February 20, 1996

Fee Cap Is Killing Many Small Travel Agencies


Mary Hogan, the owner of a tiny three-person travel agency in Cambridge, Mass., thought she was ready for anything in the notoriously fickle travel business. "I survived the gulf war," she said, "when not a soul was traveling anywhere."

But she did not survive the decision made a year ago by the airline industry to limit the normal 10 percent commissions on domestic travel to no more than $50 a ticket. She closed up shop last April, shortly after the cap went into effect.

"When my income went down and my overhead didn't, I had the business sense to know to get out," Ms. Hogan said. "As we speak today I know five other people who are closing their agencies. The small, independent agency is an endangered species."

That may be an exaggeration, but clearly something is amiss. Last year, even though overall travel revenues were up and the number of agents grew, 1,550 full-service travel agencies went out of business. That is 53 percent more than in 1994, according to figures compiled by Airlines Reporting Corp., the clearinghouse for funds between airlines and travel agencies.

Many of those were replaced by new agencies springing up elsewhere, for a total of 33,600. But single-office locations -- most of them the traditional mom-and-pop shops that have long been the mainstay of the industry -- fell by 1.3 percent.

Moreover, the longer the cap has been in effect, the more agencies are going out of business. Travel Weekly magazine reported 484 full-service agency closings in the fourth quarter of last year, compared with 407 such closings in the third quarter of 1995 and 340 in the second quarter. There were only 290 closings during the fourth quarter of 1994.

"Many small agencies struggled all year to hang on," said Lauraday Kelley, president of the Association of Retail Travel Agents. "When you'll really see closings and mergers is later this year, when leases and contracts with customers expire."

Others echoed that view. "Lots of people in the industry think we'll see a drastic number of people calling it quits in the next few months," said Paul Rudin, senior vice president of industry affairs for the American Society of Travel Agents.

The majority of agencies do less than $2 million in business annually. Most of them see themselves as under siege from almost every side: from the imminent opening of a prototype Wal-Mart Travel agency in Roanoke, Va., to the spread of travel and reservation services onto the Internet.

And with the savings airlines already achieved last year by capping domestic flights -- commissions fell 3 percent to $3.69 billion -- carriers are now talking about whether they can get away with capping commissions on international flights as well.

No wonder, travel agents say, that so many smaller agencies have decided to call it quits.

Stephen and Ruthie Dukkony of Annapolis, Md., were travel agents for 17 years before recently concluding there was little future as an independent agency for their Annapolis Travel. Three months ago, they sold it to Travelogue, a small chain based in Washington, although they continue to run the agency.

"In the past we used the 10 percent commission we made on fares over $500 to offset the money we lost writing low-priced fares," Dukkony said. The caps "pushed us over the edge."

Although about one-third of agencies charge service fees or say they plan to do so, small agencies fear that fees will drive away customers. Even giant American Express withdrew its $20 fee on airline tickets priced less than $300.

When Delta Air Lines began the stampede by airlines to cap agency commissions last February, the driving force was clearly economics. Delta, in its bid to cut a total of $2 billion in operating costs in little more than two years, argued it had little choice but to seek savings from commissions, its third-biggest expense after salaries and fuel.

Delta's commissions to travel agents fell $157 million last year, or 12.5 percent, to $1.1 billion. During the fourth quarter of last year, Delta's commission payments plummeted 17 percent compared with the comparable period a year earlier.

The only hope for the agencies of lifting the cap is to win a class-action lawsuit against AMR's American Airlines, Continental Airlines, Delta, Northwest Airlines, UAL's United Airlines and USAir. The suit contends that the carriers conspired to impose the caps.

The jury trial -- from which Trans World Airlines was dropped as a defendant last spring when it restored the full 10 percent commission -- is tentatively scheduled for the fall in U.S. District Court in Minneapolis.

"Because it's in litigation, we don't have any comment on the cap," said Jackie Pate, a Delta spokeswoman.

To blunt the impact of commission caps, many agents have diversified into specialty markets and into booking more tours, hotels, rental cars and cruises. Results appear mixed.

Hotel commissions more than doubled last year, to $74 million. But only about 300 agencies out of an estimated 10,000 responded to an offer by Carnival Cruises to increase commissions for bookings from those who had not done business with the cruise line before. That was "far fewer than we expected," said Tim Gallagher, a Carnival spokesman.

Still, many surviving travel agencies are optimistic. Northwestern Travel Service, a large Minneapolis agency, spent a good part of last year renegotiating contracts with its commercial accounts, at a cost to its bottom line. "But our clients are now paying more attention to what services we offer them, and finding them worth the price," said Arthur I. Dahl, Northwestern's president.

While acknowledging that the commission caps hurt, Mark Mancini, an industry consultant in Los Angeles, also sees vast opportunities for travel agents as opinion brokers.

"You can access the best fare from New York to Paris, but try finding how far it is to Monet's gardens at Giverney," he said. "What travel agents can do best is tell you what planes have more legroom and what airline has better food."

Meanwhile, newcomers are still coming into the business, although at a slower pace than before.

Faye DiGirolamo opened Paradise Travel Ltd. in Kansas City, Mo., after having worked as an independent agent for a dozen years. "Even with all the drawbacks, I love the business," he said, "I never intend to be in another one the rest of my life."

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