Agencies obtain virtually all their revenue from commissions earned on booking arrangements with airlines, hotels, tour companies, car rental firms, and the like; only a few charge service fees. Commissions average 9.9 percent on airline fares (up from about 8 percent a decade ago); 10 percent on hotel arrangements; and 10 to 22 percent on tours and car rentals. So, a medium sized agency, doing some $5 million in sales, actually earns about $500,000 in commissions. The $500,000 is the agency's operating revenue for paying employees, utilities, advertising expenses, interest on loans, and so on. According to a survey of financial statements submitted to bank loan officers, agencies clear only 2.9 percent in profit before taxes.
A financial study by ASTA Agency Management magazine disclosed that the average one or two outlet agency generates total commission income of $155,245 and has expenses of $122,416, leaving a net profit (before payment to principals) of only $32,829. Reasonable levels of return occur only above the $2 million (gross dollar) volume level, when the level of return is $80,211.
Travel agencies in 1987 generated $64.2 billion in total travel sales about 20 percent of the total U.S. travel expenditures domestically and abroad. Of this amount, agents generated $37 billion in airline sales, $10.3 billion on cruises, $7.1 billion on hotels and other accommodations, $5.2 billion in car rentals, $1.9 billion in rail travel, and $1.9 billion in miscellaneous services such as sightseeing, according to the 1988 Travel Weekly Louis Harris Survey.
A decade ago, an agency that generated $3 million would have been considered large; most agencies generated under $1 million in total volume and were able to keep only about 8 percent of it to cover all expenses and profits. The average agency might have consisted of two or three people a husband and wife and an extra agent a so called Mom and Pop operation. Today, according to a Louis Harris study, the average agency does about $2.5 million a year; a large agency, on the order of $25 million and up; and mega agencies and chains, such as Carlson Travel Network and American Express, from $500 million to $1 billion in business.
Because agencies are now free to negotiate commissions based on volume, bigness and consequently consolidation is becoming an advantage. The biggest agencies not only have the clout to negotiate favorable rates, but they also benefit from certain economies of scale the ability to purchase sophisticated computers and software, to advertise, to pay higher salaries to attract top people, and to afford training and development programs.
Though the industry is still very diverse, with 65 percent of all agencies still generating under $2 million in revenue, these generate only 32 percent of all sales. The largest agencies, those generating $5 million or more in revenues, though only 9 percent of the total, generate 33 percent of the sales.
Others specialize in some special interest, such as adventure travel. About 1,000 travel agencies specialize in servicing government accounts a $ 15 billion business or in handling the military (SATO Travel, a $900 million travel agency network, is owned by 13 airlines). And then, there are thousands of "cruise only" agencies that do nothing but sell cruises.
An Example: The Travel Spot
Being a travel agent, said Richard Dixon, the owner manager of The Travel Spot, Cranford, NJ, is the "most difficult job in the world. Customers are often irrational. You have to sift through what they think they want and figure what they really want, then choose among 9,000 potential travel products for the right one.
'In 1965, when I entered the business after leaving Pan Am, this was a regulated business [fares had to be approved by a government agency and were the same for everyone]. Yesterday, we spent the day cutting discount coupons from the newspaper in order to give our customers the best deal.
'It's enormously frustrating. But it's the greatest business in the world. Something is always new."
Dixon, a former fine arts major who found his way into travel, epitomizes the new wave travel agent who clips coupons, keeps on top of the best deals, and uses innovative marketing programs and good business practices.
For example, seeing a weakening in the economy of Cranford, a town of 30,000 people, Dixon joined forces with other local merchants to create a "Home Town Advantage" promotion to stave off competition from surrounding suburban shopping malls and boost traffic into the local stores. Participating merchants cross promoted: a photo store provided a $25 gift certificate to its customers toward the next vacation booked at The Travel Spot; the local bookstore sponsored a murder mystery weekend at The Sagamore on Lake George, NY, booked by the agency; a local restaurant donated a dinner that the travel agency used as a prize in conjunction with its promotion with the bookstore. A town wide treasure hunt was also planned.
The agency has also been successful in turning individual travelers into groups thus multiplying sales and, at the same time, building brand loyalty through its own travel club. Club members pay into an interest bearing escrow account, with the funds ear marked for some special amenity or activity on the tour. The agency offers six or seven special tours a year for club members.
"We discovered a long time ago that unless people are made to feel special, they will shop price," said Dixon.
Dixon himself helps promote the agency's and his own credibility as a travel expert through a weekly column he writes for the local paper.
Dixon also knows the importance of keeping tight controls on cash flow and scrutinizes corporate accounts (which represent 30 percent of the agency's volume). "Unless they can convert to a seven day billing [paying as frequently as the agency has to pay the airlines] or a credit card, we say we can't afford to handle them. I have told clients we think they would be happier in a different environment."
The Travel Spot, which does over $3 million in business (70 percent of it in leisure travel), employs 11 agents, all of whom are specialists in some facet of travel. One agent has a great following among senior citizens; Dixon specializes in the United Kingdom and cruises. (The Travel Spot has a sister agency, Camelot, which handles cruises exclusively and employs 9 people.) "When I hire/' commented Dixon, "I only hire from tour and travel programs because I find these people understand the language and have an interest in travel. As an employer, I will refine the interest."
Starting salaries at The Travel Spot are $22,000 for someone with an education. 'The more travel and service related back ground you have, the better. Sure, someone who wants to be a travel agent should love to travel, love people. But you also need a sense of service, and be detail oriented."
And being a travel agent, Dixon noted, does give you the opportunity to travel: 'Travel is a life changing experience. You don't come back the same, or your heart is dead."