Mark Pestronk
Q: A year ago, you wrote a Legal Briefs column focusing on the increasing "verticalization" of the retail travel industry. Appointed agencies need to join hosts, consortia or franchises. Downstream, most fully appointed agencies have independent contractors, who retain sub-ICs, and so on. You noted that one of the facilitators of this phenomenon was ARC, which allowed subagencies to flourish by virtue of repealing a particular provision of the Agent Reporting Agreement and allowing so-called Associate Branches. Have you found any other factors that are also contributing to what we see as the ever-increasing verticalization?
A: Verticalization is accelerating. Today, many if not most of my clients, from the newbie sub-IC to the biggest TMC, are affiliated upstream with larger entities that have better commission and override agreements than they could negotiate on their own.
Aside from the ARC rules, I see four causes for the megatrend.
First, entry into the travel advisor business has become deregulated and available to anyone. You can be a self-employed businessperson selling travel without any training or accreditation, if you affiliate with an appointed agency host and follow the state seller-of-travel law exemption criteria. For some reason, it seems that more people are entering than ever before.
Second, if you are already an ARC and Iatan-appointed agency, entry into the host-agency business is very simple and cost-free for you. There are no legal requirements other than having a written IC contract.
As a result of the ease of entry, host agencies have proliferated, so that there are lots of them for every niche and experience level. At the turn of the century, there were two or three host agencies, and now there are hundreds.
Third, to my knowledge, there have been very few IC audits by the federal government or states, so that the risk of having your ICs reclassified as employees is lower than it used to be. Even California, which used to be the epicenter of audits, has been relatively quiet, thanks to ASTA's victory in creating an exception for travel advisors.
Fourth, the latest commission agreements by major carriers are forcing smaller agencies to ticket through larger ones in order to get commissions. Last year, American cut back on corporate-discount and override program availability. This year, clients will not earn AAdvantage points if a small, nonpreferred agency issues their tickets, unless the clients have their own business agreement with American.
So to survive, many corporate and leisure agencies will need to counter American's assault on the agency business by affiliating with large, preferred agencies. The latter not only get the best commissions and overrides but will also soon be the only ones able to offer AAdvantage points.
In the not-too-distant future, a small number of mega-agencies will dominate the industry because most smaller agencies will be affiliated with them through various hosting, branching, ticketing or ownership arrangements. Ironically, the giants will have so much volume that they could have the upper hand in carrier negotiations.