ) Date Commission L e v e l Percentage Incre a s e Over P r e v i e u s Year 1 March 31, 1975 5.. 81 .% 1 June 31, 1975 6.01 J Sept. 31, 1975 6-40 \ Dec. 31, 1975 6.86 \ March 31, 1975 7. 43 27.9 i June 31, 1976 7. 86 30.8 i Sept. 31, 1976 8.25 28.9 i Dec. 31, 1976 8. 42 22-7 i March 31, 1977 8.32 12-7 i June 31, 1977 8-40 6-.S i Sept- 31, 1977 8-47 2.7 Source; IATA -.• Agreements Concerning Agencv- M a t t e r s — U n i f o r m Commiss-iofl'- Bates* Washington D.C.: March 15, 1978, p- 60. i n c e n t i v e commissions have been c i t e d as the bulk of the cause behind i n c r e a s i n g commissions i n recent y e a r s . T h i s f a c t tends.to i n d i c a t e the h i g h l y c o m p e t i t i v e nature of the marketing b a t t l e among the c a r r i e r s t o a t t r a c t the 'large-volume and selected-volume agencies. More i m p o r t a n t l y , an open commission s t r u c t u r e which emphasizes i n c e n t i v e commissions tends to s h i f t 40 control of a larger segment of the market to the volume s p e c i a l i s t s to the detriment of the smaller agencies. Although owners of small t r a v e l agencies would not agree, from an economic e f f i c i e n c y point of view, i t might he more advantageous i n an industry marketing a highly homogeneous product such as a i r transportation for large firms to capture a greater share of the market. Observers of the t r a v e l agent industry have noted that the industry has become much more concentrated i n recent years. Since incentive commissions tend to reinforce this concentration, the Canadian Transport Commission must reach a decision as to whether permitting c a r r i e r s to o f f e r agents incentive commissions i s i n the public's best i n t e r e s t . The Beg i o nal Be velop me nt Co mm i s s i on^ Alter native- Dnder the present uniform commission structure prevailing in Canada, travel agents i n Hhitehorse, Yukon T e r r i t o r y , earn the same rate of commission as do t r a v e l agents i n Toronto. Agents earn the same rate of commission based on the published a i r f a r e i r r e s p e c t i v e of the community where they are situated whether i t be an i s o l a t e d northern outpost or a t h r i v i n g southern metropolis. A i r f a r e s to the North from the major Canadian centres of population are generally higher per journey than the price of the average ticket in southern Canada. This i s because i t costs northern c a r r i e r s more to provide transportation services. Moreover, average distances between centres of population are greater. A l l of t h i s implies that the average commission earned 41 on the sale of an a i r journey i s higher. Nonetheless, travel agent operating costs, e s p e c i a l l y the labour portion, are generally much higher i n northern communities than i n the South. As i s frequently the case when a proposal i s put forth c a l l i n g for the subsidization of a par t i c u l a r geographic region, government o f f i c i a l s and taxpayers ask how i s a subsidy for northern residents i n the i n t e r e s t of the country as a whole? Answers to t h i s guestion would have to be found i f higher commissions were allowed to be paid to t r a v e l agents in northern communities because unless a i r f a r e s were raised on northern routes, the net r e s u l t would be a subsidy of a i r l i n e marketing costs i n northern communities. The rationale underlying the need for higher rates of commission i n the North i s found i n the great importance which a i r transportation plays i n northern development. One authority on the subject has stated that "In most new remote communities a i r transportation i s v i t a l . . . I t i s often the only p r a c t i c a l way for r e l a t i v e l y permanent residents to travel to larger centres for recreation, shopping and other purposes." 3 1 If regional development commissions which allowed agents to earn higher rates cf commission on t h e i r sales were approved by the Canadian Transport Commission, one could then anticipate p r o f i t s to r i s e and new firms to enter the industry offering passengers a wider range of t r a v e l counselling services. There i s l i t t l e 3 1K. M. Euppenthal, The Centre for Transportation Studies, University of B r i t i s h Columbia, Transportation Needs and A v a i l a b i l i t y in North Costal Comnsinities in B r i t i s h Columbia. (Vancouver, B. C.: Centre f o r Transportation Studies, 1978) 42 doubt that higher commissions i n northern communities would ameliorate northern t r a v e l agency conditions by providing ad d i t i o n a l incentives to small businesses to of f e r a wider range of services. If t r a v e l agents are to earn nigher commissions than t h e i r associates i n southern population centres, then the issue cf by how much should northern commission rates exceed southern commission rates would have to be resolved. One alternative proposes that average cost differences between agencies operating i n southern c i t i e s and agencies in northern c i t i e s be apportioned in such a manner that bigher commission earnings could o f f s e t the higher costs of operation i n northern areas. One disadvantage with such a proposal i s that a great deal of variation i n operating costs of northern agencies poses the problem of non-runiformity. Another area of concern i s that cost determination procedures are costly to implement and since no single costing method i s necessarily the best costing method, government regulatory agencies and t r a v e l agents would have to come to a consensus before any progress in th i s area could be made. Before blindly accepting a proposal c a l l i n g f o r regional development commissions, additional problems «ith implementation should be considered. C l e a r l y , some degree of animosity could be expected from travel agents not c l a s s i f i e d as northern t r a v e l agents. And of course, the c a r r i e r s which tend to favour stimulating t r a f f i c through high volume, speci a l t y agencies located i n urban centres would most l i k e l y object to the additional cost imposed by higher commissions. 43 In essence, what policy-makers are faced with i n t h i s s i t u a t i o n i s the fundamental question of whether northern development should be subsidized by the producing areas i n the South- Higher commissions i n the North imply a subsidy of northern sales intermediaries by the c a r r i e r s and;possibly by agents i n urban southern Canada- CHAPTER 3 INDUSTRY REGULATION 3-0 The Process Of Entry The establishment of a successful t r a v e l agency requires a stable f i n a n c i a l backing and knowledge of a p a r t i c u l a r segment of the travel industry. In t h i s chapter, questions such as the following are addressd: "What i s t i e extent to which government has regulated the t r a v e l industry?"; "How have p r o v i n c i a l government r e g i s t r a t i o n requirements affected the industry?"; One. ought to also ask, "How has the t r a v e l l i n g public benefited or suffered from the protection offered by p r o v i n c i a l government l e g i s l a t i o n ? " Individuals or aspiring entrepreneurs seeking to establish new t r a v e l agencies i n Canada f i n d that s i m i l a r to many other regulated transportation i n d u s t r i e s , entry requirements are not i n s i g n i f i c a n t and l e g a l and f i n a n c i a l h arriers must be surmounted before p r o f i t s are forthcoming and fringe benefits enjoyed- Generally speaking, i t i s no lcnger possible f o r entrepreneurs to open "whole in the wall" t r a v e l agencies s e l l i n g space on non-IATA c a r r i e r s , at least not i n B r i t i s h Columbia and i n those provinces and states K i t h t r a v e l services l e g i s l a t i o n . The most prestigious c e r t i f i c a t i o n which a tr a v e l agent can receive i s the seal of approval from t i e International A i r Transport Association. C e r t i f i c a t i o n from1 t h i s organization i s highly desirable because the vast majority of international a i r l i n e s belong to IATA and internaional t i c k e t sales make up a 45 large portion of t o t a l a i r l i n e t i c k e t sales by t r a v e l agents i n Canada. A series of steps must be followed before obtaining International A i r Transportation Association (IATA) and Air T r a f f i c Conference (ATC) approval and of course, a provincial government licenc e to market tr a v e l services. F i r s t , the newcomer to the t r a v e l industry must s a t i s f y a l i s t of prerequisites before becoming licenced to s e l l t r a v e l services. After s a t i s f y i n g f i n a n c i a l character reguirements, the debutant i s then ready to be licenced and begin contributing tc the p r o v i n c i a l t r a v e l services compensation fund designed to provide redress to consumers in need. However, t h i s i s only the beginning of the reguirements facing the new agent. Receiving pr o v i n c i a l government approval in no way e n t i t l e s the lieencee to s e l l space on IATA or ATC c a r r i e r s . Conference reccqniticn i s only conferred upon the agent aft e r numerous reguirements have been met. 3.1 A i r l i n e Conference Recognition Of Travel Agents Long before provincial l e g i s l a t i o n was enacted dealing with t r a v e l agents, LATA had established a detailed set of requirements for agency approval. One should, however, note that p r o v i n c i a l government l e g i s l a t i o n i s much more comprehensive as i t encompasses tour wholesalers r e t a i l t r a v e l agents and non- p r o f i t organizations engaged i n the marketing cf . t r a v e l services. Due to the lack of comprehensive entry reguirements, i t was possible for tour wholesalers to s e l l space on a i r c a r r i e r s along with ground transportation and hotel 46 accommodations. A l l too often, t r a v e l l e r s were l e f t with worthless t i c k e t s or even worse, were stranded abroad. In such cases, a i r c a r r i e r s frequently volunteered t h e i r services to stranded passengers or honoured t h e i r t i c k e t s even though no revenue 1 was col l e c t e d from the insolvent t r a v e l firm. In Canada, agencies which have previously been established but not yet approved, must apply to the Agency Investigation Panel, a d i v i s i o n of IATA- This panel administers a programme whose objective i s that of assuring that agency outlets used by IATA c a r r i e r s are capable of providing accurate and dependable service to the public. Other objectives of the programme include ensuring that adequate f i n a n c i a l controls have been taken and that unauthorized commission payments are e l i m i n a t e d . 3 2 Indeed, one of the binding agreements which IATA c a r r i e r s must agree to i n order . to retain membership i n the organization i s the r e s t r i c t i o n of commission payments only to those agents which have been approved by the IATA machinery. The s p e c i f i c IATA requirements f o r establishing a new agency are as f o l l o w s ; 3 3 (1) Sponsorship; An agency must be sponsored by one of the member a i r l i n e s . However, no agency i s accepted i f i t i s owned partly or «holly by an a i r c a r r i e r . i2) Time in Business: An agency must be able to show that i t has been established, staffed and has been doing business for at le a s t s i x months. 32Brancker, J.K.S., IATA and What It Does A. W. S i j t h o f f , Leyden, The Netherlands, p. 60. 3 3Audrey Saunders, International i A i r Transport Association, Agency Investigation Panel, Correspondence, March 25, 1977.. £3) Sales Volume: Tbe agency must have the a b i l i t y t o generate b u s i n e s s not* considered to be p r e s e n t l y r e a c h i n g the a i r l i n e s . The agency must provide a resume of s a l e s p r o d u c t i v i t y f o r s a l e s on • non-? IATA c a r r i e r s . 14) Experience: The Agency I n v e s t i g a t i o n Panel uses d i s c r e t i o n a r y power f o r s p e c i a l circumstances but i n g e n e r a l , minimum l e v e l s of experience are required, f o r two key managers i n the t r a v e l agency; the manager of the agency must have had two years o f f u l l - t i m e experience i n an IATA approved agency or an IATA c a r r i e r i n " c r e a t i n g , generating and promoting passenger t r a n s p o r t a t i o n , s a l e s and s e r v i c e s " . In a d d i t i o n , another agent must have had at l e a s t one year of experience i n i n t e r n a t i o n a l a i r l i n e t i c k e t i n g and r e s e r v a t i o n s with an approved agency or c a r r i e r . (5) Promotional A c t i v i t i e s : The a p p l i c a n t must demonstrate to the panel t h a t the agency has the a b i l i t y t o promote the s a l e s of i n t e r n a t i o n a l a i r t r a n s p o r t a t i o n . (6) Premises: The premises must be devoted e x c l u s i v e l y to the promotion and s a l e of a i r passenger t r a n s p o r t a t i o n and r e l a t e d s e r v i c e s . The premises must a l s o be c l e a r l y marked as a t r a v e l agency. Photographs d e p i c t i n g the appearance of the agency must be submitted to the panel. f7) F i n a n c i a l : The a p p l i c a n t must provide an a u d i t e d balance sheet as w e l l as a bank statement v e r i f i e d by the a p p l i c a n t ' s banker. The f i r m * s working c a p i t a l must exceed $15,00 0. Net worth i n the case o f p a r t n e r s h i p s and p r o p r i e t o r s h i p s and p a i d i n c a p i t a l i n the case of c o r p o r a t i o n s , must not be l e s s than $20,000. ( 8 ) Industry Need: One of the most important s t i p u l a t i o n s s e t f o r t h by the panel i s the need reguirement because t h i s e f f e c t i v e l y g i v e s the Agency I n v e s t i g a t i o n P a n e l the power to r e j e c t an a p p l i c a t i o n i n a p a r t i c u l a r l o c a l e thereby a v o i d i n g the d i l u t i o n of s a l e s revenues of e x i s t i n g IATA approved agencies. When e v a l u a t i n g i n d i v i d u a l a p p l i c a t i o n s , the Agency I n v e s t i g a t i o n Panel uses d i s c r e t i o n by t a k i n g i n t o c o n s i d e r a t i o n d i f f e r i n g l o c a l market c o n d i t i o n s . For example, the requirements f o r management experi e n c e and p h y s i c a l appearance of the 48 premises would most l i k e l y be relaxed for the f rentier -i town of Williams Lake, B.C., whereas they would be held to s t r i c t l y i n cosmopolitan Montreal where int e r n a t i o n a l a i r l i n e sales o f f i c e s are presently saturating the downtown area. The Air T r a f f i c Conference of America (ATC), an a i r l i n e conference a f f i l i a t e d with the Air Transport Association of America and composed of 0-S. domestic c a r r i e r s with associate provisions f o r the two major Canadian c a r r i e r s has developed s i m i l a r standards for individuals seeking to establish trav e l agencies which would engage i n • the sale of space on ATC c a r r i e r s . S i m i l a r l y , the Air Transport Association of Canada (ATAC), a conference of Canadian, c a r r i e r s has developed s i a i l a r entrance c r i t e r i a . Even though the three conferences use s i m i l a r c r i t e r i a f o r the evaluation of new applicants, they have yet to combine resources and eliminate the necessity cf applying to separate organizations in order for Canadian t r a v e l agents to s e l l t r a v e l space on domestic as well a i n t e r n a t i o n a l c a r r i e r s which are members of the two bodies., Even though conference entry requirements have not diminished i n r i g i d i t y , the number of conference appointed agencies has witnessed phenomenal growth over the past decade- In the United States, at the end of 1976, there were approximately 12,240 conference-appointed agencies- This represents an increase of 83 percent over the approximately 49 6,800 agencies which were i n business i n 1970. 3* The annual volume of s a l e s of these a g e n c i e s i n 1976 was $14.9 b i l l i o n , or approximately three times the 1970 l e v e l . In an i n d u s t r y with such an impresive r e c o r d f o r growth, i t i s l i t t l e wonder that e n t r e p r e n e u r s both q u a l i f i e d and incompetent have been a t t r a c t e d t o the i n d u s t r y . The number of new e n t r a n t s to the i n d u s t r y has c r e a t e d an acute need f o r p u b l i c p o l i c y makers^to decide whether more s t r i n g e n t r e g u l a t i o n of the i n d u s t r y should be forthcoming. T h i s i s s u e i s addressed i n the s e c t i o n which f o l l o w s . 3.2 Causes Of Agency F a i l u r e s In e a r l y 1977, before t r a v e l agency l e g i s l a t i o n was made law i n B r i t i s h Columbia, a Hawaii-based tour o p e r a t o r c l o s e d the doors of i t s Vancouver o f f i c e d e p r i v i n g as many as one thousand B r i t i s h Columbians of both t h e i r l o n g awaited winter h o l i d a y s and approximately $300,000. 3 5 According t o l o c a l : newspaper r e p o r t s 3 * the f a i l u r e of H. G. Haina and A s s o c i a t e s of Honolulu placed a great deal of pressure on the c a r r i e r s which were to 3»The Character and Volume of thê •Q-.:S-."-Travel'--:-'&qie.gc.vir-aa::rk-e-t;s- 1976. L o u i s H a r r i s and A s s o c i a t e s , I n c . Pp. 5-6. c i t e d i n IATA- Agreements Concerning Agency Mat t e r s - U n i f orm-Commissioha^te. Docket 28672 U.S. C i v i l A e r o n a u t i c s Board, March, 1978, p. 19. 3 s I n f o r m a t i o n on r e c e n t developments concerning Canadian t r a v e l agents i s d i s c u s s e d i n " L i c e n s e d L e i s u r e " , The- F i n a n c i a l Post. March 26, 1977, p. T-3, a s p e c i a l supplement on the t r a v e l i n d u s t r y . 3 6 " S u n Not Down Yet on Hawaii T r i p s " . T h e P r o v i n c e , February 8, 1977, p.27. 50 provide transportation services to Haina customers and on t i e t r a v e l agents which were involved i n the marketing of the bankrupt firm's tours i n Hawaii. In f a c t , one major department store owned t r a v e l agency agreed to unconditionally guarantee the holidays of twenty-three of i t s customers. A spokesman for Northwest Orient A i r l i n e s expressed his company»s willingness to honour a l l t i c k e t s issued on h i s a i r l i n e for inclusion i n Haina tour packages. Underlining the importance of t r a v e l industry regulations from a humanitarian point of view was the f a c t that s i x t y Victoria-area old age pensioners were among the victims of the folded tour wholesaling firm. Events such as t h i s have created a r a l l y i n g point for those interested i n protecting the i n t e r e s t s of consumers of travel services through the l i c e n s i n g and regulation of t r a v e l agents and tour wholesalers. Actually, the occurrence of unfortunate events such as t h i s has had much broader implications; p o l i t i c i a n s and the t r a v e l l i n g public have started to question the usefulness of t r a v e l agents as the marketers of travel services. A number of outstanding factors may be pinpointed as the cause of the f a i l u r e of t r a v e l agent l e g i s l a t i o n . Among the most common maladies facing the industry i s a lack of s u f f i c i e n t working c a p i t a l to support the drain on funds during c y c l i c a l swings i n the t r a v e l industry business cycle. Another contributing f a c t o r to bankruptcies rests with a lack of business management experience. Before t r a v e l agent l e g i s l a t i o n came into e f f e c t , entrance i n t o the industry was r e l a t i v e l y straightforward with no s i g n i f i c a n t b a r r i e r s confronting 51 individuals aspiring to s e l l t i c k e t s on non-IATA c a r r i e r s and a n c i l l a r y t r a v e l services such as tours and hotel accommodations. The industry could appropriately be characterized as e f f i c i e n t with a s u f f i c i e n t degree of competition among small as s e l l as large firms marketing s i m i l a r products. Alternatively, there i s a cost to the public associated with t h i s type of an unregulated industry. Since the jet boom began more than two decades ago, thousands of t r a v e l l e r s have been stranded or were not able to s t a r t t h e i r journeys doe to the bankruptcy or fraud of t r a v e l agents. Travel firms s p e c i a l i z i n g in i n c l u s i v e a i r tours including a i r and land transportation as well as hotel accommodations have shown themselves to be much more susceptible to business f a i l u r e s than are r e t a i l t r a v e l agents. Therefore, one would expect t r a v e l wholesalers to be included i n most prov i n c i a l l e g i s l a t i o n regulating the t r a v e l industry. Nonetheless, one should note that i f a passenger makes his a i r trave l arrangements for t r a v e l on an IATA or on an ATC member c a r r i e r , the a i r t r a v e l portion of the services purchased s h a l l be protected even i f the i n d i v i d u a l t r a v e l agent becomes i n s o l v e n t . 3 7 Alec Burden, the Registrar of Travel Agents fo r B r i t i s h Columbia has provided some ins i g h t to the cause of travel,agent f a i l u r e s by o u t l i n i n g the c h a r a c t e r i s t i c s of agencies l i k e l y to 3 7€eorge Buchannan, A i r Transport Association of America, Testimony before the U.S. Senate Subcommittee en Foreign Commerce and Tourism, Nov. 18, 1.971. 52 f a i l : a s (1) The duration of business has generally been l e s s than two years. 12) The s t a f f i s inexperienced in the t r a v e l industry. (3) The firm i s short on operating cash- |4) The agency has f i n a n c i a l ^ connections with ether agencies in f i n a n c i a l trouble. |5) A high proportion of their business w i l l have been in a i r t r a v e l . Due to the frequent occurrence of shoddy arrangements through unregulated travel agencies, consumer a c t i v i s t s prompted p o l i t i c i a n s i n Canada and the United States to enact l e g i s l a t i o n to protect the purchasers of travel services. S i m i l a r l y , t r a v e l industry l e g i s l a t i o n was designed to protect e x i s t i n g agencies by creating b a r r i e r s to entry- 3.3 Travel Agent And Travel Industry L e g i s l a t i o n As the r e s u l t of e f f o r t s by a highly organized travel agents association i n Ontario, the Ontario Travel Industry Conference (OTIC), the Province of Ontario passed l e g i s l a t i o n i n December of 1974 regulating the operations of t r a v e l agents and t r a v e l wholesalers- These e f f o r t s were motivated as much by the desire to promote an image of professionalism a i t h i n the indostry as they were to protect the consuming1 public. Ontario's Act which i s commonly referred to as the Travel Industry Act, establishes a s p e c i a l o f f i c e under the Ministry of Consumer and Commercial Relations- One of the primary objectives of the Act i s to reg i s t e r a l l t r a v e l agents meeting the established minimum requirements- These minimum requirements are 3 8"20 to 30 Travel Agencies Expected to Fold",• The Province . June 1, 1978, p. 4. 53 designed for the purpose of eliminating the . so-called "fly-by- night t r a v e l agents", hence, reguirements related to r e s p o n s i b i l i t y and a b i l i t y to maintain a viable business enterprise i n an honest manner are included- S p e c i f i c prohibitions have been established r e s t r i c t i n g i n d i v i d u a l s with fraudulent backgrounds from becoming licenced. The act c l e a r l y outlines the reguirements f o r tr a v e l agents i n Ontario seeking to s e l l t r a v e l services to the public. The mobility of t r a v e l agents i s somewhat more r e s t r i c t e d under the Act; the Begistrar i s empowered under the Act, tc maintain records of t r a v e l agents and tr a v e l agencies. I f , f o r example, an agent wishes to move from one employer to the next, he must not i f y the Begistrar- Furthermore, the t r a v e l agent i s only allowed to work for one employer at a t i m e . 3 9 Audited f i n a n c i a l statements in d i c a t i n g the f i n a n c i a l soundness of the t r a v e l agency must be supplied to the Registrar. Bith the power of inspection, the Registrar may audit the f i n a n c i a l records of travel agencies i f he so desires- Investigations are however, only possible i f the Ministry of Consumer and Corporate Relations has reason to believe on reasonable grounds that an agent has violated any of the provisions of the Act or a l t e r n a t i v e l y has-committed an offense under the Criminal Code of Canada. An additional degree of protection i s provided by the Act by a s p e c i a l clause dealing s p e c i f i c a l l y with deceptive and f a l s e advertising. The marketing 3«Cntario, Statutes of Ontario, "The Travel Industry Act, Chapter 115:15, P. 1061- 54 of tours has proven to be p a r t i c u l a r l y s u s c e p t i b l e to d e c e p t i v e a d v e r t i s i n g and t h e r e f o r e , a d d i t i o n a l s u r v e i l l a n c e on the p a r t of the R e g i s t r a r may be deemed t o be i n the best i n t e r e s t cf the t r a v e l l i n g p u b l i c . The O n t a r i o T r a v e l Industry Act r e g u i r e s a l l t r a v e l agents and t r a v e l wholesalers to post a bond with a f a c e value of from $5,000 to $25,000 depending upon t h e i r s a l e s v o l u m e . 4 0 Moreover, an annual payment to the compensation fund i s r e g u i r e d which i s d i r e c t l y p r o p o r t i o n a l to the s a l e s l e v e l , A compensation fund funded by t r a v e l agents c o n t r i b u t i o n s i s h i g h l y d e s i r a b l e f o r consumer's p r o t e c t i o n p a r t i c u l a r l y f o r the t r a v e l i n d u s t r y f o r a number of reasons. F i r s t of a l l the r i s k of business f a i l u r e r e s u l t i n g from l a g s between cash i n f l o w s and o u tflows and poor cash budgeting i s r e l a t i v e l y high i n comparison with other s m a l l b u s i n e s s e s of e g u i v a l e n t s i z e with a s i m i l a r l e v e l of f i x e d c o s t s . Secondly, the r a t i o of t o t a l revenue to f i x e d c o s t s i s r e l a t i v e l y high f o r t r a v e l agents; combining t h i s with s e a s o n a l f l u c t u a t i o n s i n s a l e s l e v e l s can imply s i g n i f i c a n t exposure t o b u s i n e s s r i s k and l a r g e sums of money r e s t i n g i n the c o f f e r s of t r a v e l agents while i n t r a n s i t from t r a v e l l e r t e c a r r i e r - B r i t i s h Columbia f o l l o w e d the l e a d of Quebec and O n t a r i o and e s t a b l i s h e d i t s own T r a v e l agents R e g i s t r a t i o n Act which came i n t o f o r c e on February 21, 1S78. The Act i s r e v e a l e d i n i t s e n t i r e t y i n Appendix 2. Although modelled c l o s e l y a f t e r the 4 0 n I i c e n s e d L e i s u r e " , The F i n a n c i a l Post. March 26, 1977, pp. T1- 7. 55 O n t a r i o A c t , B r i t i s h Columbia's Act has some important d i f f f e r e n c e s which i t s authors b e l i e v e provides a d d i t i o n a l consumer p r o t e c t i o n - For example, an important f e a t u r e of the Act i s found i n i t s p r o v i s i o n of p r o t e c t i o n f o r B r i t i s h Columbia consumers whose t r a v e l agents d e a l with o u t - o f - p r o v i n c e w h o l e s a l e r s - * l One of the most convenient means of compensating t r a v e l l e r s f o r t h e i r l o s s e s as the r e s u l t of a t r a v e l agent f a i l u r e i s to e s t a b l i s h a s p e c i a l compensating fund e x p r e s s l y f o r t h a t purpose. Such i s the case with the B r i t i s h Columbia Act., A T r a v e l Assurance Board comprising r e p r e s e n t a t i v e s from consumers, the t r a v e l i n d u s t r y and the M i n i s t r y of Consumer and Corporate A f f a i r s a d m i n i s t e r s a T r a v e l Assurance Fund, a s p e c i a l t r u s t fund under the government's g e n e r a l revenue fund a g a i n s t which consumers may make c l a i m s i f they f a i l to r e c e i v e t r a v e l s e r v i c e s f o r which they have p a i d . . The fund may reach a maximum s i z e o f $700,000. Cash r e s e r v e s of the fund are accumulated through c o n t r i b u t i o n s of agents on a p r o - r a t a b a s i s . * 2 Hair Mair, B.C. Consumer and Corporate A f f a i r s M i n i s t e r estimated t h a t "the number of cases i n which the fund w i l l be needed w i l l be s m a l l , but each case c o u l d i n v o l v e huge amounts of money-"* 3 Compensation i s granted to those who have s u f f e r e d d i r e c t economic l o s s as s t a t e d i n * * Ne w s Release, B r i t i s h Columbia, M i n i s t r y of Consumer and Corporate A f f a i r s , Jan- 30, 1978. P.30. 4 2Jj2iJ-» P-30. : * 3 , ,B.C. T r a v e l Operators Helccme R e g i s t r a t i o n P r o v i s i o n s " , 'The P r o v i n c e , Feb. 12, 1977, p. 10. 56 S e c t i o n 17 of the Act:** 11) A person who has s u f f e r e d d i r e c t economic l o s s by reason of Ca) the i n s o l v e n c y or bankrutpcy of a t r a v e l agent or a t r a v e l wholesaler r e g i s t e r e d under t h i s A c t , o r (b) f a i l u r e to c o l l e c t money ordered by a c o u r t to be paid by a t r a v e l agent or wholesaler r e g i s t e r e d under t h i s Act a f t e r reasonable e x e c u t i o n proceedings have been attempted, or (c) such other circumstances as may be p r e s c r i b e d may, s u b j e c t to t h i s Act and the r e g u l a t i o n s , apply f o r compensation from the fund. In order to enf o r c e the Act p r o p e r l y , s p e c i f i c p e n a l t i e s have been provided f o r i n the l e g i s l a t i o n . A l s o , an e a r l y d e t e c t i o n system r e q u i r i n g agencies to f i l e annual f i n a n c i a l r e p o r t s with the R e g i s t r a r has been provided f o r i n the A c t . 4 5 Moreover, i f the R e g i s t r a r s u s p e c t s t h a t an agency has not been adhering t o the requirements of the Act, an i n v e s t i g a t i o n of the p a r t i c u l a r agency i n q u e s t i o n under the a u s p i c e s of the R e g i s t r a r may be undertaken. One of the a l l e g e d b e n e f i t s of t r a v e l i n d u s t r y l e g i s l a t i o n i s that i t improves the public»s image of t r a v e l agents and t o u r o p e r a t o r s . Although one might expect t r a v e l agents to be somewhat apprehensive when faced with l e g i s l a t i o n c u r t a i l i n g managerial freedoms, a g r e a t deal of ap p r o v a l was e v i d e n t i a * * B r i t i s h Columbia, B r i t i s h Columbia S t a t u t e s . " T r a v e l Agents R e g i s t r a t i o n A c t , Chapter 22, 1S77., *:S"Summary of Proposals P e r t a i n i n g to T r a v e l S e r v i c e s l e g i s l a t i o n " , Douglas K. H a r r i s o n , February 1977. (mimiographed) 57 B r i t i s h Columbia subsequent to the introduction of the a c t . The president of the B r i t i s h Columbia chapter of the Canadian Society of Travel agents indicated p a r t i c u l a r approval of r e g i s t r a t i o n provisions which require "seme professionalism" from travel industry p a r t i c i p a n t s . 4 6 As with many government imposed insurance schemes, a certa i n degree of debate developed over the issue of who s h a l l pay for increased consumer protection; should i t be the t r a v e l l e r , the r e t a i l agent, the wholesaler, the c a r r i e r or as i s so often the case, the taxpayer? Followinq the enactment of the B.C. Travel agents Registration Act, r e t a i l agents represented by the Associtation of Travel Agents of B r i t i s h Columbia expressed some concern that Section 8 of the A c t 4 7 holds r e t a i l agents l i a b l e f o r a l l consumer claims which have not been co:vered by the t r a v e l f u n d . 4 3 E s s e n t i a l l y , t h i s implies that r e t a i l t r a v e l agents are not exempt from j o i n t and several l i a b i l i t y and more importantly, consumers of t r a v e l services are e n t i t l e d to repayment of money which they paid. The Act therefore reguires the t r a v e l industry to bear the burden of the cost of administering the act. The impact of t r a v e l industry l e g i s l a t i o n with mandatory 4 6Qp- C i t . . The Province, p. 10. 4 7 S e c t i o n 8 of the B r i t i s h Columbia Travel Agents Registration Act i s revealed in Appendix 1. 4 8 " I f B. C. Fund Runs Out, Agents May Have to Cover C l i e n t losses", Canadian Travel Courier, No. 12, A p r i l 7, 1977, p .1. 58 compensation funds upon the approximately 400 firms which registered following the enactment of the l e g i s l a t i o n might appropriately ne compared to l e g i s l a t i o n requiring firms to insure themselves against bankruptcy. The burden of additional costs must be borne by firms within the industry but benefits are derived from the additional protection which consumers en-joy. The l e g i s l a t i o n uses minimua f i n a n c i a l requirements as a safety device to protect the public from floundering agencies and tour operators. On-going f i n a n c i a l standards must be maintained by agencies in B r i t i s h Columbia i f tbeir r e g i s t r a t i o n s are to remain v a l i d . According to Regulations under the Travel Agents Registration Act, sole proprietorships can have their r e g i s t r a t i o n c e r t i f i c a t e s cancelled i f they develop a negative net worth or working c a p i t a l p o s i t i o n ; and corporations can lose t h e i r c e r t i f i c a t e s i f they f a i l to maintain a net worth position of at least $15,000. 4 9 Financial requirements such as these cannot be maintained without costs being incurred by the firms which are most d i r e c t l y affected. From the i n d i v i d u a l firm's point of view, a working c a p i t a l position which i s larger than what would be the case without l e g i s l a t i o n implies an opportunity cost e s p e c i a l l y i f short-term debt i s r e l i e d upon heavily to finance growth- Some degree of resentment to the newly introduced l e g i s l a t i o n was evident subseguent to i t s introduction i n * 9 B r i t i s h Columbia, Ministry of Consumer and Corporate A f f a i r s , "Regulations under the Travel Agents Registration Act", May 1S77, p.4- 59 B r i t i s h Columbia, p a r t i c u l a r l y among the smaller firms- In the i n t e r e s t of countering the present industry trend toward concentration, one must guestion the appropriateness of the i n i t i a l $4 00 per o f f i c e r e g i s t r a t i o n fee as small agencies may fi n d their f i n a n c i a l resources strained to meet the i n i t i a l a pplication fee hurdle- Perhaps l e g i s l a t i o n designed to stimulate the growth of small agencies such as a graduated or progressive tax structure would better serve the i n t e r e s t s of the t r a v e l l i n g public. Moreover, costing studies designed to measure the cost of s e l l i n g an a i r l i n e t i c k e t would be useful in determining whether i t i s more costly cr less costly to r e l y upon the services of an independent t r a v e l agent as opposed to an a i r l i n e owned c i t y sales o f f i c e . Due to various reguirements of the Act which could not be met, two or three companies were reported to have dropped out of the industry shortly a f t e r the r e g i s t r a t i o n d e a d l i n e - 5 0 One can only hypothesize as to whether these agencies would have exposed the public to an excessive degree of r i s k of business f a i l u r e . Whatever the case may be, t r a v e l industry l e g i s l a t i o n creates additional barriers to entry for future business firms and hence tends to strengthen the grasp of the market of established firms. Another p o t e n t i a l l y troublesome section of the Act centres around the unlimited coverage of t r a v e l wholesalers whether they be based i n B r i t i s h Columbia or not., David Hordouin, of s°"Twenty to t h i r t y more t r a v e l agents expected to f o l d " , The Province, June 1, 1978, p-4. 6 0 B.C. based Suntours, a tour wholesaling firm, has pointed out that i t would be possible for a wholesaler to operate offshore, i . e . , outside of the province without contributing toithe compensation fund and s t i l l benefit from the consumer protection offered by the Travel Assurance Fund.si The reason for t h i s i s that a registered r e t a i l agent can s e l l tours packaged by any wholesaler i n the world with t r a v e l l e r s purchasing those tours protected by tbe compensation fund. The implication of t h i s law for the p r o v i n c i a l t r a v e l industry could be s i g n i f i c a n t i n the future i f compensation fund contribution requirements increase s i g n i f i c a n t l y above their present l e v e l . B r i t i s h Columbians could e a s i l y witness the gradual exodous of t r a v e l wholesalers to provinces with either l e s s stringent regulations or no regulations at a l l . 3.4 Consumer Protection From The Bisk Of Bankruptcy Small t r a v e l agency firms which have not been established for a s u f f i c i e n t length of time are highly sensitive to the lag between c a r r i e r payment and the c o l l e c t i o n of receivables. Due to the fact that a i r c a r r i e r conferences, tour operators and hotels reguire prompt payment and competitive pressure may force agency cre d i t managers to extend c r e d i t to commercial accounts to a dangerous degree, agencies can e a s i l y f i n d themselves highly exposed to the r i s k of bankruptcy- Of the importance of a i r l i n e t i c k e t sales payment dates to 5 1"B.C. Act Insures the Bhole World, Wholesale Group T e l l s Government", Canadian Travel Courier, A p r i l 7 , 1 9 7 7 , p.2. 61 t r a v e l agents there i s l i t t l e guestion. For most t r a v e l agencies, a i r l i n e t i c k e t sales comprise the bulk of revenues earned. The IATA Bank Settlement Plan reguires t r a v e l agents to remit funds to settlement banks on a bimonthly basis. Agencies with a high percentage of commercial sales {which generally implies delays i n cash inflows) can e a s i l y be confronted with insolvency when declining sales l e v e l s are combined s i t h the payment reguirements of i n d i v i d u a l domestic c a r r i e r s and the IATA clearing bank. This problem i s accentuated when r e t a i l agents are required to provide t r a v e l services to c l i e n t s in the case of the f a i l u r e of wholesalers. The minimum working c a p i t a l requirements of the Travel Agents Registration Act combined with the protection offered the t r a v e l agent by the Travel Assurance Fund, subs t a n t i a l l y reduce the exposure to default faced by the agent «ith a large proportion of i t s sales through tour wholesalers. According to provisions of the Act, in d i v i d u a l s as well as t r a v e l agents may make claims against the Fund. Therefore, protection i s afforded both consumers and agents at a cost which has i t s primary impact upon travel agents because i n Canada, for the most part, they are not able to strongly influence the rate of commissions shich c a r r i e r s pay. 62 CHAPTER 4 COMPETITION FOR MARKET SEGMENTS 4,0 A i r l i n e R eliance Upon T r a v e l Agents T r a v e l agents p l a y an e s s e n t i a l r o l e as marketing channel members p r o v i d i n g s e r v i c e s t o both passengers and c a r r i e r s of v a r i o u s types- The a i r l i n e . i n d u s t r y r e l i e s h e a v i l y open the t r a v e l agent i n d u s t r y to provide t r a v e l c o n s u l t i n g s e r v i c e s and t i c k e t i n g without b i a s as t o c a r r i e r - For the most p a r t , t r a v e l agents depend h e a v i l y upon a i r t r a v e l t o p r o v i d e them with commission e a r n i n g s . Indeed, ac c o r d i n g to a 1976 survey of 708 conference appointed t r a v e l a g e n c i e s , a i r t r a v e l accounted f o r 63 percent of the t o t a l t r a v e l s a l e s r e v e n u e - 5 2 E s s e n t i a l l y , the f u n c t i o n of the t r a v e l agent i s that of f a c i l i t a t i n g t r a v e l arrangements f o r the t r a v e l l e r - The geographic l o c a t i o n o f the agency alone can i n c r e a s e the convenience f o r the customer i n purchasing h i s t i c k e t and making t r a v e l arrangements- The t r a v e l l e r a v o i d s t i c k e t c o u n t e r queues a t the a i r p o r t - Moreover, c l i e n t s r e c e i v e p e r s o n a l i z e d a t t e n t i o n which u s u a l l y extends beyond merely booking a seat on a f l i g h t and making a h o t e l r e s e r v a t i o n - Many t r a v e l l e r s develop e f f e c t i v e l i n e s of communication with i n d i v i d u a l agents which f a c i l i t a t e s determining the needs of the t r a v e l l e r . T h i s type of p e r s o n a l i z e d a t t e n t i o n , which i s very common between agent and c l i e n t does n o t, as a g e n e r a l r a l e , develop as e a s i l y between 5 2 P.P. c i t , L o u i s H a r r i s and A s s o c i a t e s , 1977, p. 10. 63 a i r l i n e ; t i c k e t sales personnel and a i r l i n e customers. One proponent of t r a v e l agents has remarked that the t r a v e l agent w i l l "use h i s experience and knowledge to synthesize the best combination of t r a v e l services offered to s u i t the needs of the i n d i v i d u a l or group. 1 , 5 3 Another important function performed by the t r a v e l agent i s the organization of packaged tours or as i s more often the case, r e t a i l t r a v e l agents market tours which have been organized and packaged by tour wholesale companies. S i m i l a r l y , wholesale t r a v e l firms freguently own subsidiaires which are active participants i n the r e t a i l t r a v e l business. The Louis Harris survey revealed that 30 percent of the agencies surveyed were involved in the wholesale trade to some degree. One advantage which the commercial t r a v e l l e r may derive from purchasing a i r t r a v e l services from a travel agent in comparison with an a i r l i n e operated c i t y sales o f f i c e , i s the a v a i l a b i l i t y of commercial c r e d i t . Travel agencies s p e c i a l i z i n g i n the commercial trade t a i l o r c r e d i t arrangements to meet the needs of i n d i v i d u a l firms. Such agencies are often times overburdened with accounts receivable and were i t net for p r o v i n c i a l government l e g i s l a t i o n which establishes minimum working c a p i t a l reguirements, many would become insolvent. Competition between c a r r i e r and t r a v e l agents for the very important commercial t r a v e l market segment has taken on a new dimension sutseguent to the introduction of e l e c t r o n i c reservations systems (ERS), to t r a v e l agencies. The next chapter 3 3R- E l l i s , " A i r l i n e v. Agent". Aeroplane. Aug. 14, 1968, p. 15. 64 of the thesis addresses t h i s issue and considers i t s implications f o r the future of the industry- a i r l i n e s have come to be increasingly r e l i a n t upon the t r a v e l agent industry despite s p i r a l l i n g commission expenses. Due to IATA prohibitions, member a i r l i n e s have refrained from eguity involvement in travel agencies- Moreover, there has been no widely noticeable trend to rapidly augment c i t y sales o f f i c e capacity; instead, greater emphasis has been placed upon marketing through t r a v e l agencies. An excellent example of the unigue role which t r a v e l agents play may be found i n the ethnic communities where c a r r i e r s have proven themselves to be i n e f f e c t u a l in at t r a c t i n g minority group members to purchase d i r e c t l y from the c a r r i e r s through a i r l i n e operated c i t y sales o f f i c e s . This statement i s based upon the observation of a strong travel agent industry within various ethnic communities in Canada. 4.1 Ethnic Markets within the ethnic communities of large North American c i t i e s , ethnic t r a v e l agencies f l o u r i s h due t c a variety of reasons. F i r s t , s u f f i c i e n t demand fo r a i r transportation services e x i s t s because strong f a m i l i a l t i e s with r e l a t i v e s abroad are s t i l l present, e s p e c i a l l y among communities of new immigrants. Secondly, ethnic agents are fa n i l i a r with the language and customs of ethnic community members. Indeed, some tr a v e l agencies staffed by new immigrants are more f a m i l i a r with minority group language and customs than they are with the language and customs of the host country. T h i r d l y , under the 65 present remuneration scheme i n e f f e c t i n Canada, i t costs ethnic community members no more to purchase from an ethnic agent than i t does to purchase from an agent or c a r r i e r l e s s f a m i l i a r with ethnic attitudes and customs. The ethnic t r a v e l agent can be defined as an agency which devotes the majority of i t s resources to servicing t r a v e l l e r s from a pa r t i c u l a r ethnic group. Sociologists define the ethnic group as a group consisting of people who conceive of themselves and are regarded by others as belonging together by virtue of common ancestry and a common c u l t u r a l background. 5* Alternatively, one might use language as a c r i t e r i a by which ethnic t r a v e l agents could be i d e n t i f i e d . The reliance upon foreign languages by ethnic agents and their c l i e n t s i s one of the factors which strengthens the t i e s between the two groups and.makes entry into the ethnic market by non-ethnic group members d i f f i c u l t . Chinese Travel Agencies In Vancouver Approximately 25 Chinese t r a v e l agencies compete for the bulk of the Chinese ethnic market i n Vancouver. 5 5 According to 1976 census information, 45,385 or 3.9 percent cf the 1.17 mi l l i o n people in metropolitan Vancouver gave Chinese or 5 * Society Today, Rodney Stark, e d i t o r , Delmar, C a l i f . : CRM Eooks, 3973, p. 528. S 5Agencies were selected from E r i t i s h Columbia, Ministry of Consumer and Corporate A f f a i r s , O f f i c e of the Registrar of Travel Agents, Registred Tray e l Agents and Wholesale rs as of February 21 f 19 78. (unpublished document). 66 Japanese as t h e i r mother t o n g u e . 5 6 The majority of these are of Chinese o r i g i n . Due to the . r e l a t i v e l y l a r g e number of t r a v e l agencies s p e c i a l i z i n g i n a p a r t i c u l a r market segment, the l e v e l o f competition i s r a t h e r h i g h . Evidence of t h i s c o m p e t i t i o n has su r f a c e d i n the form of r e p o r t s of i l l e g a l d i s c o u n t i n g by o r i e n t a l agencies- One o r i e n t a l agent recounted that a t one p o i n t d u r i n g a r e c e n t p r i c e war, p r i c e l e v e l s reached a point so low t h a t r e c e i p t s from t i c k e t s a l e s were below standard t i c k e t p r i c e s l e s s commissions i m p l y i n g that , t r a v e l a g e n c i e s were i n c u r r i n g a l o s s on t i c k e t s a l e s assuming t h a t i l l e g a l o v e r r i d e s were not being p a i d . 5 7 S p e c i a l S e r v i c e s O f f e r e d To E t h n i c Customers E t h n i c c l i e n t s can o b t a i n a unigue range of s e r v i c e s from agents i n t h e i r communities which are not as r e a d i l y a v a i l a b l e elsewhere.. The a b i l i t y t o communicate i n the language of the e t h n i c group member i s but one of the important s e r v i c e s o f f e r e d by agents. T r a v e l c o n s u l t a n t s employed i n e t h n i c agencies are o f t e n times f a m i l i a r with popular d e s t i n a t i o n s of e t h n i c c l i e n t s . Indeed, e t h n i c agencies tend t o have s a l e s p a t t e r n s which emphasize a l i m i t e d number of e t h n i c d e s t i n a t i o n s . 5 8 S 6 C a n a d a , S t a t i s t i c s Canada, 1976: Census of Canada,, Catalogue 92- 821, February, 1978. ^ i n t e r v i e w with P a t r i c k Wang, Reeds T r a v e l , Vancouver, J u l y , 1S78. S 8 T h i s f a c t was r e v e a l e d i n d i s c u s s i o n s with CP a i r Marketing Managers, i n p a r t i c u l a r , Roger Pike, S a l e s F o r e c a s t e r , Vancouver, February, 1978. 67 Aside from route f a m i l i a r i z a t i o n , ethnic agents understand the c u l t u r a l attributes of t h e i r c l i e n t s and may be better prepared to accommodate the desires of ethnic c l i e n t s . Ethnic agents with contacts within ethnic community organizations are more l i k e l y to succeed i n developing tours of i n t e r e s t to ethnic groups. In this capacity, i t i s common for r e t a i l agencies to play a dual role, one of organizing a tour by making arrangements with i n d i v i d u a l tour operators and hotels e c t - , and another of acting as a vendor of t r a v e l services- Ethnic agents are freguently involved with the transmittal of Prepaid Ticket Advice {PTA) instruments due to their involvement i n inte r n a t i o n a l a i r transportation and the process of immigration. The PTA o f f e r s the sponsoring r e l a t i v e the opportunity to send an a i r l i n e t i c k e t to a pot e n t i a l immigrant without incurring the r i s k of losing the funds spent on the t i c k e t , as refunds are made only to the o r i g i n a l purchaser- The use of PTA instruments by ethnic agents has, at times, been misused i n conjunction with immigration. One incident related by an Australian a i r l i n e executive concerned the Greek community i n Sydney, A u s t r a l i a . 5 9 Government o f f i c i a l s uncovered a scheme whereby Greek agents charged landed immigrants excessive service fees for prepaid t i c k e t s , communications and assistance in immigration f o r m a l i t i e s when bringing their r e l a t i v e s from abroad. This exemplifies how new immigrants must r e l y upon the honesty of ethnic agents. 5 9Interviess with S i l l i a m Noble, Quantas Airways, Vancouver, February 23, 1978. 68 Due to the need for representation abroad and the lack of a language barrier, ethnic agents can establish r e c i p r o c a l agreements with t r a v e l agents abroad i n order to f a c i l i t a t e the transfer of prepaid t i c k e t advice instruments. However, one should not be mislead into believing that PTA's have provided a major source of income to ethnic agents. Most agencies re l y much more heavily upon income from t r a f f i c o r i g i n a t i n g in t h e i r own communities- The a b i l i t y of the ethnic agent to meet the s p e c i a l needs of ethnic community members by communicating i n a foreign tongue and providing t r a v e l information i s a much more poignant reason for the success of the ethnic agency than i s income from prepaid ticket advice instruments. 4.2 Ethnic Travel Agent Marketing Strategies Within the t r a v e l industry, ethnic agencies have been noted for t h e i r unigue marketing approach wbich r e l i e s heavily upon non-conference approved subsidiary agents. Under t h i s approach which i s reported to be quite common i n the Orient, p a r t i c u l a r l y i n Japan and Hong Kong, the p r i n c i p a l travel agency uses a sales d i s t r i b u t i o n system comprised of subcontracted agencies and sales personnel which may or may not be approved by a i r l i n e conferences. 6 0 One might hypothesize that the reason for the reliance upon thi s unauthorized subcontract system ; of marketing stems from c u l t u r a l reasons. A casual s t r o l l through Vancouver's Chinatown 6 , 0Interview with Aaron Lee, AA Travel Industry Inc., Vancouver, February, 1978., 6 9 reveals the ominous presence of uniquely ethnic business practice. Although s t r i c t l y prohibited by IATA, the "Japanese" approach to marketing t r a v e l services i s wide spread among ethnic agencies i n Canada. This system, incorporating part-time or f u l l - t i m e sales representatives paid on a commission basis contradicts the s p i r i t and rationale underlying t r a v e l agent r e g i s t r a t i o n l e g i s l a t i o n previously referred to. Under the "Japanese approach", ethnic community members benefit from closer and more personalized contacts with their t r a v e l agents. The elimination of the grand scale impersonalized approach of the large agencies i s made possible by i n d i v i d u a l agents who have f a m i l i a r i z e d themselves with a p a r t i c u l a r facet of the travel industry. A l t e r n a t i v e l y , ethnic c l i e n t s may have to r e l y upon the services of the pr i n c i p a l agent i f a wider range of services i s to be obtained than can be offered by a part-time commissioned agent representative. In accordance with industry l e g i s l a t i o n i n B r i t i s h Columbia, agencies which market a i r t r a v e l services through subcontractors are held l i a b l e f o r the services which they provide. Hence, ethnic t r a v e l l e r s who purchase through subcontracted agents benefit from the protection offered by t r a v e l agent l e g i s l a t i o n as well as from personalized attention. 4.-3 Co-operation Among Ethnic Travel Agencies The l e v e l of price competition among ethnic agencies i s generally agreed to be higher . than the l e v e l which prevails among non-ethnic agencies. This may be attributed to the smaller 70 s i z e of ethnic t r a v e l firms, the close proximity of ethnic agencies and also to the r e l a t i v e l y greater economic impact which foreign t r a v e l has upon ethnic community members- I t i s probably not incorrect to surmise that following the enactment of t r a v e l industry l e g i s l a t i o n , the l e v e l of competition among ethnic agencies deminished- Within a year following B r i t i s h Columbia*s r e g i s t r a t i o n deadline, four ethnic t r a v e l agencies were reported to have ceased doing business-* 1 Nevertheless, even with t r a v e l agent l e g i s l a t i o n i n e f f e c t , controls on discounting among ethnic agents have not been established- Various ethnic agency groups across Canada including Chinese, Pakistanis and F i l i p i n o s , have formed associations in order to encourage the exchange of information among ethnic agents of a s i m i l a r type and to reach agreements to eliminate t i c k e t price discounting. An attempt at forming an association of Chinese t r a v e l agents i n Greater Vancouver was made during the l a t t e r part of 1S78 by a group of prominent Chinese agencies s u f f e r i n g from alleged revenue losses due to discounting- Approximately 25 agencies i n Greater Vancouver have been i d e n t i f i e d as Chinese t r a v e l agencies- 6 2 These agencies have been i d e n t i f i e d i n Exhibit 7. 6 1Interview with Ivan Cheng, Love and White Travel, Vancouver, July 11, 1978. 6 2Interview with Ivan Cheng, Love and White Travel Services, Vancouver, July 11, 1978. 71 r , , I I J 1 | E x h i b i t 7 | I I. | Chinese T r a v e l agencies In Greater Vancouver J I J . j. : . : , , 4. 1 1 | C o r p o r a t i o n s J'. i J i 1. AA T r a v e l Industry Corp- I 3 2- Advice T r a v e l S e r v i c e Ltd- J I 3. Asian Express L t d - 1 | 4. C o n t i n e n t a l T r a v e l Agency L t d - J | 5- Double Happiness T r a v e l Ltd- J ] 6. Galaxy T r a v e l Agency L t d . J J 7. , Kowloon T o u r i s t S e r v i c e I n t e r n a t i o n a l L t d . I j 8. Love And white T r a v e l S e r v i c e L t d - } | 9. , Bandarin Tours L t d , t 1 10. O r i e n t T r a v e l Centre L t d . J | 11- P r e s i d e n t T r a v e l Agency Ltd- J J 12- Quon On Company L t d - ] J 13- Right On Company Ltd- I J 14. South East T r a v e l S e r v i c e (Canada) Co. L t d . J | 15- T-P-Y- T r a v e l S e r v i c e L t d . 1 J 16. T i k i T r a v e l Inc. I I 17. wankow Tour And T r a v e l L t d - i I I I S o l e Propr l e t or s h i e s J i i J 18- Cathay T r a v e l S e r v i c e | | 19. Quon H. Wong. Agencies J J 20. Spot T r a v e l j l I f . __ ^ I J J Source: Ivan Cheng, Love And White T r a v e l And | J M i n i s t r y Of Consumer And Corporate A f f a i r s I I L i s t s . J I I «. i , ™ „ _ _ J By p l o t t i n g the l o c a t i o n of Chinese a g e n c i e s * 3 and comparing t h e i r l o c a t i o n s a i t h a demographic mapping of persons born i n Asia r e s i d i n g w i t h i n Vancouver, one can r e a d i l y observe " C h i n e s e agencies a r e d e f i n e d f o r these purposes as agencies which are i n v o l v e d i n the Chinese e t h n i c t r a v e l b usiness and have been i n v i t e d t o j o i n the A s s o c i a t i o n of Chinese T r a v e l Agents. 72 that Chinese agencies are concentrated i n areas with the .highest concentrations of Asians as expected. Appendix 3 reveals the location of 23 Chinese t r a v e l agencies. There are 15 agency outlets i n the Chinatown or Downtown East Side of Vancouver. The bulk of the Chinese agencies are clustered together i n t h i s r e l a t i v e l y small geographic area. Just as ind i v i d u a l s shop from store to store when purchasing an expensive consumer durable, members of the Chinese community have been known to shop from agency to t r a v e l agency f o r the least expensive price for an a i r l i n e t i c k e t to the Ear East. This practice would be widespread i n the t r a v e l industry under the net fare remuneration system presented i n Chapter 2.: The practice i s presently a common business practice in major c i t i e s i n the Orient. • Owners of Chinese t r a v e l agencies view discounting as a threat to p r o f i t a b i l i t y . For t h i s reason, organizers of the Association of Chinese Travel Agents sought to bring about an agreement to stop discounting and publish a b u l l e t i n informing members of correct fares and association a c t i v i t i e s . * * The reason for the inclusion of fare information i n the publication stems frcm the b e l i e f that some discounting was the r e s u l t of incorrect fare information. The organizing of an association of Chinese agencies in Toronto was reported to have eliminated many of the discounting problems among ethnic agencies- Before considering the e f f e c t over time of changes i n the ^ " O r i e n t a l Agents Organize to Combat Hanky-Pankv". Cain^d^an Travel Courier, Aug- 25, 1977, pp. 1-2- 73 market structure of ethnic agencies, the issue of whether the formation of associations among ethnic agencies has had a detrimental e f f e c t upon the service l e v e l provided members of the ethnic community must be addressed. The c h a r a c t e r i s t i c s of healthy competition are present within t h i s highly regulated segment of the t r a v e l industry. Owners of ethnic agencies benefit from the higher prices charged when a viable agency association enforces IATA and government approved t a r i f f l e v e l s . A l t e r n a t i v e l y , i t i s clear that the consumer pays more while receiving the same l e v e l of services when an agency association i s successful in maintaining higher prices- The advent of consumer protection l e g i s l a t i o n for the t r a v e l industry has increased the b a r r i e r s to entry for potential t r a v e l agents; nevertheless,, regulations are not so stringent as to severely r e s t r i c t entry. Agencies can s t i l l e s tablish themselves without an overly long delay. Since the supply of new agents i s not l i m i t e d , agency associations such as ethnic agencies encounter d i f f i c u l t i e s forming c o l l u s i v e agreements e.g., maintaining authorized price l e v e l s . Although i t may seem as i f consumers benefit from i l l e g a l discounting, the cost i n the form of a lower service l e v e l must be kept i n mind because reduced earnings from commission earnings imply lower p r o f i t s . In a regulated industry such as the a i r t r a v e l industry, i t would seem prudent f o r the earning l e v e l s of t r a v e l agents to be available to government regulatory bodies and hence, f o r discounting of a i r l i n e t i c k e t prices to be s t r i c t l y controlled. 74 4.4 D i v e r s i f i c a t i o n Of E t h n i c T r a v e l Agencies Within the Canadian mosaic o f e t h n i c groups, one f i n d s a multitude of d i f f e r e n t e t h n i c t r a v e l agencies s p e c i a l i z i n g to d i f f e r i n g degrees i n s e r v i c i n g the; passenger t r a n s p o r t a t i o n needs of t h e i r r e s p e c t i v e communities. Immigration p a t t e r n s i n Canada, h i s t o r i a n s have noted, have f o l l o w e d waves. From the o r i g i n a l e x p l o r e r s from France and the B r i t i s h I s l e s t o the re c e n t waves from the Asian subcontinent, immigration from p a r t i c u l a r areas of the world has tended t o be grouped or c l u s t e r e d i n the v a r i o u s p e r i o d s throughout Canadian h i s t o r y - * 5 The longer e t h n i c m i n o r i t i e s have been e s t a b l i s h e d i n the c i t i e s , the g r e a t e r the p r o b a b i l i t y t h a t members of tbe group w i l l a s s i m i l a t e and i n c r e a s e t h e degree to which they i n t e r a c t with the e t h n i c m a j o r i t y . T h i s s o c i o l o g i c a l phenomenon i s r e f l e c t e d i n the s a l e s p a t t e r n s of e t h n i c t r a v e l agencies. E t h n i c t r a v e l agents which i d e n t i f y with e a r l i e r waves of immigration such as those from Northern Europe tend to be more d i v e r s i f i e d than are e t h n i c agencies a s s o c i a t e d with more recent waves of immigration such as the Chinese and P a k i s t a n i e t h n i c groups. Over the g e n e r a t i o n s , as language d i f f e r e n c e s become l e s s of a b a r r i e r , e t h n i c a gencies tend t o d i v e r s i f y and deminish t h e i r c o n c e n t r a t i o n of s e r v i c e t o one: e t h n i c group. S i m i l a r l y , the e t h e n t i c i t y of "new wave" ag e n c i e s i s more v i s i b l e than i t i s f o r " o l d wave" agen c i e s . Among i n d i v i d u a l e t h n i c agencies, there i s a tendency to " S t a t i s t i c s 36 Canada, Can a d a H andbook- 1977 Ottawa: 1977, pp. 34- 7 5 d i v e r s i f y i n t o non-ethnic t r a v e l segments of the t r a v e l i n d u s t r y - T h i s may i n c l u d e expansion i n t o marketing a c t i v i t i e s such as cargo marketing, commercial t r a v e l and the i n c l u s i v e tour market as w e l l . The d i v e r s i f i c a t i o n r e f e r r e d t o here i s found i n the case of aa T r a v e l I n d u s t r y C o r p o r a t i o n , a s u c c e s s f u l Vancouver-Phased e t h n i c t r a v e l f i r m . In January o f 1375, Aaron Lee, a member of Vancouver's Chinese community, commenced business s e l l i n g a i r l i n e t i c k e t s and i n c l u s i v e t o u r s to members of the e t h n i c community. Since i t s founding i n 1975, the f i r m has expanded r a p i d l y through a d i v e r s i f i c a t i o n programme which has i n c l u d e d the development of t o u r s o f Western Canada marketed through a f f i l i a t e d agencies i n J a p a n - 6 6 Many agencies are of the b e l i e f t h a t i n order t o expand and improve t h e i r f i n a n c i a l p o s i t i o n , they must be s u c c e s s f u l i n marketing to the anglophone community. as mentionned p r e v i o u s l y , some e t h n i c a g e n c i e s conduct up to 90 percent o f t h e i r t r a n s a c t i o n s i n a f o r e i g n language. When Aa T r a v e l was f i r s t e s t a b l i s h e d , s a l e s were conducted almost e n t i r e l y with members of the Asian community. A f t e r three years of o p e r a t i o n , the f i r m ' s p r e s i d e n t estimated t h a t i n 1977, a f u l l 70 percent of i t s customers were members of Vancouvers e t h n i c m i n o r i t i e s and that of these approximately 60 percent 6 6AA T r a v e l I n d u s t r y I n c o r p o r a t e d , "Annual fieport 1977", (unpublished), Vancouver B.C., 76 were of Chinese o r i g i n . 6 7 E t h n i c agencies seeking t o e s t a b l i s h themselves i n other segments must, f i r s t of a l l , break through the language b a r r i e r and secondly, develop t h e i r e x p e r t i s e i n another market segment., T r a v e l c o u n s e l l o r s a t AA T r a v e l have become p r o f i c i e n t a t p r o v i d i n g t r a v e l s e r v i c e s to c l i e n t s from Vancouver*s downtown business community. Many s m a l l e r e t h n i c agencies have been s e v e r e l y hindered from expanding i n t o other market segments by language and c u l t u r a l b a r r i e r s . T y p i c a l l y , these o r g a n i z a t i o n s l o c a t e d i n tbe heart of e t h n i c communities are s t a f f e d by new immigrants.. E t h n i c t r a v e l agents p l a y a r o l e i n the d i s t r i b u t i o n of a i r t r a v e l s e r v i c e s which i s of c o n s i d e r a b l e importance to members of e t h n i c communities. Due to language and c u l t u r a l d i f f e r e n c e s , a i r l i n e s cannot e a s i l y provide s u b s t i t u t e s f o r the s e r v i c e s o f f e r e d by e t h n i c agents. The v a r i e t y of t r a v e l r e l a t e d s e r v i c e s provided by e t h n i c t r a v e l agents such as multimodal booking and t i c k e t i n g as well as other t r a n s p o r t a t i o n r e l a t e d s e r v i c e s r e f l e c t s the improved s e r v i c e l e v e l which the t r a v e l l i n g p u b l i c r e c e i v e s i n the d i s t r i b u t i o n system i n c o r p o r a t i n g t r a v e l agents as s a l e s i n t e r m e d i a r i e s , from another p o i n t of view, the a n a l y s t must ask whether the t r a v e l l i n g p u b l i c might not be b e t t e r served by gr e a t e r a i r l i n e emphasis upon i n t e r n a l marketing, c o n s i d e r i n g the 1976 commission expense of $1.44 b i l l i o n which faced the world's a i r l i n e s . 6 8 6 7 I n t e r v i e a with Aaron Lee, AA T r a v e l I n d u s t r y Incorporated, Vancouver. Date. 6 8 A i r .Transport World, op. c i t . , October 1977, p 32. 77 4.5 Travel Agents Vs. C i t y Ticket Offices City Sales Offices As Alternative Channels Of fristributjion A i r l i n e s have an alt e r n a t i v e means of marketing th e i r transportation product. U n t i l the recent growth i n the share of a i r l i n e revenues generated by t r a v e l agents, c i t y t i c k e t o f f i c e s owned and managed by i n d i v i d u a l c a r r i e r s generated a much larger share of t o t a l passenger revenue. The a i r l i n e s contend and conference appointment agreements s t i p u l a t e that the purpose of a i r c a r r i e r reliance upon agencies i s to stimulate new t r a f f i c , primairly pleasure t r a f f i c or to service c l i e n t s needs i n is o l a t e d locations. Differences In Service C h a r a c t e r i s t i c s From the consumer's point of view, the services received from a c i t y sales o f f i c e d i f f e r from those received from a t r a v e l agency. Among the most important^ i s the f a c t that a i r l i n e owned c i t y t i c k e t o f f i c e s emphasize their own transportation services, hence, sales agents may not bring to the t r a v e l l e r ' s attention a l l of the options a v a i l a b l e to him. A i r l i n e operated c i t y sales o f f i c e s and t r a v e l agencies located i n urban centres compete for the large and highly stable commercial t r a v e l market. One of the service c h a r a c t e r i s t i c s shich t r a v e l agents have l a i d stress on i n order to a t t r a c t commercial customers has been the extension of c r e d i t terms to commercial c l i e n t s . As previously discusssed, t h i s additional service or enticement from t r a v e l agencies has been viewed as the cause of agency bankruptcies. A i r l i n e s maintain their own 7 8 commercial accounts and i n addition a i r l i n e s as well as t r a v e l agents honour major c r e d i t cards- Carriers have responded to the infringement of the t r a v e l agent on the commercial t r a v e l market by creating a variety of new services. For example, ind i v i d u a l s or firms with appropriate c r e d i t ratings may be e n t i t l e d to "express" t i c k e t i n g f o r domestic t r a v e l whereby the t r a v e l l e r writes his own t i c k e t . This expedites t i c k e t i n g procedures greatly and i s p a r t i c u l a r l y a t t r a c t i v e to commercial t r a v e l l e r s who t r a v e l freguently. Another advantage which most c i t y sales o f f i c e s have i n comparison with most tr a v e l agencies i s the a v a i l a b i l i t y of instant information from a i r l i n e reservations systems. . The introduction of the cathode ray tube {CRT) terminal to travel agencies, an important milestone i n the evolution of the travel agent s h a l l gradually a l t e r t h i s s i t u a t i o n . The implications of the introduction of e l e c t r o n i c reservation systems to t r a v e l agents are considered i n Chapter 5. The Impo rtance Of Tr ave1 Aqencies For The City Sales O f f i c e The decision to establish a new c i t y sales o f f i c e depends upon the marketing strategy of the a i r l i n e and upon marketing environment c h a r a c t e r i s t i c s . An A i r Canada marketing manager reports that the perceived need of customers, the number of t r a v e l agents i n the area, the p r o f i t a b i l i t y of a region and the demographic c h a r a c t e r i s t i c s of the area .are taken into consideration when deciding to establish a new c i t y sales 79 o f f i c e . 6 9 The c o m p e t i t i v e r e l a t i o n s h i p between t r a v e l agents and the a i r l i c e s i s a l s o taken i n t o c o n s i d e r a t i o n along with other f a c t o r s i n a r r i v i n g a t a d e c i s i o n to e s t a b l i s h a new c i t y s a l e s o f f i c e w i t h i n a given urban area. The l e v e l of s e r v i c e which an a i r l i n e seeks to p r o v i d e i t s passengers i n a g i v e n area depends upon the number of agents and s a l e s o f f i c e s i n the a r e a . T r a v e l agents, a c t i n g through t h e i r i n d u s t r y a s s o c i a t i o n s may p r o t e s t the establishment of a new s a l e s o f f i c e . However, b o y c o t t s o f a i r l i n e s by t r a v e l agencies because of the e s t a b l i s h m e n t of c i t y s a l e s o f f i c e s have not been an obvious problem due to the l i m i t e d b a r g a i n i n g s t r e n g t h of t r a v e l agencies. In order to provide b e t t e r s e r v i c e to commercial t r a v e l l e r s , an a i r l i n e may sometimes adapt i t s d i s t r i b u t i o n system t o the demographic changes of the business community. A recent case i n Toronto e x e m p l i f i e s t h i s s i t u a t i o n . As more and more f i r m s r e l o c a t e d t h e i r o f f i c e s i n the suburbs, and s e r v i c i n g through e s t a b l i s h e d A i r Canada s a l e s o u t l e t s became l e s s and l e s s convenient, higher commission expenses were most l i k e l y b e i n g i n c u r r e d among suburban t r a v e l agencies. T h e r e f o r e , the a i r l i n e reached the d e c i s i o n t o e s t a b l i s h two new s a l e s o f f i c e s i n the suburbs to b e t t e r serve the commercial t r a v e l market segment. 7 0 Although i n d i r e c t l y r e l a t e d t o the a d v e r s a r i a l r e l a t i o n s h i p between c a r r i e r s and t h e i r agents, t h i s a c t i o n " I n t e r v i e w .with W.A.C. Rowe, A i r Canada, General S a l e s and S e r v i c e Manager, Vancouver, B.C. March 9, 1978. 7 0 I n t e r v i e w with G. Kennedy and D. Tangry, A i r Canada, Western Region, Passenger Marketing D i v i s i o n , Vancouver, J u l y 19, 1S78. 80 r e f l e c t s the b e l i e f o f f i c i a l l y advocated by IATA t h a t t r a v e l agents should c o n f i n e t h e i r e f f o r t s to s e r v i c i n g d i s c r e t i o n a r y pleasure t r a f f i c . A i r l i n e s do not base the d e c i s i o n on whether to e s t a b l i s h a new s a l e s o f f i c e s o l e l y on whether i n t e r n a l o p e r a t i n g c o s t s are lower : than the c o s t which Mould be i n c u r r e d i f the s e r v i c e s of t r a v e l agents were r e l i e d upon. I t i s c l e a r t h a t an a i r l i n e ' s c i t y s a l e s o f f i c e i s much more l i k e l y t o s t i m u l a t e t r a f f i c f o r the c a r r i e r than w i l l supposedly i m p a r t i a l independent t r a v e l a g e n c i e s . Nonetheless, some c a r r i e r s i n the United S t a t e s have s t a r t e d to deemphasize t h e i r r e l i a n c e upon c i t y s a l e s o f f i c e s . For example, B r a n i f f Airways which r e p o r t e d t h a t i t s c i t y t i c k e t o f f i c e s were c o s t i n g : i t approximately 16 percent of a i r l i n e t i c k e t s a l e s was r e p o r t e d t o have dropped i t s c i t y s a l e s o f f i c e o r g a n i z a t i o n i n 1977. 7 1 Other c a r r i e r s i n c l u d i n g Trans World A i r l i n e s and Eastern A i r l i n e s have followed s u i t . ^ " S p e c i a l Report on A i r l i n e and T r a v e l Agents". A i r T r a n s p o r t World, October, 1977, pp 51-56. 81 CBAPTEB 5 ACCESS TO ELECTRONIC RESERVATIONS SYSTEMS 5.0 The Introduction Of Computer-Based Reservations Systems to Travel Agencies The focus of t h i s chapter i s not so much upon technological developments which are repeatedly being introduced to the industry, but rather upon how various participants i n the t r a v e l industry stand to benefit from better access to a i r l i n e reservations systems. Ultimately, an attempt i s made at answering the question, "Does the consumer benefit?" Prior to the introduction of cathode ray tube terminals (CRTs) to travel agents, reservations placed through travel agencies were relayed v i a telephone. However, as early as 1976, a i r l i n e s seeking to stimulate t r a f f i c experimented with the concept of placing terminals with d i r e c t communication to a i r l i n e e l e c t r o n i c reservations systems within wholesale as well as r e t a i l t r a v e l agencies. The implications of t h i s development for the future of the t r a v e l industry are s i g n i f i c a n t and therefore should be taken into consideration i n the analysis of the changing role which travel agents play. Highly sophistocated a i r l i n e reservations systems with, communications l i n k s at a i r l i n e points of service are as e s s e n t i a l to the e f f i c i e n t operation of a modern f i r s t l e v e l a i r c a r r i e r as are the a i r c r a f t which transport passengers. Computer-based a i r l i n e reservations systems perform a variety of v i t a l services i n addition to real-time seat a v a i l a b i l i t y and inventory. Reservations systems maintain passenger name records 82 of pertinent.information related to the i n d i v i d u a l passenger. 7 2 In addition, present day reservations systems can communicate among themselves and reguest bookings from other e l e c t r o n i c reservations systems. Reservations systems are c l o s e l y linked with a i r l i n e t i c k e t i n g and indeed, computerized t i c k e t printers are presently used by both a i r l i n e s and agents. 5 . 1 A i r l i n e Competition For Travel Agent Bookings It i s i n a c a r r i e r ' s best i n t e r e s t to seek to e s t a b l i s h i t s own e l e c t r o n i c reservations terminals | i . e . , CRT sets) i n travel agents since i t f a c i l i t a t e s s e l l i n g the services of the a i r l i n e which i s featured on the system. Even i f a variety of c a r r i e r s inventories are maintained on the system to which the t r a v e l agent has immediate access, the agent s h a l l place greater emphasis upon s e l l i n g the transportation services of the a i r l i n e featured on the system. For example, on a route served by two c a r r i e r s , the c a r r i e r with more terminals i n r e t a i l agencies stands to capture the larger market share assuming, of course, that t r a v e l agents provide a s i g n i f i c a n t amount of t r a f f i c on the route. The Introduction Of A Reservation System To Iravei Agencies The introduction of Air Canada's Reservec I I computer system which includes the inventories of most regional Canadian c a r r i e r s and a p a r t i a l inventory of CP A i r f l i g h t s to travel 7 2 U n i t e d States, Department of Transportation, Office of F a c i l i t a t i o n , "Passenger Reservations and Ticketing", Washington D.C, 1971, pp. 2-7. 83 agents provides evidence of the importance which the placement of CBT sets in t r a v e l agencies can have as a marketing t o o l . Since the Air Canada reservations system i s the largest and includes the most services of any e l e c t r o n i c reservation system i n Canada, ( i t i s anticipated that i t s h a l l eventually include a l l i n t e r l i n e partners on a connecting f l i g h t basis, car rental firms and hotel accommodations) i t has been vieaed as the most desirable system to be included in the Canadian travel accent's p o r t f o l i o of t o o l s , at least from the t r a v e l agent's point of view. The elec t r o n i c reservation system offered by CP A i r , the nation*s next largest c a r r i e r , provides a different variety of a i r l i n e inventories. Those CP Air f l i g h t s which overlap with Air Canada f l i g h t s are included in the Air Canada system, however, agents must make a spe c i a l regues* i n order to view CP Air f l i g h t s on their terminals. A i r Canada has placed i t s e l f i n an advantageous position with regard to the placement of a i r l i n e reservations systems i n comparison•> with CP A i r which, to date, has.not established remote terminals i n tr a v e l agencies. 7 3 As of September,1978, approximately 30 remote CHT terminals had been placed i n t r a v e l agencies i n B r i t i s h Columbia's lower mainland. The agencies chosen by Air Canada to be linked with the a i r l i n e ' s e l e c t r o n i c reservation system were selected on the basis of how many A i r Canada sales they would produce. From a p r o f i t a b i l i t y standpoint, i n d i v i d u a l d i s t r i c t s are held accountable for a preestablished return on investment for each 7 3Intecview with E i l l Hurphy, Pagaesus Systems, CP A i r , Harch, 1S78. 84 terminal. 7* In the case of the t r a v e l agencies which have dire c t access to Air Canada's system, precautions have teen taken to l i m i t the amount of information to which t r a v e l agents have access. Agents cannot obtain passenger name l i s t s , instead, they are only provided access to information revealing whether cr not space i s available on a p a r t i c u l a r f l i g h t . Nonetheless, a wide variety of information including information on i n d i v i d u a l passengers may be obtained or stored by the travel agent. Electronic Reservations Systems i n U. S- Tra-vel- Agencies- A i r l i n e competition f o r travel agent t i c k e t i n g in the United States has been much more competitive than i t has been i n Canada. This can be attributed to the large number of trunk c a r r i e r s with extensive e l e c t r o n i c reservations systems. The es s e n t i a l difference between computerization developments i n Canada vis-a-vis those i n the U.S. i s the greater degree of choice which American agents have because of the greater number of systems available- Due to United States Justice Department disapproval of the j o i n t development of an a i r l i n e / t r a v e l agent reservations system. United A i r l i n e s , American A i r l i n e s and Trans world A i r l i n e s have each decided to market t h e i r systems to travel agents on a separate basis. Both United's and American's systems are designed f o r their own ti c k e t agents and hence, th e i r own f l i g h t s are displayed f i r s t on the CRT. 7 5 The significance of 7*Intervie * i with W.A.C, Rowe, A i r Canada, General Sales and Services Manager, Vancouver, March 9, 1978- , 85 establishing an e f f e c t i v e t r a v e l agent reservations interface with a i r l i n e reservations systems i s made evident by the f a c t that i n Onited's case, some 50 percent of the c a r r i e r ' s passenger revenues were generated by t r a v e l agents i n 1976.7* Each c a r r i e r appears to u t i l i z e i t s own c r i t e r i a f o r the selection of agents chosen for i n s t a l l a t i o n of terminals. United a i r l i n e s f o r example, has established minimum revenue l e v e l s which agencies must f u l f i l l i n order to qualify for the i n s t a l l a t i o n of a CRT terminal, an approved agency must either generate $300,000 i n annual a i r l i n e revenue with United cr an annual a i r revenue of $1 million of which 15 percent must be on United. Marketinq Advantages Through aut omat ion The automated t i c k e t printer which i s used i n conjunction with reservations terminals by t r a v e l agents and commercial accounts has become a r e a l i t y for many large Canadian t r a v e l agencies. Such t i c k e t i n g accessories were introduced previously to travel agencies i n the United States. Printers f a c i l i t a t e the writing of most domestic and some international a i r l i n e t i c k e t s as v e i l as the payment of net revenues to the c a r r i e r s involved. Travel agencies which s p e c i a l i z e i n s e l l i n g domestic a i r l i n e transportation products to commercial t r a v e l l e r s are the primary users of the t i c k e t printer although this i s f a r from the only group which benefits from their use. Consequently, 7 s " a i r l i n e s Spar Over Ticketing", AviationKeek and Space Technology, February 2, 1S76. p. 30. 7 6 Op. C i t . . a i r Transport World, October, 1977,; p. 33. 86 t r a v e l agent associations have opposed e f f o r t s by A i r Canada to provide commercial customers with terminals and t i c k e t printers free of charge which detracts from the sales of t r a v e l agencies, p a r t i c u l a r l y from t r a v e l agencies s p e c i a l i z i n g in commercial t r a v e l . 7 7 Agents fear the next step by Air Canada may be to offer commercial accounts a commission on t h e i r purchases of a i r l i n e t i c k e t s . The adversarial r e l a t i o n s h i p between a i r l i n e and t r a v e l agent i s apparent once again i n the minor c o n f l i c t which might be fundamentally viewed as an attempt on the part of a i r l i n e s to minimize ; commission expenses and on the part of t r a v e l agents to maximize commission earnings- 5-2 Benefits Snd Costs Of System I n s t a l l a t i o n for The Travel Agent fox those agencies which are fortunate enough to meet the c r i t e r i a established by the a i r l i n e s to obtain a cathode ray tube terminal, a variety of marketing and operating e f f i c i e n c y benefits are forthcoming. Two managers of Vancouver-based tr a v e l agencies which have been operating with A i r Canada remote terminals and t i c k e t p r i nters for six months reported the following b e n e f i t s : 7 8 leservec II provides t r a v e l consultants with guick access to r e l i a b l e information; reservations can be changed or altered in a much more convenient manner than under previous methods; and a great deal of information previously ""Commercial Accounts to Get Ticket Prin t e r s " , CanadianMEraye'l Con t i e r , June 16, 1977, p- 1. ^Interview with Malcolm Nicholson, P. lasson's Travel, Vancouver, March 30, 1978 and Gordon Bees, Bayshore Travel, Vancouver, A p r i l 6, 1978- 87 o n l y a v a i l a b l e from manuals becomes a v a i l a b l e through the a i r l i n e e l e c t r o n i c r e s e r v a t i o n s system- . Agencies using the high speed communications l i n k s provided by r e a l - t i m e access t o computer-based r e s e r v a t i o n s systems b e n e f i t from fewer minutes spent on the telephone and/or b e t t e r u t i l i z a t i o n of e x i s t i n g communications reso u r c e s - On the ether hand, the c o s t of data communications l i n k s must be borne by the t r a v e l agent a c c o r d i n g to A i r T r a f f i c Conference or IATA r e g u a l t i o n s , 7 9 In a d d i t i o n to lower communications charges, users of CBT t e r m i n a l s r e p o r t fewer telephone c a l l s r e t u r n e d to customers- A s u b s t a n t i a l time sa v i n g s occurs because t r a v e l agents are a b l e to c o n f i r m passenger r e s e r v a t i o n s while the customer waits- T h i s e l i m i n a t i o n of most " c a l l - b a c k s " by the use of a r e a l - t i m e system i s an important b e n e f i t which makes CBT s e t s p a r t i c u l a r l y a t t r a c t i v e to u n d e r s t a f f e d t r a v e l agencies. Due to the r e l a t i v e l y low commission r a t e on domestic t r a v e l Capproximately 7.5 p e r c e n t ) , agents i n c u r l o s s e s when p r o v i d i n g s e r v i c e s f o r short—range domestic j o u r n e y s ^ 8 0 The e f f i c i e n c y provided by a i r l i n e r e s e r v a t i o n s systems t e r m i n a l s makes i t p o s s i b l e f o r t r a v e l agents t o cover f i x e d and v a r i a b l e c o s t s a s s o c i a t e d with low margin s a l e s such as domestic a i r l i n e s a l e s . 7 9"Autcmated S e r v i c e s Provided to T r a v e l Agents l o c a t e d i n the United S t a t e s " , A i r T r a f f i c Conference of America, Passenger Committee B u l l e t i n No. 19, Washington D.C, March 3 1 , 1978. 8 0Touche Boss and Company, J o i n t T r a v e l Agent-ZAirline- Eccccmic and Value Study, r e p o r t e d i n " T r a v e l Agents Lose $ 2 3 M i l l i o n on Domestic S a l e s " , A i r l i n e E x e c u t i v e , J u l y , 1978, p. 40. 88 The presence of an a i r l i n e ' s r e s e r v a t i o n t e r m i n a l w i t h i n a t r a v e l agency provides a c e r t a i n degree of promotional b e n e f i t . Commercial customers may be a t t r a c t e d to t r a v e l agencies which appear t o be p r o g r e s s i v e . A r e s e r v a t i o n t e r m i n a l p r o j e c t s the image of f a s t and e f f i c i e n t s e r v i c e s . Moreover, t r a v e l agency employees may enjoy the c h a l l e n g e of o p e r a t i n g the CBT t e r m i n a l and l e a r n i n g the many subprogrammes a s s o c i a t e d with i t . Furthermore, i t i s c l e a r t h a t the " p r o f e s s i o n a l " or " a i r l i n e " image i s f o s t e r e d by the presence of a CBT s e t i n a t r a v e l agency. The b e n e f i t s which the t r a v e l agent d e r i v e s frcm the i n t r o d u c t i o n of an a i r l i n e r e s e r v a t i o n s system are not without c o s t s to agents, competing c a r r i e r s and p o s s i b l y even to the consumer of a i r t r a v e l s e r v i c e s . A i r l i n e s have agreed through conference r e g u l a t i o n s to charge t r a v e l agencies or t r a v e l wholesalers a monthly f e e f o r the use of CBT t e r m i n a l s and automatic t i c k e t p r i n t e r s . The major t r a i n i n g c o s t i s the o p p o r t u n i t y c o s t of the time which agents must devote t o l e a r n i n g to use CBT d e v i c e s . Assuming that agents earn an average commission of 8.5 percent, i t would be necessary f o r the agent d e c i d i n g whether t o add an e x t r a t e r m i n a l to s e l l an a d d i t i o n a l $3,117 of t i c k e t s each month i n order to cover the monthly f e e . 8 1 Using average f a r e per t i c k e t i n f o r m a t i o n as c a l c u l a t e d i n 8 1 0 p . C i t . , I n t e r v i e w with Malcolm N i c h o l s o n , March 30, 1978. I n A i r Canada's case an i n i t i a l i n s t a l l a t i o n fee o f $100 i s charged f o l l o w e d by subsequent monthly payments of $265- 89 t i e 1978 Touche Boss study of travel aqeat p r o f i t a b i l i t y , an agent would have to s e l l 20.9 domestic point-to-point tickets or 4.9 international t i c k e t s at the normal fare in order to cover the cost of one CRT terminal. One should bear i n mind that t h i s analysis considers U.S. t r a v e l agent commissions which are generally higher than Canadian, commissions due to the open rate s i t u a t i o n prevailing i n the United States. One of the primary dangers of the Canadian t r a v e l agent industry's reliance upon a single a i r l i n e reservations system which gives p r e f e r e n t i a l display of one c a r r i e r i s the p o s s i b i l i t y of increasing a i r l i n e industry concentration- t r a v e l agents may gradually become dependent not only on the f l i g h t display of one c a r r i e r but also upon other services offered by a i r l i n e management information systems including marketing and accounting systems. With regard;to the l a t t e r , independent firms have developed which provide t r a v e l agencies with management information services. Computer inter-face firms have the poten t i a l of lessening the dependence of the t r a v e l agent on a single c a r r i e r as well as providing t r a v e l agents with access to a i r l i n e as well as tour operator reservations systems. From the t r a v e l agency as a small business point of view, i t i s advantageous to obtain real-time access to a i r l i n e reservations systems provided that the l e v e l of t r a f f i c serviced by the agent i s s u f f i c i e n t l y high. 5.3 Benefits And Costs Of System I n s t a l l a t i o n For The A i r l i n e s In Canada, Air Canada stands to benefit substantially by 90 placing i t s CRT terminals i s travel agencies since i t s market share s h a l l undoubtedly increase, eiterus paribus- Another s i g n i f i c a n t benefit accruing to the c a r r i e r providing the system i s derived from the dissemination of current fare and other marketing information to t r a v e l agents hooked in t o the system. Carriers can better dominate their sales intermediaries i f they are the primary source of marketing information for ; the sales intermediary. Carriers with a substantial portion of t h e i r sales through t r a v e l agents may lose a part of t h e i r market share to aggressive a i r l i n e s with an e f f e c t i v e programme of placisg CRT terminals i n agencies- This issue i s p a r t i c u l a r l y pertinent i n the United States where many c a r r i e r s compete for the right to place terminals in t r a v e l agencies- Although impractical, the p o s s i b i l i t y of placing more than one CRT terminal i n larger agencies should not be ruled out- A i r l i n e s which couple the placement of terminals with the placement of a i r l i n e t i c k e t stock can also benefit from a substantial short-term cash flew. For example, Trans World A i r l i n e s would benefit from the issuance of a t i c k e t f o r another a i r l i n e i f the t i c k e t were issued on 184 t i c k e t stock. The reason for this i s that cash flows f i r s t to the host c a r r i e r then to the conference clearing house f o r d i s t r i b u t i o n . This benefit provides additional incentives to c a r r i e r s tc provide agents with i n d i v i d u a l a i r l i n e t i c k e t printers. Whether i n s t a l l a t i o n and monthly rental fees cover the cost which the a i r l i n e incurs implementing electronic reservation systems to t r a v e l agents i s not e n t i r e l y obvious from the 91 l i m i t e d amount of cost information available to the public. Nevertheless, the fact that special A i r T r a f f i c Conference regulations had to be adopted to i n h i b i t c a r r i e r s from entering into a price war over CBT terminal placement coupled with Air Canada's move to o f f e r complementary CRT terminals and ticket printers to commercial accounts tends to i n d i c a t e that the benefits f o r the c a r r i e r of additional t r a f f i c generated outweighs the cost of e s t a b l i s h i n g and' maintaining peripheral terminals, 5.M The Benefits And Costs Of System Implementation for The Consumer The benefits which consumers of travel services receive from travel agents with e l e c t r o n i c reservations systems are d i f f i c u l t to measure. On certain occasions, such as when a i r l i n e telephone reservation l i n e s are busy, the advantage of the CRT becomes quite apparent, other advantages such as those associated with improved accuracy are l e s s obvious. The major benefit cited by most agents who have recently had CRT sets introduced to them i s the a b i l i t y to service customers more rapidly. As previously outlined, t r a v e l agents pay a monthly rental fee for the right to operate remote video terminals. I t i s hot e n t i r e l y c l e a r that a i r l i n e s recoup the entire cost of remote terminals in the from of user fees., The cost to the a i r l i n e s of establishing additional terminals including hardware, software, and communications l i n k s i s not i n s i g n i f i c a n t . For example. United A i r l i n e s was reported to be prepared to spend $700 m i l l i o n on agent terminals i n 19 76. 92 Given the regulated nature of the industry and the f a c t that the cost of improvements i n customer service l e v e l s can ultimately be f e l t by the consumer/, the chain of cost impacts may follow a sequence wherein t r a v e l agents i n i t i a l l y demand higher commissions, c i t i n g larger losses on t i c k e t s a l e s . Once a i r l i n e conferences are cajoled into augmenting commission l e v e l s , the c a r r i e r s in turn fellow by reguesting higher fare l e v e l s from regulatory bodies. The increases i n cost which remote t r a v e l agent terminals contribute to o v e r a l l a i r l i n e cost increases may not be very great r e l a t i v e to other rapidly r i s i n g costs such as commission costs, nonetheless, they are a contributing factor which should not be ignored. 5.5 long-term Implications The introduction of e l e c t r o n i c reservations systems to t r a v e l agents i n Canada by the national c a r r i e r , A i r Canada, has important implications for - the structure of the a i r l i n e and t r a v e l agent industries and consequently f o r the l e v e l of service which consumers receive. Air Canada presently has the largest share of the transcontinental Canadian market with CP Air t r a i l i n g f a r behind. A monopoly in the placement of reservations terminals i n t r a v e l agencies by Ai r Canada at l e a s t during t h i s introductory stage can e a s i l y r e s u l t i n a greater concentration of power with one semi-autonomous, government-owned c a r r i e r . One might guestion the b e l i e f that greater concentration within the a i r l i n e industry i s i n the consumer's best i n t e r e s t . From the consumer's point of view, a computer i n t e r f a c e 93 system providing t r a v e l agents with access to the reservations systems,of a l l c a r r i e r s serving Canadian points would o f f e r a isider range of reservations services while at the same time, eliminate the p r e f e r e n t i a l treatment offered by s i n g l e a i r l i n e reservations systems. On another industry l e v e l , that of the t r a v e l agent industry, the introduction of electronic reservation system terminals may r e s u l t i n future s t r u c t u r a l changes e s p e c i a l l y i n that segment of the industry s p e c i a l i z i n g in the commercial t r a v e l market. One can a t t r i b u t e t h i s to the minimus f i n a n c i a l reguirements which have been established by the a i r l i n e s i n marketing their reservations terminals to t r a v e l agents. The e f f e c t of the reguirements i s that only the l a r g e r , more prosperous agencies are i n a position to obtain reservations systems; hence, the trend toward industry concentration to the detriment of the consumer i s the implied r e s u l t . Concentration in the United States t r a v e l agent industry since 1970 has been noticed i n the C.A.B. investigation of commission l e v e l s . 8 2 One might argue that as the travel agent industry becomes more c a p i t a l intensive, the industry, which i s presently composed of many independent small business, and few large firms, s h a l l move toward greater concentration. S i m i l a r l y , i f economies of scale can only be taken advantage of by larger firms, then i t follows that consumers stand to benefit from the improved service levels offered by larger firms with CRT terminals. 8 20p. C i t . , United Agreements Concerning pp. 80-107. States, C i v i l Agency H a t t e r s - Aeronautics Board, "IATA Uniform Commission Hates", 94 Although the el e c t r o n i c reservations introduction phase stands to a l t e r the compostition of the t r a v e l agent industry, some segments of the t r a v e l industry s h a l l probably not be affected s i g n i f i c a n t l y . For example, ethnic agencies are protected by the unigue services which they o f f e r . S i m i l a r l y , northern t r a v e l agencies which are unlikely to t i e into a i r l i n e reservations styterns w i l l most l i k e l y r etain the same l e v e l of business because of the protection offered by their geographic monopolies. In summary, a i r l i n e s which succeed in obtaining a pr e f e r e n t i a l position i n providing f l i g h t information and other services to travel agencies s h a l l benefit from the capturing of a larger market share, larger agencies i n the commercial travel market which have the f i n a n c i a l : resources available to them to provide their customers with the speed, accuracy and convenience of real-time access to e l e c t r o n i c reservations systems s h a l l probably benefit to the detriment of the agencies servicing the commercial market without e l e c t r o n i c reservations terminals. , 95 CHAPTER 6 EVALUATION OF TRAVEL AGENT REMUNERATION ALTERNATIVES 6 - 0 Method Of Evaluation Description of the benefits and costs' which a i r t r a v e l l e r s and a i r c a r r i e r s receive from the services performed by the tr a v e l agent has been presented i n order to reveal the e s s e n t i a l r o l e which the travel agent plays i n the marketing of travel services to the t r a v e l l i n g public. Desirable service a t t r i b u t e s of a i r transportation marketing systems have been referred to:in discussions of curent issues facing the t r a v e l agent industry. The purpose of th i s chapter i s to evaluate commission and' non-commission alternatives, and select the "best" a l t e r n a t i v e . In order to do so, c r i t e r i a for evaluation and public policy objectives must be defined and c l a i r f i e d . After the most a t t r a c t i v e alternative has been selected, i t . i s then recommended for adoption and implementation by the Canadian Transport Commission. I t i s also possible that an a i r l i n e conference, eithe r international or domestic, would be w i l l i n g to implement a remuneration alternative which i t deemed to be i n i t s favour. 6- 1 Service Attributes Many desirable service e f f i c i e n t passenger transport the preceding chapters- The ch a r a c t e r i s t i c s associated with an marketing system have arisen in service attributes which have been 96 i d e n t i f i e d for the purpose of policy analysis include the following,: a) i m p a r t i a l i t y v i s - a - v i s c a r r i e r and mode of transport choice b) i n d i v i d u a l attention c) a b i l i t y to provide t r a v e l services to specialized market segments d) rapid access to passenger reservations information It i s generally agreed that the i m p a r t i a l i t y of the sales intermediary i s a desirable c h a r a c t e r i s t i c since the c l i e n t i s presented with a greater number of al t e r n a t i v e s to choose from. Impartiality can extend to the choice between modes as well as the choice between c a r r i e r s . Another service a t t r i b u t e which has been associated with the t r a v e l agent industry i s personalized attention. I t has been argued by proponents of small businesses that i n d i v i d u a l attention and knowledge of an individual's comprehensive travel needs cannot be adequately provided by larger a i r l i n e operated c i t y sales o f f i c e s . The a b i l i t y of the passenger transportation marketing system to serve a diverse set of market segments snch as t r a v e l l e r s from the business community, holiday t r a v e l l e r s and ethnic community t r a v e l l e r s i s a service c h a r a c t e r i s t i c taken for granted under the present system- As outlined i n Chapter 4 , some tr a v e l agencies have specialized in i n d i v i d u a l market segments because of their a b i l i t y to meet the demand for unigue services- A t r a v e l agent remuneration policy would not eliminate the a b i l i t y of the marketing system to ; meet these specialized 9 7 needs- At the same time, i t should minimize the cross- subsidization of specialized c l i e n t s by c l i e n t s not , requiring specialized assistance. leservation systems and access to them have come to be important determinants of the l e v e l of customer service which a i r c a r r i e r s and sales intermediaires provide t h e i r c l i e n t s - As described i n Chapter 5, rapid or "real-:time" access to a i r l i n e reservations systems i s a highly desirable c h a r a c e r i s t i c associated with the a i r : t r a v e l industry- I t i s l i k e l y that d i f f e r e n t remuneration alternatives w i l l foster the development of electronic reservation systems i n travel agencies to a dif f e r e n t extent. Therefore, t h i s attribute should not be excluded from consideration i n the analysis- I t i s d i f f i c u l t to judge the r e l a t i v e importance of each of these at t r i b u t e s however, i t does not appear to be f a r from the tru t h , considering descriptions of the industry, to state that i m p a r t i a l i t y and the a b i l i t y to provide personalized attention are among the most important--. 6.2 C r i t e r i a For Evaluation As part of the policy analysis procedure, each alt e r n a t i v e i s analyzed i n r e l a t i o n to public policy objectives designed to r e f l e c t the long-run best i n t e r e s t of the public- Objectives which w i l l be considered i n the decision include the following: 98 1- Service Level Objectives - i m p a r t i a l i t y -access to reservation information -personalized attention -service to market segments 2. Economic Objectives -user pay -economic e f f i c i e n c y 3. P o l i t i c a l Objectives -user pay -avoid cross subsidization between user groups 4. Regional Development Objectives -adeguate service levels to small communities Tbe desirable service c h a r a c t e r i s t i c s which have been apparent under the status quo such as i m p a r t i a l i t y with regard to c a r r i e r choice and i n d i v i d u a l attention may be considered to comprise the service l e v e l objectives. The economic objectives considered include the implementation of the user pay philosophy and the avoidance of subsidies flowing from the general public to the owners of t r a v e l agencies. The general rule here i s that commission lev e l s should not be so high that regulatory agencies grant a i r f a r e increases. With respect to economic objectives, a l t e r n a t i v e s should be selected on the basis of whether the r a t i o of service l e v e l to commission expense i s increased i . e . , on the basis of improving economic e f f i c i e n c y . In a regulated industry such as the a i r transport indostry, lack of managerial co n t r o l of marketing variables including the a b i l i t y to set prices and to decide where services should be provided implies that regulatory involvement may be necessary to 9 9 ensure that economic e f f i c i e n c y objectives related to the a i r transport marketing system are not neglected- S p e c i f i c a l l y , the trade-off between the l e v e l of marketing services provided by t r a v e l agents and a i r carriers, must be juxtaposed against the opportunity cost of devoting resources to marketing instead of other services- Evidence of rapidly r i s i n g commission expenses and trav e l agent p r o f i t l e v e l s presented i n Chapter 2 serve as indications of economic i n e f f i c i e n c i e s , given the state of the industry. P o l i t i c a l objectives related to the decision to choose an alternative remuneration policy must be in l i n e with federal p o l i t i c a l objectives concerning travel and transportation i n general., The magnitude of the remuneration issue must be realized- Of the importance of the issue within the t r a v e l agent industry there i s no question, however, on a f e d e r a l p o l i t i c a l l e v e l , i t i s not very s i g n i f i c a n t - Hence, because the impact for p o l i t i c a l purposes i s i n s i g n i f i c a n t , one can expect that regulatory decisions made by the Canadian Transport Commission w i l l r e f l e c t the economic objective of implementing the user pay philosophy. Regional development objectives referred to are oriented toward reducing regional economic d i s p a r t i e s and ensuring that adequate a i r transport marketing services are provided to residents of i s o l a t e d communities. In the i n t e r e s t of northern development, i t would seem prudent to provide monetary incentives to entrepreneurs to provide better service to residents of i s o l a t e d communities as far as i s practicable. 100 6-3 Evaluation Of Alternatives Ibe Net Fare Remuneration Alternative The adoption of a net fare concept would bring about dra s t i c long-run changes i n the t r a v e l agent industry and i n the way in which a i r transport services are marketed by the a i r l i n e s - With agencies no longer receiving commissions, the op t i c a l firm size for many market segments would increase because revenues would decrease from their present l e v e l s and many small firms would be hard pressed to cover fixed costs- The res u l t would be the increase i n the concentration of larger firms and possibly the i n s t i t u t i o n of franchaise agreements i n an attempt to cover fixed costs- Counteracting t h i s e f f e c t i s the lack of c l e a r substitutes for ; the personal travel consulting attention provided by small t r a v e l agencies. In other words, some c l i e n t s would s t i l l be w i l l i n g to pay an ad d i t i o n a l service fee for the personalized t r a v e l consulting offered by t r a v e l agents- These people would probably be few in number. Ser v ioe Leve 1 0b iec t i yes Sith net fares, the i m p a r t i a l i t y of the agent with regard to c a r r i e r choice would be retained to the extent that the same fare could be charged for the same c a r r i e r s on the same route. On the other hand, t r a v e l agents would become increasingly biased toward:the choice of other modes of transportation which retained the commission form of remuneration- However, as previously pointed out, inter-modal competition i n long distance 101 passenger transportation i s not a major factor in many markets- Assuming that net fares would r e s u l t i n increased concentration and lower p r o f i t l e v e l s , one could expect few agencies would he able to afford the add i t i o n a l cost of introducing an e l e c t r o n i c reservation system. Direct access to a i r l i n e e l e c t r o n i c reservation systems would probably be enhanced by the a i r c a r r i e r s themselves because additional i n t e r n a l channels of d i s t r i b u t i o n (eguipped with CRT sets) would be established in order ;to replace the reduced service l e v e l provided by t r a v e l agencies. However, the increased concentration i n the industry caused by the adoption of a net fare remuneration approach could r e s u l t i n an increase i n the like l i h o o d that larger agencies would be f i n a n c i a l l y capable of adopting electronic reservation systems. Hith regard to the a b i l i t y to provide c l i e n t s with i n d i v i d u a l attention under t h i s a l t e r n a t i v e , the demise of the small agency would serve to support the argument that the a b i l i t y to provide personalized attention would be reduced. Although a trend in t h i s d i r e c t i o n would r e s u l t , i n d i v i d u a l i z e d t r a y e l counselling attention could be provided in a s i n i l a r manner by small branch outlets of larger firms which would be able to survive by spreading fixed costs over many branch outl e t s . Service levels to some market segments would be adversely affected by the adoption of net fares. A l t e r n a t i v e l y , i n market segments where t r a v e l agents provide services which are not readil y provided by the c a r r i e r s , such as i n the case of the ethnic market segments, c l i e n t s would be w i l l i n g to pay for 102 s p e c i a l i z e d services. ¥ith regard to the commercial t r a v e l market segment, one could expect greater emphasis cn sales through a i r l i n e c i t y sales o f f i c e s because many commercial t r a v e l l e r s Mould -be unwilling to pay extra f o r the services offered by the t r a v e l agent. {This would also be true f o r non- commercial t r a v e l l e r s ) . Economic Objectives The i n s t i t u t i o n of a net fare t r a v e l agent remuneration procedure would eliminate any subsidization of the t r a v e l agent industry by the c a r r i e r s which existed under the fixed remuneration scheme. This i s because fees charged by travel agents would be established in the marketplace. In t h i s regard the net fare alternative i s i n l i n e with the user pay philosophy. On the other hand, i f a i r l i n e s were forced, on an i n d i v i d u a l basis to emphasize i n t e r n a l marketing channels- Hence incurring greater marketing costs and i n turn passing these increased costs on to consumers i n the form of higher fares, then t h i s alternative would not be in the t r a v e l l i n g " p u b l i c ' s best inte r e s t as a misallocation of resources would r e s u l t . I t i s generally agreed that commission expenses would be l e s s under the net fare alternative than they would be under an open rate situation as discussed i n Chapter 2. P o l i t i c a l Objectives I t goes without saying that owners of tr a v e l agencies would object to the removal of the protective fixed commission 103 blanket which,has fostered the development cf an extensive industry. However, i n the long-run, the elimination of outright commissions by regulatory support of the net fare concept should r e s u l t i n lower a i r f a r e s , c e t e r i s paribus. C l e a r l y , t h i s r e f l e c t s the user pay philosophy i s in the public's best in t e r e s t . Moreover,: t r a v e l l e r s would s t i l l have the opportunity to pay f o r t r a v e l counselling services i f they so desired. Beg 1 on a 1 . He ve lop me n t 0 b i e c t i v e s Under the net fare concept, small agencies i n small communities would be faced with serious decreases i n revenues due to the s h i f t i n market share to the a i r l i n e s i n areas where t r a v e l l e r s could conveniently purchase th e i r t i c k e t s d i r e c t l y from the c a r r i e r s , such as at a i r p o r t ; t i c k e t counters. In areas where agency competition i s l i m i t e d , c l i e n t s could expect tc pay monopoly prices for t r a v e l agent services unless r e s t r i c t i o n s were imposed. T fa e - jUniformCommission Alternative - This i s < the remuneration alternative with which participants i n the industry are most f a m i l i a r . As discussed i n Chapter 2, uniform commission structures prevailing u n t i l 1975 d i f f e r e d only with regard to domestic or in t e r n a t i o n a l t r a v e l - She uniform commission alternative considered here would not make such a d i s t i n c t i o n because the nature of the i n t e r n a t i o n a l and domestic a i r t r a v e l markets have changed dramatically i n the l a s t f i v e years- One should note that the l e v e l of commissions has an 104 important impact upon the structure of the industry, , Uniform, hut low, commissions would not encourage the formaticn of small agencies. Ser vice Ch ar act er i s t i c s The rationale underlying the long-standing defense of uniform commissions by a i r conferences i s based on the premise that uniform commissions foster the impartial choice of c a r r i e r s by agents. This i s one of the strongest arguments i n favour of the retention of this remuneration al t e r n a t i v e since a i r l i n e owned and operated c i t y sales o f f i c e s are unlikely to provide c l i e n t s with a tr u l y unbiased choice of c a r r i e r s a i t h d i f f e r e n t i a l commissions prevailing. The l e v e l of uniform commissions determines whether agents w i l l be induced to introduce: e l e c t r o n i c reservation systems to t h e i r firms. Under a uniform commission structure which i s s u f f i c i e n t l y high, small agencies f l o u r i s h because their i s no spe c i a l incentive to d i s t r i b u t e fixed costs as under the net fare alternative. The emphasis upon marketing a i r travel services through t r a v e l agents encourages the placement of ele c t r o n i c reservation systems i n t r a v e l agencies and hence, encourages a higher customer service l e v e l . The uniform commission alternative promotes the development of a personalized t r a v e l consulting r e l a t i o n s h i p between c l i e n t and agent because such rel a t i o n s h i p s are more e a s i l y provided by smaller firms. furthermore, c l i e n t s are more l i k e l y to place t h e i r confidence in the t r a v e l agent's choice of c a r r i e r when the f i n a n c i a l incentive to select the c a r r i e r offering the 105 highest commission i s present. D i f f i c u l t to service market segments such as the ethnic market segments w i l l he served to some degree whether uniform commissions are offered or not.. Nonetheless, uniform commissions w i l l tend to favour those market segments which are the l e a s t c o s t l y to service. Under a commission al t e r n a t i v e which offers agents the same rate for s e r v i c i n g the commercial t r a v e l market segment, {a market segment, r e l y i n g heavily upon domestic transportation services), as i t does f o r ser v i c i n g the ethnic market,. (a market segment heavily involved i n in t e r n a t i o n a l t r a v e l ) , marketing service l e v e l s w i l l be r e l a t i v e l y higher f o r the former than for the l a t t e r . Economic Objectives By retaining uniform commissions, cross subsidization of one market segment by another i s retained. This i s because remuneration l e v e l s established through, the a i r l i n e conferences and the government regulatory framework r e f l e c t average costs, not the cost of providing services to i n d i v i d u a l market segments. Users of sp e c i a l i z e d t r a v e l agent services do not bear the f u l l cost of the marketing services which they consume. However, because uniform commissions are necessarily agreed upon, and the conferences are instrumental i n set t i n g commission l e v e l s , i t i s unlikely that the l e v e l of commission expenses w i l l be so high that regulatory agencies are requested to increase fares. An associated economic factor related to the uniform commission alternative i s the reduction of business r i s k 106 r e s u l t i n g frcm stable and predictable remuneration l e v e l s . g c l i t i c a 1 Ob i e c t i ve s Uniform commissions are popular among t r a v e l agents r e l a t i v e to tbe net fare a l t e r n a t i v e which would have a dramatic impact upon the industry. Aside from the difference between international and domestic commission l e v e l s , uniform commissions represent the states quo i n Canada. From a public policy point of view, uniform commissions represent a compromise between the marketplace generated t r a v e l consulting fees under the net fare concept and the exorbitant commission expenses under a policy of deregulated incentive commissions. Nevertheless, uniform commissions do not r e f l e c t the costs incurred by travel agents i n providing marketing services. Regional Development Objectives As discussed i n Chapter 2, uniform commissions do not r e f l e c t the higher cost of providing a i r t r a v e l marketing services to residents of remote communities i n Canada. Nevertheless, given a s u f f i c i e n t l y high l e v e l , they do provide enough incentive for agencies to prosper, while at the same time they provide consumers with an inherent form of protection against monopolistic service fees which could a r i s e under the net fare alt e r n a t i v e . Regional development objectives might best be achieved by providing additional f i n a n c i a l incentives to tr a v e l agents in smaller communities- This p o s s i b i l i t y i s addressed i n the next al t e r n a t i v e to .be considered.. 107 TherIncentive Commission -Alternatives- For purposes of analysis, two types of incentive commission alternatives are considered; F i r s t , the incentive commissions which develop under an unregulated s i t u a t i o n are evaluated against the stated objectives. Second, regulated incentive commissions are considered. The l a t t e r could be regulated in such a manner that regional development objectives could be attained. The Unregulated Incentive Gommiss;ion,iAlternative It i s possible for incentive commissions to e x i s t as a method of compensating t r a v e l agents for the services which they provide under both regulated and deregulated conditions. I t has been shown by the open rate s i t u a t i o n prevailing for international a i r t r a v e l marketed by t r a v e l agents i n the United States that incentive commissions are a natural economic' phenomenon which develops i n an unregulated environment to the benefit of the c a r r i e r implementing- the commission structure- Commission schedules based upon either volume or destination incentives are termed incentive commission structures. Examples in Appendix 1 reveal that such commissions are oriented toward the stimulation of group travel and travel on particular routes, what i s not evident from th i s appendix i s that c a r r i e r s use incentive commissions to increase their sales l e v e l s through larger t r a v e l agencies which are capable of qualifying for volume incentives. I t has been argued that incentive commissions have been the major; cause of s p i r a l l i n g commissions in the United States- They 108 have also been attributed to have caused a s h i f t i n power to the volume s p e c i a l i s t s and hence, have contributed to concentration within the industry. In the extreme case, firms may become, for a l l p r a c t i c a l purposes, agents of the firm o f f e r i n g the most a t t r a c t i v e incentive scheme. Service Objectives Incentive commissions a l t e r the t r a v e l agents unbiased attitude toward s e l l i n g the services of i n d i v i d u a l c a r r i e r s . Carriers invariably o f f e r d i f f e r e n t l e v e l s and types of incentives i«hich entice agents to emphasize the a i r transport services of the c a r r i e r with the most a t t r a c t i v e f i n a n c i a l incentive. However, the introduction of incentive or "open" commissions would not completely destroy the unbiasedness of the agent. Consumer l o y a l t y would deminish for those agencies which are highly biased i n their choice of c a r r i e r . This would result from the fact that a i r t r a v e l l e r s asould r e a l i z e that they were not being informed of a l l of the alternatives available in the market, i . e . , suboptimal booking would result- S i m i l a r l y , i m p a r t i a l i t y with regard to inter-modal choice could be affected by an unregulated incentive commission situ a t i o n which resulted i n very high l e v e l s cf remuneration. This i s true of both the unifrom and the net fare alternatives because they are capable of providing t r a v e l agents with either low earning l e v e l s (as may be the case with net fares) or high earning l e v e l s (as may be the case with uniform commissions). Nevertheless, an unregulated incentive commission structure i s more l i k e l y to result i n higher o v e r a l l remuneration l e v e l s for 109 agents. The tendency toward concentration resulting frcm the introduction of incentive commissions would speed up the process of introducing e l e c t r o n i c reservation systems, tc volume- s p e c i a l i s t s , many of whom already have CBT terminals. Small firms adversely affected ty incentive commissions because they are not large enough to qu a l i f y for large incentives would be hindered from obtaining real-time access to el e c t r o n i c reservation systems. The o v e r a l l l e v e l of earnings i s important here. I f incentive commissions o f f e r small firms earning l e v e l s which are greater than what would be achieved under other a l t e r n a t i v e s , i t i s conceivable that small t r a v e l agencies would be more l i k e l y to have the f i n a n c i a l resources available to introduce e l e c t r o n i c reservation systems- The high commission expenses attributed to an open com mission structure would make i t economically f e a s i b l e for c a r r i e r s to open new c i t y sales o f f i c e s e s p e c i a l l y i n locations with high a i r l i n e passenger sales where sales could be diverted from e x i s t i n g agencies. This p o s s i b i l i t y combined with the f a c t that incentive, commissions favour larger firms, tends to indicate that c l i e n t s would receive a lower l e v e l of personalized attention. Earning l e v e l s of agencies involved in sp e c i a l i z e d markets such as the ethnic markets could be adversely affected by incentive commissions as agencies involved i n sp e c i a l i z e d market segments such as t h i s are t y p i c a l l y smaller firms. Other market segments such as the commercial t r a v e l segment could, a l t e r n a t i v e l y , benefit from a higher l e v e l of service. However, 110 unregulated incentive commissions would not ne designed to meet the needs of s p e c i a l i z e d market segments- T r a v e l l e r s requiring specialized t r a v e l agent services Mould probably receive a lower l e v e l of service under t h i s a l t e r n a t i v e because agencies s p e c i a l i z i n g i n smaller market segments could not take f u l l advantage of incentives offered. Economic Objectives Unregulated incentive commissions r e s u l t in higher commission expenses for the c a r r i e r which may eventually be s h i f t e d to consumers in the form of higher a i r f a r e s . To the extent that higher commission expenses are r e f l e c t e d i n higher a i r f a r e s , the economic objective defined as implementing the user pay philosophy i s further achieved. Moreover, incentive commission structures are congruent with economic objectives i n that structures are generally designed so that d i f f e r e n t a i r transport marketing costs f o r different services are r e f l e c t e d in the commissions offered agents. On the other hand, with a i r f a r e s c l o s e l y regulated by the C.T.C., unregulated commissions r e s u l t i n disproportionately large earning l e v e l s f o r agencies as was revealed i n the discussion of i n t e r n a t i o n a l commission l e v e l s i n the United States. The i n a b i l i t y of a i r l i n e conferences to control commission l e v e l s and the reluctance of regulatory bodies to allow concomitant increases i n a i r f a r e s may be c i t e d as a cause of the misallocation of resources between a i r l i n e s and t r a v e l agents. Although high l e v e l s of service would be provided to most market segments, the cost i n the form of a i r l i n e commission 111 expense would be excessively high. P o l i t i c a l Objectives The higher earning lev e l s offered by unregulated commission structures would be popular among owners of travel agencies. However, from a public policy point of view, travel agent remuneration l e v e l s could justly be c a l l e d exorbitant i f commissions were deregulated while a i r f a r e s remained under s t r i c t regulatory c o n t r o l . In the long-run, passengers would be receiving a lower l e v e l of service than that which they could be receiving i f . e i t h e r a i r f a r e s and commissions were deregulated or a l t e r n a t i v e l y , both were regulated. In other words, unregulated incentive commissions do not c l e a r l y r e f l e c t the user pay philosophy. Regional Development Objectives Isolated communities would most l i k e l y not receive any s p e c i a l attention under an unregulated incentive commission scheme. This i s due to the fact that c a r r i e r s concentrate there marketing e f f o r t s i n the most profitable market segments. These are t y p i c a l l y large urban markets. Small firms would most l i k e l y not be able to q u a l i f y for volume incentives because s u f f i c i e n t l y high t r a f f i c l e v e l s could not be generated. The Regulated Incentive C o m a i ss i o n Alt ernative This al t e r n a t i v e represents a tempering of the extremes presented by unregulated incentive commissions. Commissions could be designed in such a manner that the attainment of 112 objectives could be better achieved. As revealed in Exhibit 8, the regulated version of the alternative achieves the objectives to a greater extent on a l l counts than does the unregulated com mission incentive scheme. Service Level Objectives The l o s s of i m p a r t i a l i t y of the t r a v e l agent would he reduced by the regulatory process which reguires agents to f i l e commissions with the C . T . C . The acceptance of incentive schemes which would not neglect the i n t e r e s t s of small agencies would i n d i r e c t l y improve consumer access to e l e c t r o n i c reservation systems. S i m i l a r l y , the promotion of small agencies would be more l i k e l y to provide t r a v e l l e r s with i n d i v i d u a l attention and service i n s p e c i a l i z e d markets. Economic Objectives Regulatory control over incentive commission structures allows public policy makers to set commission l e v e l s to r e f l e c t the user pay philosophy. Moreover, the economic e f f i c i e n c y of the system can be regulated by r e s t r i c t i n g exorbitant remuneration l e v e l s . P o l i t i c a l Objectives By regulating incentive schemes so that they support small businesses, the regulated incentive commission alternative becomes more popular. However, c l i e n t s requiring special services from s p e c i a l t y t r a v e l agencies are unlikely to hear the 1 1 3 f u l l cost of the services provided by them- To t h i s extent, cross subsidization of one market segment by another i s present. Regional Economic Objectives In t h i s regard, regulated incentive commissions are superior. The higher cost of providing marketing services to t r a v e l l e r s can be incorporated i n incentive commissions which small tr a v e l agents i n smaller communities receive- The impact upon o v e r a l l a i r l i n e marketing costs of t h i s a l t e r n a t i v e would not be great for most c a r r i e r s . Summary • 0 f 0b j e c t i v e Achievement For the purpose of presenting a v i s u a l display of the preceding evaluation of remuneration a l t e r n a t i v e s , a summary matrix i s presented in Exhibit 8. This i s not meant to be a substitute for the preceding text and caution should be exercised i n interpreting the a u t h o r s summarizations of the degree to which i n d i v i d u a l alternatives have been achieved. This table should be interpreted with care as i t neglects to reveal the r e l a t i v e importance of each objective. 6.4 Conclusion Each of the remuneration alternatives considered i n t h i s analysis has i t s own advantages and disadvantages i n relationship to the objectives which have been spe c i f i e d . E s s e n t i a l l y , nhat the analyst must do i s select the alternative which best f u l f i l l s these objectives. In order to do t h i s , subjective judgement concerning the, r e l a t i v e importance of the 114 various objectives necesarily comes int o play- In the author's opinion, economic and service l e v e l objectives are the most important objectives- The user pay philosophy and regional development, objectives c o n f l i c t i n that attempts to subsidize one group of users may impose additional costs upon another group- The achievement of p o l i t i c a l objectives i s very important i n the s e l e c t i o n of an a l t e r n a t i v e , indeed, government agencies can net be expected to support the introduction of a policy change which opposes p o l i t i c a l goals. Nevertheless, compromises are frequently made. The alternative which i s recommended for adoption by the Canadian Transport Commission to serve as the commission structure f o r Canadian t r a v e l agents for both domestic and international travel i s the regulated incentive commission alt e r n a t i v e . This alternative i s not the "best" a l t e r n a t i v e on a l l _ counts; instead, i t serves as a compromise. Through the process of a r b i t r a t i o n , c a r r i e r s and governments would be able to arrive at incentive commission structures which would r e f l e c t the i n t e r e s t s of the t r a v e l l i n g public as well as the c a r r i e r s . Jcr example, the same volume incentives f o r particular destinations could be authorized f o r a number of c a r r i e r s i n order to ensure that i m p a r t i a l i t y with regard to c a r r i e r was retained- S i m i l a r l y , i n the i n t e r e s t of a t t a i n i n g economic objectives, higher commission l e v e l s could be authorized f o r the marketing of tours through travel agencies- 115 Exhibit 8 Summary Of Remuneration Scheme, Objective Achievement I - i H H I Remuneration Alternatives 4 - Objectives J ilNet JFare I I 1 J Unif- jCom. » i 1 I JSeq. JInc. JCem.,2 J iUnreq. l i n e . 3Com-3 1 Service Objectives a) i m p a r t i a l i t y B) i n f o . sys. acc, * c) i n d i v i d . a t t n , 3 d) service to spec. mkts.* Economic Objectives P o l i t i c a l Objectives Regional Development i 1 I f a i r Jf a i r i poor J good I I I v.g- \ I v.g. I 1 poor J J 1 I v.g. I good j f a i r j f a i r I I i poor I 1 poor J I poor I i ! I \ poor J good If a i r I poor I i I good i I good J J v.g. i i i I j v. p. If a i r i poor I v. p. 1 1 1 poor i J poor I I v. p. I "v.g." means very good, "v.p." means very poor. n'Onif. Comm." i s the uniform commission alternative.; 2"Reg. Inc. Com." means the regulated incentive commission a l t e r n a t i v e . 3"0nreg. Inc. Com." refers to the unregulated incentive commission a l t e r n a t i v e . * " i n f o . sys. acc." means access to a i r l i n e e l e c t r o n i c reservation systems. s"lndivd. attn." r e f e r s to the a b i l i t y of the travel agent to provide i n d i v i d u a l attention. ^"service to spec, mkts." i s the; a b i l i t y of the system to provide services to a i r t r a v e l market segments. 116 Services to specialized market segments such as those i n urban ethnic and i s o l a t e d northern communities which were i d e n t i f i e d by the C.T.C. as important, could he retained by allowing greater remuneration incentives i n these market segments. Given the fact that a i r f a r e s are regulated by the f e d e r a l government and i n most provinces, entrance into the t r a v e l agent industry i s p r o v i n c i a l l y regulated, i t follows that t r a v e l agent remunerations should be regulated as well. Moreover, i t has been shown that regulated incentive commissions can be adjusted by regulatory bodies so that consumers receive an adequate service l e v e l , a i r l i n e s are not excessively burdened with commission expenses and t r a v e l agents are induced by a s u f f i c i e n t l y high remuneration l e v e l to provide a i r t r a v e l services to the t r a v e l l i n g public which are necessary for an e f f i c i e n t a i r transport industry. 117 CHAPTER 7 SUMMARY 7.0 Summary The environmental changes i n the past decade associated with the a i r l i n e industry have brought about tremendous changes i n the role which the t r a v e l agent plays i n the a i r l i n e industry. In the mid-1970*3, the relationship between a i r l i n e s and t h e i r agents began to deteriorate as the r e s u l t of r i s i n g commissions. Faced with higher commission expenses, c a r r i e r s caused government agencies to 'question whether t r a v e l agent services provided to the public were at a s u f f i c i e n t l e v e l to warrant such an expense. More fundamentally, the role of the t r a v e l agent i n the a i r l i n e industry was brought into question. In Chapter 1, the ways i n which a i r t r a v e l l e r s , owners of t r a v e l agencies, and a i r c a r r i e r s benefit from the services provided by t r a v e l agents was presented. The various travel services provided by agents including a i r l i n e t i c k e t i n g , the organization of tours and the f u l f i l l m e n t of passenger reservations requirements were described i n subsequent chapters. The s p e c i f i c objective of th i s thesis has been to select a t r a v e l aqent remuneration policy for use i n Canada,: which *ould provide a i r t r a v e l l e r s with an adequate l e v e l of service, while at the same time avoiding excessive commission expenses which are economically i n e f f i c i e n t and wasteful. Subsequent to the evaluation of the four remuneration al t e r n a t i v e s , net fare. 118 uniform commission, unregulated incentive commissions and regulated incentive commission, tee conclusion sas drawn that a regulated incentive scheme would " t e s t " meet the objectives s p e c i f i e d and hence be i n the public's best i n t e r e s t . The objectives s p e c i f i e d which included service, economic, p o l i t i c a l and regional development objectives were chosen because they were f e l t to best r e f l e c t the i n t e r e s t s of the public with regard to the provision of a i r t r a v e l marketing services either d i r e c t l y by the c a r r i e r or through travel agents. With the introduction of regulated incentive commissions which would offer Canadian t r a v e l agents incremental commissions depending upon t r a f f i c volumes generated to s p e c i f i c destinations, the s p i r a l l i n g commission expenses which have been experienced in the United States i n recent years would be avoided. Furthermore, government;policy makers would be i n a position to regulate commission l e v e l s i n such a manner that the user pay philosophy with regard;to the purchasing of a i r t r a v e l marketing services could be further implemented., The i n i t i a l impact of the incentive commission alternative Mould be moderate in the sense that the structure of the industry would not immediately be altered. Eventually, policy makers could use t h e i r regulatory power to stimulate the provision of services to p a r t i c u l a r market segments deemed to be i n need. For example, the Canadian Transport Commission might seek to stimulate the growth of smaller firms.. Aside from addressing the najor policy issue of selecting an appropriate remuneration scheme, background information 119 d i r e c t l y and i n d i r e c t l y related to the thesis topic has been pre sen ted. She travel agent industry i s regulated by p r o v i n c i a l t r a v e l industry l e g i s l a t i o n which seeks to protect consumers f r o i the r i s k of tour wholesaler or r e t a i l t r a v e l agent bankruptcy. A i r l i n e conference entrance reguirements are an i n s u f f i c i e n t means of providing consumers with protection against f i n a n c i a l injury. The enactment of l e g i s l a t i o n requiring mandatory contributions to compensation funds has been praised as a more comprehensive approach to protecting the t r a v e l l i n g public. Ah important c h a r a c t e r i s t i c associated with the t r a v e l agent industry i s the a b i l i t y to provide spec i a l i z e d services to market segments not readily served d i r e c t l y by the a i r l i n e s - Two market segments which exemplify this a b i l i t y include the ethnic and commercial t r a v e l market segments. A i r c a r r i e r management i s faced with the decision of whether to emphasize sales externally, through the t r a v e l agent channel of d i s t r i b u t i c n or i n t e r n a l l y through c i t y sales o f f i c e s . The use of remote e l e c t r o n i c reservation system terminals in t r a v e l agencies emphasizes the importance which access to accruate, up-to-date reservation information plays f o r t r a v e l agents i n many market segments. The i m p a r t i a l i t y of the travel agent with regard to c a r r i e r choice i s threatened by the biasedness of reservations systems owned by i n d i v i d u a l c a r r i e r s . Discussion of changes i n the tr a v e l agent industry environment has been instrumental i n the evaluation of alt e r n a t i v e t r a v e l agent remuneration schemes- Although models have been used i n forecasting the impact of various remuneration 120 a l t e r n a t i v e s , whether the implementation of a regulated incentive commission policy by the Canadian Transport Commission for Canadian agents s e l l i n g i n t e r n a t i o n a l and domestic a i r t r a v e l service i s i n the ."public's best interest can, i n f a c t , only be revealed by implementing such a remuneration scheme. 121 Bibliography A A Travel Industry Incorporated. Annual Report. 1S77. "Agent Commissions S t i r Concern." Aviation Week and Space Technology, A p r i l 14, 1975. Ai r Canada, Training Programme Development Manager. Introducing Reservec I I . Third e d i t i o n , January 1975. Air T r a f f i c Conference of America. "Automated Services Provided to Travel Agents Located i n the united States." Passenger Committee B u l l e t i n No. 19. Washington D.C., March 3, 1978. Air T r a f f i c Conference of America. "Conference B u l l e t i n No. 71," Washington D- C., March 6, 1S78. Air T r a f f i c Conference of America. , Trade Practices Manual.• December 31, 1975. Air T r a f f i c Conference cf America., "Travel Agent Commission Structure. 1 1 Washington D.C, 1:974. {unbound document). "Air Travel Dominates Travel Agent Business-Travel Weekly." • Aviation Daily. " May 2, 1S77. "Airfare Commissions May Go-IATA Considers Net Fare P o l i c y . " Canadian Travel Courrler. May 5. 1977., / " A i r l i n e Commissions Go Sky High.1?* Business; Week:, February 7, 1977. P.31. " A i r l i n e s Spar Over Agent Ticketing.'? : Aviation- ffeek- and- Space '• Technology -. February 2, 1976. "The Big Business of Travel." The.Financia1 Post, March 26, 1977. Brancker, J.W.S. IATA and What It Does. Leyden, The Netherlands: A.W. S i j t h o f f , 1977. B r i t i s h Columbia. B r i t i s h Columbia Statutes, Travel Agents Registration Act, Chapter 22, 1977 . B r i t i s h Columbia. Ministry of Consumer and Corporate A f f a i r s . "Regulations under the Travel Agents Registration Act." Bay, 1977. "£.C. Act Insures the Whole World, Wholesale Group Tells' Government." Canadian T r a vei Cour ier-;. A p r i l 7, 1977. "B.C. Travel Operators Welcome Registration Provisions." The Province, February 12, 1977. 122 Buchannan, George A- Air Transport Association of America. Testimony before the U.S. Senate Subcommittee on Foreign Commerce and Tourism. November 18, 1971. (mimeographed). Canada. S t a t i s t i c s Canada. A i r Carrier F i n a n c i a l Statements. Catalogue 51-206. 1870-1976. Canada. S t a t i s t i c s Cana d a. 1976 Cens us of Canada» Catalog ue 92- 821. February 1878. ~ Cheng, Ivan. Interview. Love and White Travel Service Ltd., Vancouver. July 11, 1978. "Commercial Accounts to Get Ticket Printers." - Can adj an Tr aye 1 Courier. June 16, 1877. Elingsworth, R. K. "Pan Am I n f l e x i b l e on Agent Fee Reform." Aviation Week and Space Technology. June 23, 1975. E l l i s , R- " A i r l i n e v. Agent." Aeroplane. August 14, 1968., Harrison, Douglas K. "Summary of the Proposals Pertaining to T r a v e l . Services L e g i s l a t i o n , " December 1976. (mimeographed). "How Discounts Bleed the A i r l i n e s . " Business ̂ jeek, June 23, 1975. "If B.C. Fund Runs Out, Agents May Have to Cover C l i e n t Losses." Canadian Travel Courier. A p r i l 7, 1977. ; Kennedy, George and Tangry, D. Interview. Air Canada, Western legion, Passenger Marketing Division, Vancouver, July 19, 1978. Lee, Aaron. A A Travel Industry, Vancouver. Interview. February 28, 1878. "Licensed Leisure." The Financial P o s t M a r c h 2 6, 1977. Louis Harris and Associates, The Character and' Volume of the - United States Travel Agency Industry. New York: Ziff-Davis Publications, March 1973 and A p r i l 1978. Ludjfig, Richard. Interview. CP A i r . Vancouver- A p r i l 27, 1978. Martin, James. Design of Real-Time Computer Systems : Englewood C l i f f s , New Jersey: Prentice^Hall. 1967. Morgan, P h i l l i p . Interview. CP A i r Marketing Department. Vancouver. A i r l i n e - T r a v e l Agent Relations. February 25, 1977. Murphy, B i l l . Interview. Pagaesus Services, CP A i r , Vancouver. March 15, 1978. 123 N i c h o l s o n , Malcolm. Interview, p . Lawson*s T r a v e l . Vancouver. March 30, 1978. Noble, W i l l i a m . Interview. Quantas Airways, Vancouver. February 23, 1978. Off i c i a l A i r l i n e Guide-North Amerlean E d i t i o n . Oak Erook I l l i n o i s : Reuben H- Donnelley- November 15, 1977. O n t a r i o . S t a t u t e s o f O n t a r i o , "The T r a v e l I n d u s t r y A c t , " Chapter 115; 15- " O r i e n t a l Agents Organize t o Stop Hanky-panky." Canadian T r a v e l C o u r i e r . August 25, 1977. "Pan Am I n c e n t i v e s P r o h i b i t e d . " Canadian T r a v e l C o u r i e r . October 7, 1976- Rees, Gordon- I n t e r v i e w . Bayshore T r a v e l . Vancouver- A p r i l 6, 1978- "Hevenue Canada I n v e s t i g a t e s I l l e g a l Rebates." Canadian .Iravel C o u r i e r . March 8, 1S78. ?. 1. Howe, W.A-C. Interview. A i r Canada, General S a l e s and S e r v i c e , Vancouver. March 9, 1978. Ruppenthal, K a r l M. T r a n s p o r t a t i o n Nee ds and- A v a i l a b i l i t y i n : North C o s t a l C o m m u n i t i e s i n B r i t i s h Columbia. Vancouver: Centre f o r T r a n s p o r t a t i o n S t u d i e s , 1978. Saunders, Audrey. Correspondence. I n t e r n a t i o n a l A i r T r a n s p o r t A s s o c i a t i o n . Agency I n v e s t i g a t i o n P a n e l . Montreal. March 25, 1977- St a r k , Rodney. Ed. S o c i e t y Today. Second e d i t i o n . Del Mar, C a l i f o r n i a ; CRM Books. 19.73,- S t a t t o n , Brent- I n t e r v i e w . CP A i r , Marketing Department. Vancouver. February 25, 1977- "Summary of Competitive C a r r i e r Passenger Commission F i l i n g s i n the U.S.A.** CP A i r , Industry A f f a i r s , March 16, 1978 ^mimeographed) .. "Sun Not Down Yet on Hawaii T r i p s . " The Pro v i n e e , February 8, 1977. " T r a v e l Agent Commissions Reach $1.44 B i l l i o n i n 1976." J j j r ;Transport World- October 1977. " T r a v e l Agents Lose $23 M i l l i o n on Domestic S a l e s . " Airl-Lne E x e c u t i v e , J u l y 1978. " T r a v e l I n d u s t r y Welcomes C o n t r o l . " The Vancouver Sun* February 12, 1977. 124 "Twenty to Thirty More Travel Agents Expected to Fold." The Province, June 1. 1978- "U. S. A i r l i n e Commissions Jump i n 1976." Air Transport World, October 1977. United States. C i v i l Aeronautics Board. ,:; IATA. Aqreements- Concerninq Agency Matters—Unifora Commission^ Rates, Docket 28672- ;Washington D.C. March 15, 1978. United States. Department of Transportation. Office of F a c i l i t a t i o n . Passeaiqei?.^fieseg^at4ons^-%^a,^€4eketinqJ. Washington D- ,C- 1971. United States. Interagency Task Force on International Air Transportation Policy of the United States- Statement of ' International A i r Transportation Policy of the Uojted States. Washington D. C.September 1976. Wang, Patrick. Interview. Reed*s Travel. Vancouver. July 11, 1978. Hyckoff, D. Daryl and Maister, David H. The Domestic A i r l i n e Industry. Lexington, Massachucetts; D.C- Heath and Company, 1977- 125 A p p e n d i x 1 S e l e c t e d Competitive C a r r i e r Passenger F i l i n g s In The United S t a t e s 1 E i AI, I s r e a l i A i r l i n e s P o i n t - t o - P o i n t : I n c l u s i v e Tour Override; Volume I n c e n t i v e : 8% 3% $40 per passenger ($250,000 t o $1,000,000 annual revenues) ; $50 per passenger ($100,000 to $5,000,000) $60 per passenger (over $5,000,000) $30 per passenger (over $50,000 on Ho l i d a y C l a s s Economy Fares) Japan A i r l i n e s P c i n t - t o - P o i n t I n c l u s i v e Tour Override: Ecnus: Volume I n c e n t i v e 8% 3% $25 New-York-Tokyo One Kay F i r s t C l a s s New York-Tokyo one way Economy C l a s s or E x c u r s i o n IQ% - 100 to 499 passengers per year 11$ - 500 t o 999 passengers per year 12% - 1000 to 1499 passengers per year 131 - 1500 t o 1999 passengers per year 14% - 2000 t o 2499 passengers per year 15% - over 2500 passengers per year iComnission l e v e l s such as these are a p p l i c a b l e f o r payment to United S t a t e s t r a v e l agencies o n l y . Source: CP A i r , Industry a f f a i r s - Marketing, March 16, 1978- 126 Group Override/Tour Operator P l a n : 12% 10 t o 4 99 passengers per year 13& 500-999 passengers per year 14% 1000-1499 passengers per year 15% 1500 or more passengers per year Pan Am F c i n t - t o - P o i n t : 838 I n c e n t i v e l o u r : 3% f o r passengers o r i g i n a t i n g i n the United S t a t e s Volume I n c e n t i v e : To/From Borne, B r a z i l , Tokyo, Manila, Hong Kong o r the Middle East 8% - 25 t o 4 9 passengers 10% - 50 t o 7 4 passengers 12% - 75 t o 99 passengers 15% - 100 or more passengers Agent must earn a minimum or $20,000 or 110% of l a s t year«s c a l e n d a r g uarter whichever i s g r e a t e r : t o g u a l i f y . Agent earns 1% e x t r a f o r each 10% above l a s t years p e r i o d or $20,000 whichever i s g r e a t e r . Tour Operator.Support 10% on U.S.- E u r o p e / A f r i c a / M i d d l e East except Home 15% - U.S.-Borne 15% - U - S . - P a c i f i c 10% - a.S.-South America 5% - U.S.-Central America 7.5% - Best Coast-Hawaii up to 1800 l o c a l time 10% - West Coast^flawaii a f t e r 1800 l o c a l time 10% - U.S.-Alaska 10% - New York C i t y / D a l l a s / H a w a i i Group O v e r r i d e Tour Operator P l a n : Group O r q a n i z e r ; S u c t c r t l e v e I s |saae as tour operator support except 7% West Coast - Hawaii

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