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 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. 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"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. 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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