Last week, I wrote about Kensington Tours and its work to automate tour packaging in a way that embraces travel agents and enables them to put together an FIT tour and confirm it in real time.
But technology giveth, and technology taketh away. In response to that column, I received an email from a tour operator-turned-travel agent who is working on an automation business model that, if widely adopted, could profoundly disrupt some travel agent-wholesaler relationships.
Rick Garrett is the third-generation owner of Alpine Travel, which was started by his grandfather in 1969 in Saratoga, Calif. Two years later, the agency launched Happi Tours, later renamed Happy Vacations. Although it initially focused on Hawaii, it eventually expanded as a packager to include the Caribbean, Mexico and the South Pacific.
The family sold the business in late 2007, but 18 months later, Happy Vacations' new owners filed for Chapter 11 bankruptcy protection.
Garrett, who had been Happy's president for 28 years before the sale, became a full-time retailer. While maintaining his brick-and-mortar agency, he also started an online agency specializing in the South Pacific. In the period between the sale and Happy's demise, his former company allowed him access to its internal systems, and he became a "wholetailer," efficiently packaging tour components directly for his retail clients.
But once Happy closed, he couldn't find a good alternative technology to package the South Pacific, which he characterizes as a "complex" destination.
"The technological issues of foreign exchange, to name just one of the issues, are daunting," he wrote to me. "And even Expedia can't manage to package ground and water transportation into places like Fiji and French Polynesia."
So Garrett hired Happy Vacations' former programmer to re-create an automated South Pacific packaging system, but with a different business model in mind. He recalled a sentiment expressed by former Classic Vacations President Ron Letterman at a Travel Weekly Hawaii Leadership Forum: There's not enough margin in packaging to satisfy two intermediaries -- wholesalers and travel agents.
"In fact, today there are actually three intermediaries when you count the consortia, which [collect] from 1% to 2% of gross revenue," Garrett wrote. "At best, there's 30% of total margin to share on the land side and maybe 14% on the air side, and that's assuming you're selling at rack rate.
"Based on the existing paradigm, the wholesalers must net at least 10% of the land sale if they are going to survive long term. Travel agents need 15%, unless they're just order-takers. In the best-case scenario, it all works out. But most of the time, it's not the best case, and either someone isn't getting the margin they need, or the package price exceeds the sum of the [retail price of the] components. Increasingly, you get shopped, and no matter how good your service and expertise, you still have to be [competitively priced]."
Garrett wants to rent wholesaler packaging functionality to agents who specialize in South Pacific travel.
"This approach will revolutionize their businesses," he wrote.
And his, he hopes. Despite his deep knowledge of packaging and retail operations, he has struggled to make it as an online agent specializing in the South Pacific.
In a follow-up conversation, he told me that for an online travel agent, "It's all about your website and getting people to your website. The website is critical. I've spent well over six figures on mine, and some [retailer] websites are far more sophisticated.
"But Google has gamed the system. You have to play the pay-for-click game, and that adds huge costs. You can't drive enough revenue to pay for a position where people can find you."
The back-office South Pacific tour operator system he's building will create and price itineraries. But he admits, "It's not for everyone. It's not for agents who are used to picking up the phone, calling a wholesaler, describing inventory and waiting for the invoice to come. It's for ones who have expertise and selling skills but lack automation. I'll let them use my system for a very teeny percentage [of the tour price]."
He hopes his Toto Systems (www.totosystems.travel) will be up and running by March 1 but acknowledges that he's already pushed back deadlines a couple of times. "It's usable now, but I keep finding ways to improve it."
Garrett points out that wholesalers selling mass-market destinations such as Hawaii, Mexico and the Caribbean have already developed agent-friendly systems. But pondering his analysis of tour operator margins, it appears that the status quo for complex, non-mass destinations -- including many of the destinations that Kensington Tours serves -- is changing. Garrett is focusing on the South Pacific, but there are plenty of other complex destinations he could expand into.
Both Kensington and Garrett are looking for ways to use technology to improve margins in a slim-margin business, but there's a big difference between Kensington's and Garrett's approaches.
Each began with the assumption that there is not enough money for two intermediaries. Kensington, a packager, first tried to use technology to disintermediate travel agents. Consumer-direct didn't work out for Kensington, but ultimately the company realized its new technology-driven efficiencies gave enough margin to embrace travel agents as an effective intermediary.
Garrett is a travel agent who wants to turn disintermediation on its head. In his approach, if there isn't enough margin for two intermediaries, it is the packager, not travel agents, who must be disintermediated.
Email Arnie Weissmann at [email protected] and follow him on Twitter.