I often hear the question “How do travel agents make money?”. Usually the people asking are either interested in becoming a travel agent (more on travel agent salaries). To answer the question, it’s important to know a little history. I promise to keep it short and it’s actually pretty fascinating how the industry has changed over the years. For those that just can’t wait? The short answer is most travel agents make money through commissions and service fees. But that’s boring, so here’s everything you ever wanted to know about “How do travel agents make money?”
Travel Agent Commissions – A Short History
In the good ‘ol days, a large portion of travel agency income came from commissions from airlines. Since tickets were expensive, in demand, and could only be ticketed by agents or the airlines, they were the bread and butter of any agency. What about commissions from hotels, cruise lines, etc.? Just icing on the cake.
They were travel agents in every sense of the word because they were agents of travel vendors. Their revenue came from the commissions earned from selling travel products. However, when airline commissions were cut in the 1990s, the main revenue base of travel agents disappeared. It hurt. A lot.
Couple that with the growing adoption of the internet by consumers and businesses. This meant travel agents were no longer the only ones with access to – and the ability to book – airline fares. Consumers could access fares, comparison shop, and book online. Travel agents needed to find a new way to make money. And that’s where our modern day story of ‘How Do Travel Agents Make Money?’ begins.
A Shift in Business Models
With commission cuts and clients now being able to book on their own, selling airline tickets was no longer profitable for many travel agencies. The travel agency community was severely disrupted. Many agencies that didn’t adapt quickly enough had to close their doors.
Quick side note: I should mention the travel agency community, while much smaller than in its glory days, seems to have found an equilibrium. The demand now for travel agencies is much lower than it was pre-internet but there are still plenty of opportunities. After many years of agency numbers declining, there is now a healthy balance of supply and demand. The industry has adapted and become more fragmented with the rise of home-based travel agents.
The travel agency business model is becoming less dependent on vendor commissions. Why the change? With lower profit margins, travel agencies are relatively unique in the world of big ticket items. Low profit margins are partially due to lower commissions but also because when a mistake is made, it can be very expensive for the agency. Moving away from being reliant on vendor commissions to being more reliant on service fees helps travel agencies pad the bottom line that was once cushioned by generous airline and vendor commissions.
Along with the loss of airline commissions, travel agents face the challenge of many major cruise lines’ non-commissionable fees (NCFs). Yup, it’s self-describing. They’re miscellaneous fees that are not commissionable. The cruise sale may be $2000 but only $1400 of it is commissionable.
The Breakdown of Who Makes What
Different sectors of the travel agency field make money in different ways. We’ve broken down the question of how do travel agents make money into 4 main types of travel agencies: corporate, leisure, custom, the big players.
How Do Corporate Travel Agents Make Money?
Airline tickets are their lifeblood of corporate agencies. Not selling airline tickets after commission
cuts was out of the question. A service fee was implement to compensate for the loss of commission from the airlines.
Corporate travel agencies book the air/car/hotel for business travelers. They make money mainly off service fees, airline commissions in certain classes of service or on certain routings, and net/private fares. Corporate travel agencies also make money on hotel and car commissions.
So how much are corporate travel agencies charging? The 2010 ASTA Service Fee Report has the average corporate agency service fee for domestic tickets at $30 via phone, $26 via internet booking engine. For international tickets, the average service fee came in at $44 and $39, respectively.
How Do Leisure Travel Agents Make Money?
After the commission cuts, many travel agencies shifted to selling high-ticket products that still paid travel agent commissions – essentially, vacation packages and cruises. Now days, these are your leisure travel agencies – the ones you find on Main Street and increasingly home based!
Generally, leisure travel agencies’ main revenue is from commissions of vacation packages, cruises, and other add-ons. Consultation fees and service fees are becoming more common as agencies try to diversify income sources to become less dependent on supplier commissions and boost their bottom line. To discourage ‘tire-kickers’ (price shoppers), some agencies may even have a ‘look-to-book’ fee. This fee charges clients up-front fee for research and the fee is refundable when a booking is made. Some charge a straight up non-refundable fee for consultations.
The 2010 ASTA Service Fee Report has 50% of agencies charging a service fee for air/hotel/car packages, 25% for tour packages, and 22% for cruises. The most common service fee charged in all these areas was $25.
Leisure travel agencies seem to be less rigid in the charging of service fees than corporate agencies. 74% of agencies waive service fees for large tour/cruise packages and 46% waive service fees for loyal clients.
According to ASTA’s Service Fee Report, leisure travel agencies airline service fees are nearly identical to their corporate agent counterparts.
How Do Travel Agents Make Money with Custom Itineraries?
Travel agents can book packages or create custom itineraries. Custom itineraries are more time intensive. Agents that build custom trips (FITs) typically charge higher consultation, trip planning, and/or service fees to compensate.
Travel agents that specialize in custom itineraries may also increase revenue through net pricing mark-ups and commissions.
How Do the Big Travel Agencies Make Money?
The top tier of travel agencies have generous revenue streams beyond commissions and fees. Based on their revenue, they can earn overrides from vendors if sales goals are met. These overrides can come from any number of vendors including airlines, GDSs, cruise lines, tour operators, car rental companies, and more.
Next time someone asks you ‘How do Travel Agents Make Money?’ you can now give an amazingly long answer, full of information that will blow their mind. If that’s where you’re at right now, great. That was my goal. Feel free to ask any other questions about how the land of travel agencies work in the comments below. I grew up in the travel industry and have worked with many agents to start and grow their travel agencies. Find me on Facebook, Twitter, and Google+.
Photo Credits: RapidFire, M. Tawsif Salam