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Information technology's strategic impact on the American air travel service industry
269
Applications
Information Technology’s Strategic Impact on the American Air Travel Service Industrv 1. Introduction
William J. Doll The University of Toledo, Toledo, OH 43606, USA
The air travel service industry is in a period of rapid change. Within the last year, several new information technology (IT) applications have been introduced that may affect traditional relationships between airlines, travel agencies, and the corporate entities who purchase travel service. Information technology promises to have a strategic impact on the structure of the industry and the ways in which travel agencies compete. This paper describes such emerging IT applications and discusses their strategic implications. Keywords: Competitive applications, Air travel, Industry ture, Strategic implications, Information technology.
tems analyst
struc-
William J. Doll is a Professor of MIS and Strategic Management at the University of Toledo. The author of many articles in academic and professional journals including Management Science, Academy of Management Journal, Communications of ?he ACM, MIS Quarterly, Information and Management, and the Journal of Systems Management, Dr. Doll has a doctoral degree in Business Administration from Kent State University and has worked as a senior management syson the corporate staff of Burroughs Corporation.
North-Holland Information & Management 0378-7206/89/$3.50
16 (1989) 269-275
0 1989, Elsevier Science Publishers
J
The airline industry is frequently cited as an example of the use of information systems for competitive advantage. American Airlines computerized reservation system (Sabre), which was developed in the mid-1970’s at a cost of over $300 million, gave American Airlines an advantage over their competitors. United Airlines and later Eastern, Delta, and TWA responded to this competitive threat by developing their own computerized reservation systems. The development of these reservations systems and the need for national distribution networks stimulated rapid growth in the travel agency industry. Information systems can and have improved productivity, accuracy and general competence in travel agencies more than in any other industry [2]. Recently, information technology applications have threatened the traditional role of the travel agency as an intermediary between commercial airlines and travelers, especially in the case of corporate customers. Travel agencies are responding to this threat by using information technology to provide new services for corporate clients. These emerging technologies and applications may affect both the structure of the industry and the way in which travel agencies compete.
2. The Impact of Information Technology Parsons [18] distinguishes between the industry, firm, and strategy level impact of information technology. Most studies of the strategic or competitive impact of information technology have focused on the firm or strategy level [5] [8] [16] [24] [27]. Several authors have described how a
B.V. (North-Holland)
270
Information& Management
Applications
firm might identify competitive applications of information technology [15] [21]. Clemons and Kimbrough [7] suggest that the difficulty firms have in identifying strategic or competitive uses for information systems may, in large part, be because such opportunities are rare. They suggest that, for most firms, implementation is more likely to be motivated by strategic necessity than by competitive advantage. Even where the innovation has first mover advantages, competitors may quickly develop imitations. Competitive advantage may not be sustainable. The result of an innovation may be a change in the structure of the industry rather than a change in the competitive position of any individual firm. Industry level changes might include the introduction of new products or services, significant changes in markets, changes in the underlying economics of production, redistribution of value added between stages of the value chain, or development of new channels of distribution. Even for the innovator, these changes in industry structure may be more significant than change in the firm’s relative competitive position within the industry. Parsons and later Porter and Millar [19] discuss the potential impact information technology may have on industry structure; however, studies focusing on specific industries are rare. Clearly, the air travel agency industry presents an interesting case. It is an information intensive industry that is undergoing rapid technological change. Recent innovations in information technology have the potential to change the structure of the industry and the way in which travel agencies compete.
3. The Air Travel Agency
Industry
The travel agency acts as an intermediary between the private individual or corporate entity and the vendors, such as the airlines, tours, cruises, hotels, resorts, and car rental agencies. They sell their knowledge/expertise in travel information, their services in making a reservation and issuing tickets, and information concerning a commercial entity’s pattern of travel. In 1985 there were 28,054 travel agencies in the U.S. While the industry predominantly consists of small agencies with gross sales of under one million dollars, there are also a few large “mega-
agencies” such as American Express whose net sales exceed one billion dollars per year. Travel service industry sales of $269 billion represents approximately 6.7% of the U.S. Gross National Product and this is the fastest growing sector of the U.S. economy [26]. Travel has traditionally been a glamorous industry which did not require substantial capital or start-up costs. All that was needed was a home and a telephone. Most newcomers to the industry in the late 70’s and early 80’s could do so with approximately $15,000. However, these new entrants soon found that the industry was plagued by low profit margins and high labor costs. Labor costs currently range from 45% of revenue for commercial travel agents to 65% for retail travel agencies. The survival of an agency is largely dependent upon the sales volume the agency is able to achieve. Today, the travel agency industry is highly competitive [3]. Many firms, especially small agencies, are not surviving. In 1986, 1400 travel agencies went out of business. In 1987, the buying and selling of agencies under $30 million dollars increased dramatically. Now, medium size agencies (6-8 million), scared that they cannot compete in the deregulated business environment, are being gobbled up by larger agencies such as First Travel and American Express. The industry is going through a period of consolidation [14] [25]. The major markets in the travel industry include: corporate/commercial travel; group and incentive travel which can be further segmented into corporate group travel, incentive travel and awards unlimited travel; vacation travel; and consulting. The corporate segment is a large mature market; it provides high volume sales to agencies which handle travel arrangement for major corporations. Information technology is used extensively in this segment to lower cost and improve service. Travel ranks as the 3rd largest expense item for after payroll and communimany companies, cations [22]. In many large corporations, a corporate travel department negotiates with travel vendors and acts as a liason between the employee and the travel agent. Firms contract with a travel agency such as American Express to handle all their travel needs. In return, the agency shares a portion of its commission (“revenue sharing”) with the client, putting further pressure on margins.
Information & Management
The current trend is for corporations to contract with mega-agencies for their travel needs [l]; this leads to further consolidation of the industry. For example, AT&T has given its $430 million annual travel expenditures to three large agencies: Mr. Foster; American Express; and Thomas Cook. DuPont, which previously utilized 500 different agencies nationwide, recently turned to Rosenbluth Travel of Philadelphia to handle 80% of its $100 million travel budget. To compete effectively in the group and incentive segment of the industry requires access to more extensive data bases than those provided by the major airline reservation systems. The incentive travel segment is the most complex and the most difficult to enter, but it has the highest profit margins. In incentive travel, the agent is responsible for coordination of hotels, entertainment, food, beverages, meetings, baggage, transportation (shuttles or taxis), and any other arrangements requested by the client. An example of an incentive travel package is: making all arrangements for an automobile show in Las Vegas for 4000 + people. Maritz and E.F. McDonald are the most prominent “Incentive Houses” and American Express has recently attempted to enter this market. The consulting segment of the market is in its infancy and is experiencing rapid growth. Consulting services offered to corporations include administering company award programs or managing travel programs that minimize the cost and maximize the productivity of travel expenses. In this market, information technology is used to manage the client’s travel expenses (i.e., to identify where the travel dollars are going and to identify cost saving strategies). This market is largely driven by corporate efforts to cut costs. Formal travel policies, contracts with travel agencies, and information systems for managing travel resources are designed to provide cost-conscious travel arrangements. American Express has complemented its Corporate Card business with business travel services that include reports for both management control and negotiating leverage. Control reports enable the firm to audit travel expenses against expense reports. When all of a firm’s airline, hotel, and car rental arrangements are handled through the same agency, it can provide reports on the total volume of business done with each airline, hotel, or car rental firm [4]. This information can provide lever-
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271
age for organizations negotiating with vendors for better rates. Major hotel/motel chains have responded to this trend by utilizing information systems at their home offices to verify corporate usage and initiating efforts by national sales teams to use this information. Many hotel chains are now aggressively calling on corporations in the hope of negotiating travel service contracts that are attractive to both the hotel and the corporation. Until recently, information technologies in the travel industry remained relatively stagnant. In recent years, several promising new technologies have been introduced. These emerging technologies appear to have the potential to change the structure of the industry, as well as the competitive strategies of firms in the industry.
4. Emerging Applications
of Information
Teclmol-
ogY The emerging technologies in the travel agency industry include: automatic call distributors; automatic ticket machines (ATM) and satellite ticket printers (STP); travel management software, such as Price Waterhouse’s “Air Auditor”; databases, such as World Associated in Travel, Inc’s “World-File” which provides comprehensive information on tours; user friendly reservation terminals; programmable work stations and personal computer interface to backoffice mainframes. Although they have not been used commercially as yet, the travel industry is among the most attractive areas for the application of expert systems. 4.1. Automatic
Call Distributors
Automatic Call Distributor Systems (ACD’s), which sort the calls coming into an agency and report on their handling to ensure efficiency, are another example of the use of automation. ACD reports provide management with information on such things as: how long a call was on hold, the number of calls in a given time period, and the length of time necessary to make a reservation. This information helps agency management to decide the volume of manpower needed to achieve service standards. ACD’s are available for any size agency. Telecom Technologies of Ontario Cali-
272
Applications
Information
fornia offers a micro-processor controlled automatic call distribution system. It operates with tie lines that connect the agency’s major customers with agent stations across the country. Agents have reported productivity increases of 60-705X [6]. These systems are also able to generate reports to identify the productivity levels of individual agents or agency offices. Such daily reports include:
(1) number and duration of in-coming and outgoing calls,
(2) how many calls were answered before the re-
cording, (3) how many calls were transferred to support groups, (4) how long the caller had to wait before being processed. (5) percentage of total calls put on hold.
This information helps establish proper systemwide staffing levels and significantly reduces labor costs. ACD systems also allow managers to listen in on reservation conversations; this is especially helpful during training periods. Results are reviewed with agents and problem situations are quickly resolved. They can also provide a module display that identifies which client is calling. Thus, agents are able to add a personal touch to their phone conversations. ACD’s are not new, but their information management capabilities have only recently been enhanced. By using this information, agent time and the phone is more effectively utilized. The result can be competitive advantage through better service and lower costs. Although the ACD’s appear to be very efficient as cost saving devices, they are very expensive. The capital required may place this technology out of the reach of many small operations, further contributing to the industry consolidation presently underway. 4.2. ATM’s
and Satellite
Ticket Printers
ATM’s and Satellite Ticket Printers (STP) may, at some point, threaten the travel agency’s traditional role as an intermediary between the commercial airlines and individual travelers or corporate customers. Designed primarily for corporations with multiple locations and significant travel, the STP prints tickets at remote locations. It
& Management
utilizes a new cardboard ticket stock (stored in a locked container) and a printer connected to a reservation system via a modem with dial up capabilities [23]. With an STP, customers do not need to pick up tickets at the travel agency, have them mailed to their home or office, or have them forwarded to the airport to be picked up when they arrive for their flights. They enable travel agencies to queue tickets to an on-line STP at the corporate client’s location, providing quick and convenient distribution [ll]. The corporate client gets better service plus, in many cases, a portion of the travel agent’s commission. The travel agency is able to establish a continuing relationship with the corporate client, increase the client’s switching costs, and reduce the overhead and manpower costs associated with multiple agency “store fronts”. STPs may be used on-site for corporate clients to issue boarding passes, invoices, and travel management reports, as well as tickets. For example, Hewlett Packard (HP) recently signed a contract with Lifeco for its Western Region operations. Arrangements included an STP on HP’s site, as well as travel management services. The STP is an essential part of a travel management program that is expected to reduce HP’s travel costs by twenty percent or more [13]. When a satellite ticket printer is utilized by a commercial airliner, it will often have somewhat different capabilities and be referred to as an automatic ticketing machine (ATM). Airlines use ATM’s extensively in airports to provide customers with faster service. For example, Southwest Airlines distributed 20% of its tickets as of 12/22/86 using ATM’s. United Airlines is introducing its version of the unattended ticketing machines this year. United has streamlined the software to be faster and added a “Quick Path” option to permit direct access to boarding passes. Continental’s ticketing machine can now give seat assignments. Passenger acceptance of these machines, however, still represents a hurdle for the industry as most travelers still prefer human contact to “talking to a computer.” Thus, ATM’s and STP’s could significantly change the future of travel agencies. They permit airlines to deal directly with individual and corporate customers, thereby by-passing the travel agencies. The deregulation of the airline industry, increased pressure on airline margins caused by
Information
W.J. Doll / Strategic Impact on Air Travel Service Industry
& Management
“fare wars,” and the consolidation of the airline industry towards 5 or 6 mega-carriers are factors which encourage “direct selling.” However, the software for these systems must be simplified and made easier to use. Even if such an approach is used for only a few hundred major corporate accounts, this would have a significant impact on many agencies. 4.3. Travel Management
Software
Travel management software has, in part, made possible the recent growth in the travel consulting market. This software enables firms to manage their travel dollars better by identifying where dollars are being spent and evaluating the cost savings of different travel policies. For example, Price Waterhouse, a big-eight public accounting firm, has developed a system to audit air fares “Air Auditor” - which they plan to market to corporations and commercial travel agencies. The system performs a check and balance on air-travel versus company travel policies. It also projects the financial impact of a change in corporate travel policies such as expanding departure time windows. Agencies are buying it and using it as a marketing tool to attract new corporate clients [20]. Within the past year, Price Waterhouse has introduced, as an extension to this, a consulting and software package consisting of an array of travel management services, from expense design and implementation to strategic planning for airlines, corporations, and travel agencies. Most of the large travel agencies already provide these consulting services to corporate clients. Travel management software and services is especially attractive for travel agencies attempting to add value to the services they provide for their corporate customers; such services may also increase customer perception of the transfer cost of switching to another agency. 4.4. Systems
Integration
In the future, technology will permit communication with outside databases that are not part of or aligned with a vendor’s reservation system. Projected for implementation in 1989, Delta’s DATAS II adds a new concept to reservation systems - systems integration [9] [lo]. DATAS II will offer a complete access program, including
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comprehensive mainframe to mainframe communication and the most accurate and timely information from a variety of host sources. In addition, Delta has designed an advanced communication system which has networking capabilities to enhance processing time. The projected increased system capacity will be 4 000 messages per second, compared to the current 400-500. The goal is to reduce response time, which is now 3 seconds, to .62 seconds. Down-time should be reduced by 40% and interface with different corporate networks should be easier and more adaptable, even if different protocols are used in the various databases. 4.5. Databases Systems integration will stimulate the development of database services in the travel industry. These databases, linked through integrated networks to user-friendly terminals or personal computers, will provide a wide array of travel information including: airline, car, and hotel reservations; resort accomodations; tours and side trips and other information of interest to travelers. For example, World Associates in Travel, Inc. is designing a database system called “World-File”. It will be a database of comprehensive information on tours offered anywhere in the world. The database management software will permit inquiries by a variety of customer criteria, such as destination, visa, immunization, and travel tips. Such database services will make it easier and more efficient for the travel agent to sell tours. Access to these databases through integrated networks will make it easier for agencies to enter the more complex group and incentive segment of the travel industry, especially the incentive travel segment. 4.6. Expert
Systems
The travel industry is among the most attractive areas for application of expert systems [12]. Basically, travel agencies sell expert advice based upon their knowledge base of travel information. There are well over one hundred possible restrictions on air travel that affect the price of a ticket. Several of these restrictions can apply to a particular air fare, ranging from the time and day traveled to seat availability and to the number of days
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Applications
between arrival and departure. Restrictions applicable to pricing must be weighed against a traveler’s preferences concerning arrival and departure times, seating, airline, and direct vs. indirect flights. When linked to databases on resorts, tours, and side trips, as well as car, motel, and airline availability, expert systems have enormous potential for all segments of the travel agency industry. In addition to making reservations, expert systems can be used to prepare itineraries, produce ticket audits and perform corporate travel audits. These systems would replace routine evaluations that require significant man hours. In addition to these information technology innovations, there are a number of other applications of information technology that will have substantial impact on the industry. User friendly reservation terminals which give the average layperson access to travel information through their own personel computer have been developed by airlines [17]. These menu driven applications allow laypersons to access fares and flight information and queue requests to the travel agency for ticketing. However, at present, these systems do not ensure the best fares or routings when given time constraints. Other developments include the programmable work station and personal computer interfaces to back office mainframes. Using PC’s, new programmable work stations are being developed to incorporate profiles on individual traveler preferences and/or corporate travel policy information and to assist the agent or in-house travel department in automatically selecting the best fares. Interfaces between these PCs and mainframes will make it easier to transfer historic travel data from mainframes to PCs for analysis. 5. Discussion and Conclusions Over the next decade, expert systems, along with the associated databases and integrated network capabilities necessary to gain full competitive advantage from this technology, will have substantial impact on the travel agency industry. As the industry becomes more sophisticated, it will become increasingly difficult for small agencies to compete effectively. Pressures for achieving
Information & Management
the high volume operations necessary to pay for expensive ACDs, travel management software, database access, and expert system capabilities will also increase. The need to develop and train a staff of agents who are skilled in the use of these new systems will raise training requirements. Only travel agencies with sufficient technical expertise will be able to adapt to these technological changes. The result will be the consolidation of a cottage industry, leading to perhaps no more than a hundred major nation-wide mega agencies that will dominate the travel service industry. The nature of the industry itself will be transformed by information technology. The travel consulting services segment will continue to grow as travel agencies broaden the range of services they offer their customers and as they attempt to “lock in” high volume corporate clients. The group and incentive market will increasingly be considered as a source of revenue growth. Integrated reservation services and world-wide database of tours and resorts will make it easier for the larger agencies to enter the group and incentive segment of the market. ATM’s and STP’s have the potential to change the traditional role of the travel agency as an intermediary between the airline and the customer, especially for corporate clients who already have an on-site STP. At present, the airlines have been content to use ATM’s at airports; they have not attempted to bypass travel agencies. However, as the travel agency industry consolidates and high volume agencies gain significant power, airlines may wish to counter-balance this growing agency power by using a direct approach for the major corporate accounts. Information technologies will be used by some firms to gain competitive advantage over others. However, the most dramatic impact of information technology will be on the nature and structure of the industry itself, including the degree of industry concentration, the products and services offered, the underlying economics of operation, the redistribution of value added, and the development of new channels of distribution. Even for successful innovators, these changes in industry structure may be more significant than changes in their competitive position relative to other major firms in the industry.
Information & Management
References [II “A View of Business Travel in 1987”, Travel Weekly, June 1986, p. 32. [21 “Agencies Ripe to Cash In on Technological Progress,” Travel Weekly, January 22, 1987, p. 37.). [31 “Agencies Taking Steps to Improve Productivity and Profits,” Business Travel News, March 30, 1987, p. 11. [41 “American Express Travel Enhances Corporate Credit Card,” Business Travel News, June 9, 1986, p. 21). [51 Bakos, J. Yannis, and Treaty, Michael E., “Information Technology and Corporate Strategy: A Research Perspective,” MIS Quarterly, Vol. 10, No. 2, June 1986, pp. 107-119. [61 “Better Phone Service is Just the Ticket,” Modern Office Technology, October 1986, p. 5. [71 Clemons, Eric K. and Kimbrough, SO., “Information Systems, Telecommunications, and Their Effects on Industrial Organization,” Proceedings of Seventh International Conference on Information Systems, 1986, pp. 99-108. I81 Clemons, Eric K. and McFarlan, F.W., “Telecom: Hook Up or Lose Out,” Harvard Business Review, July-August 1986, pp. 91-97. [91 “Delta Eyes Global Expansion of DATAS II Through Partnerships,” Travel Weekly, April 20, 1987, p. 27). [IO1 “Delta Unveils Multifaceted Reservation System,” Travel Weekly, March 30, 1987, p. 3. [III Durbin, Fran and Godwin, Nadine, “United Will Extend Current Commissions to Satellite Locations,” Travel Weekly, Vol. 44, August 12, 1985, p. 1. [I21 “Expert Systems Soon Will Be Able to Help Plan and Book Travel,” Travel Weekly, October 1986. Co. Starts Consolidating Its Travel [I31 “Hewlett-Packard Management,” IBusiness Travel News, August 4, 1986). [I41 “Interest in Buying and Selling Agencies Reaches All-Time High: Buyers Have Edge,” Business Travel News, June 9, 1986, p. 18.).
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[I51 Ives, Blake and Learmonth, G.P., “The Information Systems as A Competitive Weapon,” Communicarions of the ACM, Vol. 27, No. 12, December 1984, pp. 1193-1201. [I61 McFarlan, F. Warren, “Information Technology Changes the Way You Compete,” Harvard Business Review, May-June 1984, pp. 98-103. [I71 Melino, Diane. “American Sets Broad Changes For Its Sabre Reservations System,” Business Travel News, February 3, 1986. p. 49. [I81 Parsons, G.L., “Information Technology: A New Competitive Weapon,” Sloan Management Review, Fall 1983, pp. 3-13. [I91 Porter, Michael, E. and Millar, Victor E., “How Information Gives Your Competitive Advantage,” Harvard Bwiness Review, July-August 1985, pp. 149-160. [201 “Price Waterhouse Unveils System to Audit Airfares,” Business Travel News, January 9, 1987, p. 1. [2Il Rackoff, N., Wiseman, C., and Ullrich, W.A., “Information Systems for Competitive Advantage: Implementation of a Planning Process,” MIS Quarterly, Vol. 9, No. 4, December 1985, pp. 285-294. [221 “Rosenbluth Travel: Training in an Unstable Environment,” Advertising Age, May 5, 1986, pp. 8-14. v31 “Satellite Ticket Printer Controller Enables Low Cost and Secure On Site Ticketing,” Business Travel Review, March 1986, p. 16). ~241Scott Morton, M.S., and Rockart, J.F., “Implications of Changes in Information Technology for Corporate Strategy,” Interfaces, Vol. 14, No. 1, January-February 1984, pp. 84-95. ~251“Takeover Targets,” Travel Weekly Focus, January 1987, p. 16. WI U.S. Industrial Outlook 1987 - Travel Services, pp. 60-61). v71 Wiseman, C., Strategy and Computers: Information Sysferns as Competitive Weapons, Dow Jones-Irwin, Homewood, Illinois, 1985.
Applications
Information Technology’s Strategic Impact on the American Air Travel Service Industrv 1. Introduction
William J. Doll The University of Toledo, Toledo, OH 43606, USA
The air travel service industry is in a period of rapid change. Within the last year, several new information technology (IT) applications have been introduced that may affect traditional relationships between airlines, travel agencies, and the corporate entities who purchase travel service. Information technology promises to have a strategic impact on the structure of the industry and the ways in which travel agencies compete. This paper describes such emerging IT applications and discusses their strategic implications. Keywords: Competitive applications, Air travel, Industry ture, Strategic implications, Information technology.
tems analyst
struc-
William J. Doll is a Professor of MIS and Strategic Management at the University of Toledo. The author of many articles in academic and professional journals including Management Science, Academy of Management Journal, Communications of ?he ACM, MIS Quarterly, Information and Management, and the Journal of Systems Management, Dr. Doll has a doctoral degree in Business Administration from Kent State University and has worked as a senior management syson the corporate staff of Burroughs Corporation.
North-Holland Information & Management 0378-7206/89/$3.50
16 (1989) 269-275
0 1989, Elsevier Science Publishers
J
The airline industry is frequently cited as an example of the use of information systems for competitive advantage. American Airlines computerized reservation system (Sabre), which was developed in the mid-1970’s at a cost of over $300 million, gave American Airlines an advantage over their competitors. United Airlines and later Eastern, Delta, and TWA responded to this competitive threat by developing their own computerized reservation systems. The development of these reservations systems and the need for national distribution networks stimulated rapid growth in the travel agency industry. Information systems can and have improved productivity, accuracy and general competence in travel agencies more than in any other industry [2]. Recently, information technology applications have threatened the traditional role of the travel agency as an intermediary between commercial airlines and travelers, especially in the case of corporate customers. Travel agencies are responding to this threat by using information technology to provide new services for corporate clients. These emerging technologies and applications may affect both the structure of the industry and the way in which travel agencies compete.
2. The Impact of Information Technology Parsons [18] distinguishes between the industry, firm, and strategy level impact of information technology. Most studies of the strategic or competitive impact of information technology have focused on the firm or strategy level [5] [8] [16] [24] [27]. Several authors have described how a
B.V. (North-Holland)
270
Information& Management
Applications
firm might identify competitive applications of information technology [15] [21]. Clemons and Kimbrough [7] suggest that the difficulty firms have in identifying strategic or competitive uses for information systems may, in large part, be because such opportunities are rare. They suggest that, for most firms, implementation is more likely to be motivated by strategic necessity than by competitive advantage. Even where the innovation has first mover advantages, competitors may quickly develop imitations. Competitive advantage may not be sustainable. The result of an innovation may be a change in the structure of the industry rather than a change in the competitive position of any individual firm. Industry level changes might include the introduction of new products or services, significant changes in markets, changes in the underlying economics of production, redistribution of value added between stages of the value chain, or development of new channels of distribution. Even for the innovator, these changes in industry structure may be more significant than change in the firm’s relative competitive position within the industry. Parsons and later Porter and Millar [19] discuss the potential impact information technology may have on industry structure; however, studies focusing on specific industries are rare. Clearly, the air travel agency industry presents an interesting case. It is an information intensive industry that is undergoing rapid technological change. Recent innovations in information technology have the potential to change the structure of the industry and the way in which travel agencies compete.
3. The Air Travel Agency
Industry
The travel agency acts as an intermediary between the private individual or corporate entity and the vendors, such as the airlines, tours, cruises, hotels, resorts, and car rental agencies. They sell their knowledge/expertise in travel information, their services in making a reservation and issuing tickets, and information concerning a commercial entity’s pattern of travel. In 1985 there were 28,054 travel agencies in the U.S. While the industry predominantly consists of small agencies with gross sales of under one million dollars, there are also a few large “mega-
agencies” such as American Express whose net sales exceed one billion dollars per year. Travel service industry sales of $269 billion represents approximately 6.7% of the U.S. Gross National Product and this is the fastest growing sector of the U.S. economy [26]. Travel has traditionally been a glamorous industry which did not require substantial capital or start-up costs. All that was needed was a home and a telephone. Most newcomers to the industry in the late 70’s and early 80’s could do so with approximately $15,000. However, these new entrants soon found that the industry was plagued by low profit margins and high labor costs. Labor costs currently range from 45% of revenue for commercial travel agents to 65% for retail travel agencies. The survival of an agency is largely dependent upon the sales volume the agency is able to achieve. Today, the travel agency industry is highly competitive [3]. Many firms, especially small agencies, are not surviving. In 1986, 1400 travel agencies went out of business. In 1987, the buying and selling of agencies under $30 million dollars increased dramatically. Now, medium size agencies (6-8 million), scared that they cannot compete in the deregulated business environment, are being gobbled up by larger agencies such as First Travel and American Express. The industry is going through a period of consolidation [14] [25]. The major markets in the travel industry include: corporate/commercial travel; group and incentive travel which can be further segmented into corporate group travel, incentive travel and awards unlimited travel; vacation travel; and consulting. The corporate segment is a large mature market; it provides high volume sales to agencies which handle travel arrangement for major corporations. Information technology is used extensively in this segment to lower cost and improve service. Travel ranks as the 3rd largest expense item for after payroll and communimany companies, cations [22]. In many large corporations, a corporate travel department negotiates with travel vendors and acts as a liason between the employee and the travel agent. Firms contract with a travel agency such as American Express to handle all their travel needs. In return, the agency shares a portion of its commission (“revenue sharing”) with the client, putting further pressure on margins.
Information & Management
The current trend is for corporations to contract with mega-agencies for their travel needs [l]; this leads to further consolidation of the industry. For example, AT&T has given its $430 million annual travel expenditures to three large agencies: Mr. Foster; American Express; and Thomas Cook. DuPont, which previously utilized 500 different agencies nationwide, recently turned to Rosenbluth Travel of Philadelphia to handle 80% of its $100 million travel budget. To compete effectively in the group and incentive segment of the industry requires access to more extensive data bases than those provided by the major airline reservation systems. The incentive travel segment is the most complex and the most difficult to enter, but it has the highest profit margins. In incentive travel, the agent is responsible for coordination of hotels, entertainment, food, beverages, meetings, baggage, transportation (shuttles or taxis), and any other arrangements requested by the client. An example of an incentive travel package is: making all arrangements for an automobile show in Las Vegas for 4000 + people. Maritz and E.F. McDonald are the most prominent “Incentive Houses” and American Express has recently attempted to enter this market. The consulting segment of the market is in its infancy and is experiencing rapid growth. Consulting services offered to corporations include administering company award programs or managing travel programs that minimize the cost and maximize the productivity of travel expenses. In this market, information technology is used to manage the client’s travel expenses (i.e., to identify where the travel dollars are going and to identify cost saving strategies). This market is largely driven by corporate efforts to cut costs. Formal travel policies, contracts with travel agencies, and information systems for managing travel resources are designed to provide cost-conscious travel arrangements. American Express has complemented its Corporate Card business with business travel services that include reports for both management control and negotiating leverage. Control reports enable the firm to audit travel expenses against expense reports. When all of a firm’s airline, hotel, and car rental arrangements are handled through the same agency, it can provide reports on the total volume of business done with each airline, hotel, or car rental firm [4]. This information can provide lever-
W.J. Doll / Strategic Impact on Air Trawl Serv~e Industry
271
age for organizations negotiating with vendors for better rates. Major hotel/motel chains have responded to this trend by utilizing information systems at their home offices to verify corporate usage and initiating efforts by national sales teams to use this information. Many hotel chains are now aggressively calling on corporations in the hope of negotiating travel service contracts that are attractive to both the hotel and the corporation. Until recently, information technologies in the travel industry remained relatively stagnant. In recent years, several promising new technologies have been introduced. These emerging technologies appear to have the potential to change the structure of the industry, as well as the competitive strategies of firms in the industry.
4. Emerging Applications
of Information
Teclmol-
ogY The emerging technologies in the travel agency industry include: automatic call distributors; automatic ticket machines (ATM) and satellite ticket printers (STP); travel management software, such as Price Waterhouse’s “Air Auditor”; databases, such as World Associated in Travel, Inc’s “World-File” which provides comprehensive information on tours; user friendly reservation terminals; programmable work stations and personal computer interface to backoffice mainframes. Although they have not been used commercially as yet, the travel industry is among the most attractive areas for the application of expert systems. 4.1. Automatic
Call Distributors
Automatic Call Distributor Systems (ACD’s), which sort the calls coming into an agency and report on their handling to ensure efficiency, are another example of the use of automation. ACD reports provide management with information on such things as: how long a call was on hold, the number of calls in a given time period, and the length of time necessary to make a reservation. This information helps agency management to decide the volume of manpower needed to achieve service standards. ACD’s are available for any size agency. Telecom Technologies of Ontario Cali-
272
Applications
Information
fornia offers a micro-processor controlled automatic call distribution system. It operates with tie lines that connect the agency’s major customers with agent stations across the country. Agents have reported productivity increases of 60-705X [6]. These systems are also able to generate reports to identify the productivity levels of individual agents or agency offices. Such daily reports include:
(1) number and duration of in-coming and outgoing calls,
(2) how many calls were answered before the re-
cording, (3) how many calls were transferred to support groups, (4) how long the caller had to wait before being processed. (5) percentage of total calls put on hold.
This information helps establish proper systemwide staffing levels and significantly reduces labor costs. ACD systems also allow managers to listen in on reservation conversations; this is especially helpful during training periods. Results are reviewed with agents and problem situations are quickly resolved. They can also provide a module display that identifies which client is calling. Thus, agents are able to add a personal touch to their phone conversations. ACD’s are not new, but their information management capabilities have only recently been enhanced. By using this information, agent time and the phone is more effectively utilized. The result can be competitive advantage through better service and lower costs. Although the ACD’s appear to be very efficient as cost saving devices, they are very expensive. The capital required may place this technology out of the reach of many small operations, further contributing to the industry consolidation presently underway. 4.2. ATM’s
and Satellite
Ticket Printers
ATM’s and Satellite Ticket Printers (STP) may, at some point, threaten the travel agency’s traditional role as an intermediary between the commercial airlines and individual travelers or corporate customers. Designed primarily for corporations with multiple locations and significant travel, the STP prints tickets at remote locations. It
& Management
utilizes a new cardboard ticket stock (stored in a locked container) and a printer connected to a reservation system via a modem with dial up capabilities [23]. With an STP, customers do not need to pick up tickets at the travel agency, have them mailed to their home or office, or have them forwarded to the airport to be picked up when they arrive for their flights. They enable travel agencies to queue tickets to an on-line STP at the corporate client’s location, providing quick and convenient distribution [ll]. The corporate client gets better service plus, in many cases, a portion of the travel agent’s commission. The travel agency is able to establish a continuing relationship with the corporate client, increase the client’s switching costs, and reduce the overhead and manpower costs associated with multiple agency “store fronts”. STPs may be used on-site for corporate clients to issue boarding passes, invoices, and travel management reports, as well as tickets. For example, Hewlett Packard (HP) recently signed a contract with Lifeco for its Western Region operations. Arrangements included an STP on HP’s site, as well as travel management services. The STP is an essential part of a travel management program that is expected to reduce HP’s travel costs by twenty percent or more [13]. When a satellite ticket printer is utilized by a commercial airliner, it will often have somewhat different capabilities and be referred to as an automatic ticketing machine (ATM). Airlines use ATM’s extensively in airports to provide customers with faster service. For example, Southwest Airlines distributed 20% of its tickets as of 12/22/86 using ATM’s. United Airlines is introducing its version of the unattended ticketing machines this year. United has streamlined the software to be faster and added a “Quick Path” option to permit direct access to boarding passes. Continental’s ticketing machine can now give seat assignments. Passenger acceptance of these machines, however, still represents a hurdle for the industry as most travelers still prefer human contact to “talking to a computer.” Thus, ATM’s and STP’s could significantly change the future of travel agencies. They permit airlines to deal directly with individual and corporate customers, thereby by-passing the travel agencies. The deregulation of the airline industry, increased pressure on airline margins caused by
Information
W.J. Doll / Strategic Impact on Air Travel Service Industry
& Management
“fare wars,” and the consolidation of the airline industry towards 5 or 6 mega-carriers are factors which encourage “direct selling.” However, the software for these systems must be simplified and made easier to use. Even if such an approach is used for only a few hundred major corporate accounts, this would have a significant impact on many agencies. 4.3. Travel Management
Software
Travel management software has, in part, made possible the recent growth in the travel consulting market. This software enables firms to manage their travel dollars better by identifying where dollars are being spent and evaluating the cost savings of different travel policies. For example, Price Waterhouse, a big-eight public accounting firm, has developed a system to audit air fares “Air Auditor” - which they plan to market to corporations and commercial travel agencies. The system performs a check and balance on air-travel versus company travel policies. It also projects the financial impact of a change in corporate travel policies such as expanding departure time windows. Agencies are buying it and using it as a marketing tool to attract new corporate clients [20]. Within the past year, Price Waterhouse has introduced, as an extension to this, a consulting and software package consisting of an array of travel management services, from expense design and implementation to strategic planning for airlines, corporations, and travel agencies. Most of the large travel agencies already provide these consulting services to corporate clients. Travel management software and services is especially attractive for travel agencies attempting to add value to the services they provide for their corporate customers; such services may also increase customer perception of the transfer cost of switching to another agency. 4.4. Systems
Integration
In the future, technology will permit communication with outside databases that are not part of or aligned with a vendor’s reservation system. Projected for implementation in 1989, Delta’s DATAS II adds a new concept to reservation systems - systems integration [9] [lo]. DATAS II will offer a complete access program, including
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comprehensive mainframe to mainframe communication and the most accurate and timely information from a variety of host sources. In addition, Delta has designed an advanced communication system which has networking capabilities to enhance processing time. The projected increased system capacity will be 4 000 messages per second, compared to the current 400-500. The goal is to reduce response time, which is now 3 seconds, to .62 seconds. Down-time should be reduced by 40% and interface with different corporate networks should be easier and more adaptable, even if different protocols are used in the various databases. 4.5. Databases Systems integration will stimulate the development of database services in the travel industry. These databases, linked through integrated networks to user-friendly terminals or personal computers, will provide a wide array of travel information including: airline, car, and hotel reservations; resort accomodations; tours and side trips and other information of interest to travelers. For example, World Associates in Travel, Inc. is designing a database system called “World-File”. It will be a database of comprehensive information on tours offered anywhere in the world. The database management software will permit inquiries by a variety of customer criteria, such as destination, visa, immunization, and travel tips. Such database services will make it easier and more efficient for the travel agent to sell tours. Access to these databases through integrated networks will make it easier for agencies to enter the more complex group and incentive segment of the travel industry, especially the incentive travel segment. 4.6. Expert
Systems
The travel industry is among the most attractive areas for application of expert systems [12]. Basically, travel agencies sell expert advice based upon their knowledge base of travel information. There are well over one hundred possible restrictions on air travel that affect the price of a ticket. Several of these restrictions can apply to a particular air fare, ranging from the time and day traveled to seat availability and to the number of days
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Applications
between arrival and departure. Restrictions applicable to pricing must be weighed against a traveler’s preferences concerning arrival and departure times, seating, airline, and direct vs. indirect flights. When linked to databases on resorts, tours, and side trips, as well as car, motel, and airline availability, expert systems have enormous potential for all segments of the travel agency industry. In addition to making reservations, expert systems can be used to prepare itineraries, produce ticket audits and perform corporate travel audits. These systems would replace routine evaluations that require significant man hours. In addition to these information technology innovations, there are a number of other applications of information technology that will have substantial impact on the industry. User friendly reservation terminals which give the average layperson access to travel information through their own personel computer have been developed by airlines [17]. These menu driven applications allow laypersons to access fares and flight information and queue requests to the travel agency for ticketing. However, at present, these systems do not ensure the best fares or routings when given time constraints. Other developments include the programmable work station and personal computer interfaces to back office mainframes. Using PC’s, new programmable work stations are being developed to incorporate profiles on individual traveler preferences and/or corporate travel policy information and to assist the agent or in-house travel department in automatically selecting the best fares. Interfaces between these PCs and mainframes will make it easier to transfer historic travel data from mainframes to PCs for analysis. 5. Discussion and Conclusions Over the next decade, expert systems, along with the associated databases and integrated network capabilities necessary to gain full competitive advantage from this technology, will have substantial impact on the travel agency industry. As the industry becomes more sophisticated, it will become increasingly difficult for small agencies to compete effectively. Pressures for achieving
Information & Management
the high volume operations necessary to pay for expensive ACDs, travel management software, database access, and expert system capabilities will also increase. The need to develop and train a staff of agents who are skilled in the use of these new systems will raise training requirements. Only travel agencies with sufficient technical expertise will be able to adapt to these technological changes. The result will be the consolidation of a cottage industry, leading to perhaps no more than a hundred major nation-wide mega agencies that will dominate the travel service industry. The nature of the industry itself will be transformed by information technology. The travel consulting services segment will continue to grow as travel agencies broaden the range of services they offer their customers and as they attempt to “lock in” high volume corporate clients. The group and incentive market will increasingly be considered as a source of revenue growth. Integrated reservation services and world-wide database of tours and resorts will make it easier for the larger agencies to enter the group and incentive segment of the market. ATM’s and STP’s have the potential to change the traditional role of the travel agency as an intermediary between the airline and the customer, especially for corporate clients who already have an on-site STP. At present, the airlines have been content to use ATM’s at airports; they have not attempted to bypass travel agencies. However, as the travel agency industry consolidates and high volume agencies gain significant power, airlines may wish to counter-balance this growing agency power by using a direct approach for the major corporate accounts. Information technologies will be used by some firms to gain competitive advantage over others. However, the most dramatic impact of information technology will be on the nature and structure of the industry itself, including the degree of industry concentration, the products and services offered, the underlying economics of operation, the redistribution of value added, and the development of new channels of distribution. Even for successful innovators, these changes in industry structure may be more significant than changes in their competitive position relative to other major firms in the industry.
Information & Management
References [II “A View of Business Travel in 1987”, Travel Weekly, June 1986, p. 32. [21 “Agencies Ripe to Cash In on Technological Progress,” Travel Weekly, January 22, 1987, p. 37.). [31 “Agencies Taking Steps to Improve Productivity and Profits,” Business Travel News, March 30, 1987, p. 11. [41 “American Express Travel Enhances Corporate Credit Card,” Business Travel News, June 9, 1986, p. 21). [51 Bakos, J. Yannis, and Treaty, Michael E., “Information Technology and Corporate Strategy: A Research Perspective,” MIS Quarterly, Vol. 10, No. 2, June 1986, pp. 107-119. [61 “Better Phone Service is Just the Ticket,” Modern Office Technology, October 1986, p. 5. [71 Clemons, Eric K. and Kimbrough, SO., “Information Systems, Telecommunications, and Their Effects on Industrial Organization,” Proceedings of Seventh International Conference on Information Systems, 1986, pp. 99-108. I81 Clemons, Eric K. and McFarlan, F.W., “Telecom: Hook Up or Lose Out,” Harvard Business Review, July-August 1986, pp. 91-97. [91 “Delta Eyes Global Expansion of DATAS II Through Partnerships,” Travel Weekly, April 20, 1987, p. 27). [IO1 “Delta Unveils Multifaceted Reservation System,” Travel Weekly, March 30, 1987, p. 3. [III Durbin, Fran and Godwin, Nadine, “United Will Extend Current Commissions to Satellite Locations,” Travel Weekly, Vol. 44, August 12, 1985, p. 1. [I21 “Expert Systems Soon Will Be Able to Help Plan and Book Travel,” Travel Weekly, October 1986. Co. Starts Consolidating Its Travel [I31 “Hewlett-Packard Management,” IBusiness Travel News, August 4, 1986). [I41 “Interest in Buying and Selling Agencies Reaches All-Time High: Buyers Have Edge,” Business Travel News, June 9, 1986, p. 18.).
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[I51 Ives, Blake and Learmonth, G.P., “The Information Systems as A Competitive Weapon,” Communicarions of the ACM, Vol. 27, No. 12, December 1984, pp. 1193-1201. [I61 McFarlan, F. Warren, “Information Technology Changes the Way You Compete,” Harvard Business Review, May-June 1984, pp. 98-103. [I71 Melino, Diane. “American Sets Broad Changes For Its Sabre Reservations System,” Business Travel News, February 3, 1986. p. 49. [I81 Parsons, G.L., “Information Technology: A New Competitive Weapon,” Sloan Management Review, Fall 1983, pp. 3-13. [I91 Porter, Michael, E. and Millar, Victor E., “How Information Gives Your Competitive Advantage,” Harvard Bwiness Review, July-August 1985, pp. 149-160. [201 “Price Waterhouse Unveils System to Audit Airfares,” Business Travel News, January 9, 1987, p. 1. [2Il Rackoff, N., Wiseman, C., and Ullrich, W.A., “Information Systems for Competitive Advantage: Implementation of a Planning Process,” MIS Quarterly, Vol. 9, No. 4, December 1985, pp. 285-294. [221 “Rosenbluth Travel: Training in an Unstable Environment,” Advertising Age, May 5, 1986, pp. 8-14. v31 “Satellite Ticket Printer Controller Enables Low Cost and Secure On Site Ticketing,” Business Travel Review, March 1986, p. 16). ~241Scott Morton, M.S., and Rockart, J.F., “Implications of Changes in Information Technology for Corporate Strategy,” Interfaces, Vol. 14, No. 1, January-February 1984, pp. 84-95. ~251“Takeover Targets,” Travel Weekly Focus, January 1987, p. 16. WI U.S. Industrial Outlook 1987 - Travel Services, pp. 60-61). v71 Wiseman, C., Strategy and Computers: Information Sysferns as Competitive Weapons, Dow Jones-Irwin, Homewood, Illinois, 1985.