The Australian travel agency industry In 2016, the Australian travel agency industry had estimated revenue of AUD 7 billion and an estimated profit of AUD 332 million. The industry is classified as being in the mature stage of its lifecycle, with total industry revenue expected to increase by 1.6 per cent over five years to 2021. 1 Industry overview A Industry definition and services Australian travel agencies arrange travel bookings on behalf of Australians travelling both domestically and internationally, as well as international travellers coming to Australia. They do not supply their own travel products to customers, but act as the ‘middleperson’, i.e. agency, between the traveller and the travel supplier. The industry offers travellers a wide range of services, from providing basic travel information and making reservations and bookings for single travel components, to booking organised tours and arranging complex travel itineraries within Australia or overseas. The industry’s key products include travel information and bookings for transportation (e.g. airlines, ships and rental cars), accommodation (e.g. hotels, motels and serviced apartments), tourist activities and attractions (e.g. theme parks and museums) and insurance. Australian travel agencies also provide travel services for overseas visitors to Australia. Additionally, these agencies provide local advice, bookings for transport, guides and interpreters, and develop specialised itineraries for individuals or groups. The revenue from these services is directly related to inbound tourism numbers. For the purposes of this case study, travel agencies that provide face to face service in a physical location, also known as bricks-and-mortar travel agencies, will be referred to as traditional travel agencies or agency. Travel agencies (or agency) that offers their services only online will be referred to as online travel agencies (or agency). Travel suppliers are those organisations that supply products or services for travellers, such as transportation (e.g. airlines and car hire firms), accommodation (e.g. hotels and motels), travel insurance and activities (e.g. boat tours and theme parks). Most travel suppliers have allowed travellers to make direct bookings for those travel products they own. Some travel suppliers (e.g. airlines) also provide a booking service for other suppliers, e.g. hotels and car hire. These arrangements are not considered to be part of the Australian travel agency industry for this case study because these travel suppliers take bookings on behalf of a limited range of other travel suppliers and provide very limited or no advice. 2 Industry demand and revenue A Customer segments There are two broad customer segments for the industry’s products: •Leisure travellers: people travelling for holiday or leisure purposes, accounting for approximately76 per cent of all travel bookings. •Business travellers: people travelling for reasons related to their work, accounting for approximately24 per cent of all travel bookings. Many travellers are common to both customer segments. For example, a business traveller may travel frequently for work purposes and also travel for leisure. B Demand for travel agency services The industry is sensitive to economic factors and other factors that affect travel. Major events, such as the ‘war on terror’, the global financial crisis (GFC), Zika virus, volcanic ash eruptions and airline price wars have all contributed to fluctuations in traveller numbers over the last fifteen years. There are four major drivers of demand for travel agency services, largely based on the demand for travel products; •general economic conditions; •available leisure time; •Australians wanting to travel internationally; and •business travel needs. C Industry revenue Travel agencies earn revenue in three broad ways. •Commissions paid by travel suppliers: commissions accounted for about 85 per cent of industry revenue in 2016. The travel agency charges the traveller the full ticket price of the travel booking, including commissions, and transfers this amount, less the agreed commissions, to the travel suppliers that are providing these services to the traveller. •Booking fees charged to travellers: booking fees accounted for about 10 per cent of industry revenue in 2016. Some travel agencies charge customers a fee for making travel arrangements on their behalf. This type of arrangement is more prevalent for business travellers, where companies that engage a travel agency to make all travel arrangements on their behalf pay a fee per booking. •Advertising fees: these fees accounted for about five per cent of industry income in 2016.Some large travel agencies earn income from allowing travel suppliers to advertise in their brochures, travel information magazines and websites. Customers are increasingly purchasing their leisure travel by booking directly with the travel supplier (via telephone or online) rather than through a travel agency. Many major domestic and international airlines are starting to eliminate booking commissions paid to travel agents and this, combined with domestic airfare price reductions, means that commissions paid by travel suppliers for airline ticket sales are a declining source of revenue for the industry. Commission from international airline ticket sales is the main source of revenue for the industry, although commission from cruise ship travel is increasing, as the popularity of this form of travel grows. Domestic travel packages (including travel insurance, car rental and accommodation) continue to be an important source of revenue for the industry. Travel agents can upsell the ticket value by changing seat class, such as economy class to business class, and adding side trips to other destinations. 3. Industry Key Success Factors The following four key success factors are identified as critical for competitors in the industry: • Differentiated and targeted marketing: it is important to position multiple brands to different customer segments, to capture as much market share as possible. For example, providing an online presence for travellers who want to book for themselves, and physical retail stores (traditional travel agencies) for those who want advice and a face-to-face experience. Having different brands that target different types of customers can provide multiple access points as well as leverage buying power. •Having a loyal customer base: for traditional travel agencies, it is important to generate repeat custom, cross-sell and up-sell products and provide a professional service to clients. Ongoing customer service training for employees is essential to achieve this. For online travel agencies, ease of customer signup and login are important, as is saving key customer information to speed up the online booking process for return customers. Ensuring high-quality and accurate information online is also important for online travel agencies. • Proximity and visibility to customer segments: being situated in a highly-visible location can attract local and passing customers to traditional travel agencies. For business customers, traditional travel agencies need to have close geographical proximity to them, to foster face-to-face relationships. For online travel agencies, using tools such as search engine optimisation (SEO) and search engine marketing (SEM) is important to ensure good placement in search results related to travel and bookings associated with travel. • Access to the latest available and most efficient technology and techniques: a computerised information, reservation and booking system lowers costs and provides quality customer service and convenience. Further access to a reliable server to host websites, efficient and effective anti-virus solutions, and robust fire walls to minimise the chance of successful attacks from hackers or viruses is essential. 4 Competitive landscape. Traditionally, travel suppliers have distributed their products through physical travel agency stores. However, in 2016, 56 per cent of all travel reservations were made online, and online travel booking revenue had grown by more than 70 per cent over the past five years. Each year, the functionality of online booking services improves, meaning they can be used to organise more complex travel itineraries. According to recent research, 47 per cent of people who travelled internationally used a traditional travel agent although this figure is declining, with online travel agencies and booking directly with travel suppliers becoming more prevalent. Competition in the industry is high and expected to increase for two key reasons: Online travel agencies Online travel agencies are a major threat to traditional travel agencies. As customers are more knowledgeable than ever about their travel destinations and potential travel plans due to increasing internet usage, they no longer need the expert travel information that traditional travel agencies have provided. Online travel agencies such as Planetary and BigHols help travellers to locate the cheapest travel options without having to visit multiple, direct to public, travel supplier websites. Online travel agencies can achieve reasonable profitability from a combination of high volume, low physical costs, low commissions and fees charged directly to customers. In 2011, Planetary and BigHols abolished booking fees on all flights booked in Australia. These two businesses now rely on commission from airlines, plus extra profits achieved by cross-selling higher margin products and services to customers. Fee cutting by online travel agencies is a significant threat to the profitability of traditional travel agencies that have higher fixed costs, such as rent. More international competitors are expected to enter the Australian travel agency industry as technology makes entry easier. For example, in 2010, the world’s largest search engine company purchased a flight information software company for USD 700 million. The software is used to search the websites of the world’s airlines, making it easier for customers to search for flights, compare flight options and prices, and purchase tickets. The search engine earns between five and 10 per cent of its advertising revenue from online travel searches in the process. Travel supplier websites Customers’ increasing preference for booking travel online has influenced travel suppliers to develop their own websites to attract direct online bookings. Easier online purchase of air travel and the growth in low-cost airlines in Australia have encouraged customers to bypass travel agencies and make their bookings directly with the travel suppliers online. Direct customer bookings reduce the cost per booking and improve overall profitability for travel suppliers, as commissions to travel agencies no longer need to be paid. Customer trends Industry research in 2016 showed that the level of choice on the internet was damaging brand loyalty. Only 10 per cent of respondents said they book their holidays with the same travel agency or travel supplier every time. As more customers decide to book separate parts of their holiday package with different travel suppliers, only 11 per cent said they would book all the components of a holiday from the same website. For internet-smart customers, factors like price, variety and customer experience have a large influence on decision-making. Over 66 per cent of survey respondents cited price as a major consideration when booking a holiday. The trend towards online travel bookings is also increasing for business travel. However, rather than book directly through travel supplier websites, most business travel is booked through online corporate travel agency services. These corporate travel agents have sophisticated systems which consolidate individual airline, accommodation and land transport travel, and allow the business traveller to book their whole trip on a single corporate travel website. In response to strong competition and loss of sales to online travel agencies and direct bookings offered by travel suppliers, many major traditional travel agencies also have an online presence and offer online booking services. This has enabled some to expand into overseas markets through virtual shop-fronts, in search of growth and profit opportunities in other markets. These companies generally charge a fee for online bookings, ranging from AUD 15 to AUD 50 per booking for domestic travel and more for international, outbound bookings. Commission revenue is earned from the travel suppliers, and booking fees are paid by customers. Another consequence of this strong competition is significant consolidation has occurred within the industry, which now consists of a small number of large traditional travel agencies, providing both traditional shop fronts and an online presence. The advantage to both leisure and business customers of traditional travel agency websites is that they consolidate all travel booking requirements with one organisation, and customers can pick up tickets and information in-store, as well as receive booking advice and assistance. Face-to-face contact with staff can be used as an opportunity to promote awareness and acceptance of their online services available. However, the challenge with the current business model for traditional travel agents is that their advice and expertise is offered at no cost to the customer, with many customers visiting a traditional travel agent to research products, get objective advice and information, then later booking online directly with a travel supplier or an online travel agent. Increasing awareness of pricing has intensified price-based competition, as technology has increased transparency of prices across different travel agency competitors. Price competition is expected to continue in the industry. Increasing awareness of pricing has intensified price-based competition, as technology has increased transparency of prices across different travel agency competitors. Price competition is expected to continue in the industry. However, there are some important non-price elements in the competitive environment. These include the quality of service provided, detailed knowledge of destinations and products on offer, actual physical store location, and word-of-mouth recommendations. According to magazine Travel Away’s research on “Travel Booking Trends Among Leisure Travellers 2015-16” survey, traditional travel agents scored highly on ‘client satisfaction’ among travellers who had used the services of a traditional travel agency to book travel within the previous 12 months. Strong satisfaction ratings also establish consumer loyalty to a traditional travel agent, with 65 per cent of travellers using the same traditional travel agency to handle transactions for complex itineraries such as two or more destinations in the one trip. The survey found that 70 per cent of those who took three or more trips per year used the same traditional travel agent to book each trip. Strong personal relationships and advice are an important component in the industry. A correlation was also identified between the use of a traditional travel agent and length and total cost of the trip booked. Bookings made by a traditional travel agent reflected an average length of 7.8 nights compared to 5.3 nights where a traditional agent was not involved. Traditional travel agency clients were reported as spending on average about 47.5 per cent more than bookings made without their involvement. This is positive for traditional travel agency operators, as satisfaction implies that clients are likely to remain loyal, and more expensive product sales means higher commissions. Customers also favour traditional travel agencies that specialise in niche markets, for example trekking or cruising, or specific specialist destinations such as Africa. This is because there is a higher level of trust and integrity perceived in specialists. Customers believe specialist agencies know more than they do, and that knowing the details can make a large difference to the overall trip. Customers also believe that this knowledge cannot be gained just from reading information online. 5 Escape Route Limited A. About Escape Route Limited Escape Route Limited (Escape Route) is Australia’s largest travel agency, with more physical stores than any other industry competitor, employing more than 11 000 staff in Australia. With more than 20 brands in Australia, the company offers a comprehensive travel booking service to leisure and business travellers and is regarded as a trusted travel provider and ‘the travel experts’. In 2016, the company won the industry’s National People’s Choice Award for Excellence in Customer Service (Before & After Sales). B. History Escape Route began with the opening of a discount travel store in Sydney, Australia in 1980. The company was listed on the Australian Securities Exchange (ASX) in December 1995, and has expanded via a combination of organic growth and acquisitions, reaching a milestone in 2016 of 2600 physical retail stores in 10 countries, licensing agreements in 70 other countries and 19 000 staff worldwide. The locations of their physical stores are usually in large shopping centres that have a high volume of passing customers. In Australia, Escape Route has established different brands to cater for different segments of the travel market, with the Escape Route flagship brand ranked 15th most recognised brand in Australia. It is credited with revolutionising the retailing of international air-travel in Australia, creating a model where profitability was driven by volume rather than margins. Initially, the company built a price advantage through seeking out lesser-known airlines as travel suppliers. Changes over the past fifteen years in the way customers make travel bookings have presented significant threats and opportunities for Escape Route. In recognition of changing customer booking preferences, the company announced in 2004 that it would invest in the development of an online presence. Various company announcements referred to its ‘consolidated e-commerce business’ and ‘clicks-and-mortar’ strategy, and expressed desire to focus on world’s best practice in face to face, telephone and online sales. The focus would be on the company’s ability to offer the customer a complete travel agency service, no matter how customers wanted to make their booking. A comprehensive customer services training program for staff in all roles was put in place to implement this strategy and support growth in sales. However, by 2011, in an environment where travel booking was steadily moving online, this strategy had not been fully realised. Escape Route’s CEO declared internet bookings were ‘an accessory to our model’ and that ‘it wouldn’t become that important to us.’ While leisure travellers could book domestic flights online, they were still unable to book an international flight on the company’s website. The website provided only an estimate of ‘starting from’ prices. Customers had to log an expression of interest which triggered a phone or email follow up from an Escape Route travel agent. Whilst the corporate travel division of Escape Route experienced strong growth in this period, there was no doubt that customers had been lost because of Escape Route’s emphasis on their physical stores and a growing number of leisure travellers were choosing to book their travel with other suppliers. Escape Route’s digital booking capability was revamped in 2014 in response to these challenges, however the booking system was not sophisticated and customers could only book international and domestic flights. As a result, Australian online bookings grew from two per cent of Escape Route’s revenue in 2011 to five per cent in 2016. C. Financial performance In 2016, Escape Route had a 20 per cent market share in the Australian industry and revenue of AUD 1.4 billion, a seven per cent increase on the previous year. Despite Escape Route’s growth in revenue, profitability fell by 11 per cent in 2015/16 to AUD 150 million. This was due to heightened competition from online operators and lower commissions on travel products due to product discounting and increased operating costs (mainly due to wages growth and increase in store rents). D. Business model Escape Route’s vision is to be a world class retailer of travel products to leisure and corporate customers. The company has grown its international market share to become a global leader in the leisure and business traveller segments. The company’s scale and global purchasing power mean it can negotiate competitive deals with travel suppliers for leisure, business and online travel divisions. Airline tickets make up about two-thirds of booking turnover for Escape Route, while the balance comes from ‘land’ products (predominantly hotels). The latter have grown in importance over the past few years and are responsible for much of the apparent growth in leisure margins. At a recent financial results presentation, Escape Route management confirmed that 77 per cent of leisure customers who bought an air ticket through Escape Route also purchased a land product. Hence, cross-selling is a critical component of the business. The company is organised into three major divisions: • The leisure travel division In Australia the revenue for Escape Route’s leisure travel division is around 60 per cent of the total company revenue, at AUD 800 million. Escape Route has a comprehensive global distribution network of travel suppliers such as airlines, hotels and car rental businesses. Its brand is easily recognised and is well-regarded internationally. In Australia, the company targets different types of leisure customers through its different brands such as Escape Route (the parent brand), Student Travel and Holiday Hub brands. It provides a variety of travel products that range from simple domestic airline tickets to complete overseas packages, which include international airfares, accommodation, meals, tours and activities. • The corporate travel division In Australia, Escape Route’s revenue from their business customers is AUD 600 million, with significant growth over the past five years. Major companies are signed to long-term travel agreements under which Escape Route arranges all business travel requirements. The company charges the relevant ticketed value for the various components of the booking (e.g. airline, accommodation, car hire) and a booking fee per booking. This division has several large corporate customers, and is the travel supplier of choice to many Top 1000 companies in Australia. It has won the award for top global corporate travel management company five years in a row to 2016, at the World Travel Awards. This division represents around 40 per cent of Escape Route’s total booking turnover. • The online travel division Since 2014, in addition to revamping the company website and investing in digital marketing capability, Escape Route have acquired existing online websites to compete against online travel agencies and online travel suppliers. Escape Route purchased travelaround.com in 2015 and BigJet.com in late 2015; both are online travel agencies offering flights for cheaper airlines. However, the websites are basic and are limited in their ability to create complex travel itineraries. Escape Route has recently made a decision to stop development of a mobile app. E. Challenges Prior to the internet, traditional travel agencies controlled the market for travel purchases. Escape Route’s main competitors were other chains, such as Round World Holidays, Mighty Flights, and numerous independent agencies. Having grown rapidly through the 1980s and 1990s, Escape Route gained first mover advantage in sourcing attractive deals from travel suppliers, while its size provided scale advantages on the cost side. Escape Route passed most of these savings on to customers, undercutting the competition and gaining a dominant market share in Australia. However, today Escape Route is amongst the most expensive of many distribution options available to travel suppliers. This, combined with increased competition from online travel agencies, is likely to reduce the company’s bargaining power with travel suppliers. The most significant threat to Escape Route comes from online travel suppliers. Travellers can easily go online and book directly with airlines, accommodation and other travel suppliers. Like the industry trend customers can visit an Escape Route physical store to research products, source information and brochures then later book online directly with a travel supplier or an online travel agent. Booking directly with a travel supplier or online travel agent saves the travel supplier from paying commissions to Escape Route. Over the years, airlines have cut the commissions that they are prepared to pay to both online and traditional travel agencies. If airlines keep reducing commissions, online travel agencies may still be profitable in a growing market. However traditional travel agencies, such as Escape Route with higher fixed cost structures, might have trouble covering costs. With the loss of air travel sales, Escape Route might also lose the chance to sell an accommodation product to leisure customers who currently purchase accommodation with their airline ticket, as accommodation sales are also under threat from online travel suppliers where customers can book online directly for hotels and gain access to discounted prices and last-minute deals. Negotiating terms with suppliers can be challenging. For example, when Escape Route tried to negotiate greater up-front commissions from Asia Airlines, the airline initially refused. Escape Route then took Asia Airlines off its panel of preferred airlines and its agents stopped actively encouraging their ticket sales. This led to a 70 per cent reduction in Escape Route’s sales of Asia Airlines’ tickets. Most of these sales were allocated to other airlines, proving Escape Route’s industry power and the value of its expert advice. Asia Airlines renegotiated with Escape Route to prevent further loss of sales. The concern, however, is that sometime in the future; one of the major international airlines could construct a business model that does not include commissions to travel agencies. With the continued erosion of the travel agencies’ share of the airlines’ total sales, the likelihood of a different business model and a significant change in the compensation structure of the industry increases. If one airline can carry on business without the involvement of the largest travel agency chain, other airlines will have a commercial imperative to follow. F. Developments Escape Route is responding to these threats by moving aggressively into niche markets where it believes it has a competitive edge. It aims to capture 30 per cent of an estimated $1 billion ticketing cruise revenue market in Australia alone. The company recently acquired the single physical retail outlet of a travel agency focused on cruise packages, expanding this to 12 outlets with plans for 60 more. Cruise packages are higher margin sales and an area of travel booking which can involve complex options in relation to itineraries, cabin types and so on, lending itself to Escape Route’s face-to-face service offer. To date, Escape Route has responded to changes in the leisure traveller segment by focusing on corporate travel customers, where service is as important as the price. Escape Route’s personalised approach has been the key to its growth in the corporate segment, especially for higher margin, small and medium enterprise customers, and in converting business travellers into leisure customers, where it is considered there are further growth opportunities. Escape Route are also looking at implementing a customer loyalty programme that will enable customers to accumulate loyalty points to use for travelling. The response of Escape Route’s Executive team to the surge in demand for online travel agencies, and the increase in booking directly with travel suppliers, is to offer a new website, under a separate brand called ‘Lift Off’. The premise of Lift Off is to offer customers a tailored online booking experience, with personalised telephone and chat support. Using sophisticated booking technology, Lift Off will provide travel recommendations and itineraries based on a user’s search history and answers to online questionnaires. The brand aims to target the leisure traveller segment with an online solution for complete holiday packages. Escape Route’s Board has expressed concerns about launching a completely new brand into an already competitive market. Without further customer research, the brand may not resonate with the customer segments and could add confusion in the market. The Executive team are keen to pursue Escape Route’s vision to be a world class retailer of travel products to leisure and corporate customers. The industry is watching to see whether Escape Route can maintain their power as an organisation and retain their reputation for providing expert advice.