Alan E. Rosen, CTC
Introduction
The travel agency industry is dependent on its reputation as providing professional, educated, objective advice to clients to remain viable. Consumers look to agents to sift through the myriad of options available in resorts, hotels, tours, and cruises to find the perfect trip to meet their individual needs. However, compensation is provided for most agents from the suppliers in the form of a commission on the bookings made. And since suppliers offer many varying compensation programs, the agent’s income level is directly tied to which supplier the agent books. Suppliers not only offer varying base commissions but may also offer incentives such as back-end commissions, overrides or preferred supplier agreements for securing bookings through agents. So ultimately, who does the agent work for, the supplier or client?
History of Supplier Relationships & Ethical Issues
The travel agency industry has evolved over the years to where it is today. With this evolution, came the issues of balancing the needs of the client versus the supplier. In 1996, Thomas Dunfee, the Kolodny Professor of Social Responsibility at The Wharton School at the University of Pennsylvania and Bruce Black, Founder & President of McCord Travel Management wrote a paper titled “Ethical Issues Confronting Travel Agents”. They wrote in that article:
“During the 1980s, travel agents evolved from ticket writers to information specialists. Commercial and leisure clients alike have come to rely upon travel agents for information that would be too costly and difficult for them to obtain for themselves. Because of the increasing dependency on travel agents, suppliers find that the most effective, least costly route to the market is through agents.” “As a key intersection in the channel of distribution, travel agents’ interests have become significantly interdependent with those of suppliers and clients. This phenomenon of mutual interdependency is a key influence on ethical issues in the industry.” [1]
The following excerpt comes from the same article:
“Agent of whom? Who comes first the supplier or the client. As is not uncommon in the agency business, travel agents occupy a contested middle ground between travel suppliers and consumers. When the consumer is a large corporation, the travel agent may be in a position of a David between two goliaths. Each Goliath wants its interests to be given primacy by the agent. Moreover, each has significant leverage to influence the behavior of the agent.
Suppliers may actually require that the travel agency sign an agreement that contains legal language characterizing the agency as a legal agent of the supplier. For example, travel agents representing airlines will sign a standardized Airlines Reporting Corporation agreement which refers to “the Agent under this agreement” who is “hereinafter called ‘the Agent’. The tenor of the document creates the impression that the travel agent is clearly the agent of the supplier and therefore owes a primary obligation to the supplier. On the other hand, the agency may have a very close relationship with a corporate client. The agency may have its own people on the premises of the client and it may handle sensitive information about the client’s business. Thus the travel agency may have very close day to day contact with key managers of the corporate client while its contacts with suppliers are limited to information systems and rote interactions with lower level employees. A travel agency in this environment may well sense a closer alignment of its interests with corporate clients than with the supplier.” [2]
The issue of whom the agent is ultimately responsible does go back a long time.
Industry Ethical Standards
The travel agency industry has professional associations that guide agents operations. The two largest organizations, the Association of Retail Travel Agents (“ARTA”) and the American Society of Travel Agents (“ASTA”) both have there own code of ethics that members are supposed to uphold. Both organizations specifically the address the need for providing objective advice to clients. The ARTA Code of Ethics starts out stating “ARTA Members provide the consumer with professional, objective advice and information in a factual and reliable manner about the travel products and services available from travel suppliers”. [3] ASTA has the following as number 8 in their Code of Ethics: “ASTA members will not allow any preferred relationship with a supplier to interfere with the interests of their clients”.[4] Members of these organizations are expected to uphold their standards and live within the respective Code of Ethics. So clearly, whether they are adhered to or not, the industry guidelines set the expectation that the agent will not be biased by financial or other incentives (such as FAM trips) in advising clients in booking trips.
Perspectives of Industry Leaders
Agents are under constant pressure to book with the suppliers that they work with. As discussed earlier, suppliers offer financial and other incentives to book with them. Meanwhile, consortia and agency groups are also heavily marketing and pushing their “preferred suppliers”. Do these pressures taint the agent when advising clients on booking trips?
I prepared a set of questions that I sent to 16 executives of large travel agencies, consortia, and suppliers. I received responses from 5 supplier executives and one consortia executive. I did not get any responses from the travel agency executives selected.
The executives who responded to these questions were:
Isaac Cymrot, VP, Industry Relations for Travel Insured International (Supplier)
Paula Hayes, Vice-President Sales, Globus Family of Brands (Supplier)
Dondra Ritzenthaler, Senior Vice-President of Sales, Trade Support & Service, Celebrity Cruises (Supplier)
Vicki Freed, Senior Vice-President, Sales & Trade Support & Service, Royal Caribbean (Supplier)
John Chernesky, Vice-President Sales, North America, Princess Cruises (Supplier)
John Lovell, President, Travel Leaders Network, Leisure Group & Hotel Division (Consortium)
Here is a summary of the questions and responses received:
Do you believe that travel agents should put a client or a supplier’s interest first?
There was unanimity among the executives that the agent should put the client’s interest first. In fact, John Lovell stated Agents “have a fiduciary responsibility for the client’s best interest not the other way around”. He also said that he believes that “the vast majority the of the travel agency distribution channel does exactly that”. Both Dondra Ritzenthaler and Paula Hayes indicated that while an agent should always put the client’s needs first, it is also the agent’s responsibility to qualify them to ensure that they are booking the customer on a trip that matches their needs.
What is the purpose of “preferred suppliers” to travel agents, and do they conflict with the agent acting in the best interest of their client?
On this question I received a wider variety of answers:
o John Chernesky: The label “preferred supplier” was created to identify those suppliers who either produce significant volume for a travel agency or those who create favorable (premium) commercial terms. Some agencies are very strict about how they direct business for their clients to preferred suppliers while others seem to be more relaxed. On the surface, there is an inherent conflict between the best interests of a client and forcing business to a list of preferred suppliers, but in reality I suspect there is little impact. The number of preferred suppliers is very large (especially within the cruise industry). It seems the majority of cruise lines are considered preferred, so the interests of most clients would be covered by the preferred group. I would also hope that any travel agent with a client who has interest in booking a non-preferred partner would make that happen. Failure to do so would in some cases risk losing the client, so that’s not helpful for anyone. Best to make the client happy.
o Isaac Cymrot: My experience is every agency looks at this differently depending on how they are trying to brand themselves. For example, the draw for the consumer to one agency may be the relationship that agency/agent has with a supplier. The agent has established that supplier as a “preferred supplier” thus funneling all business in that channel to that supplier and earning themselves extra leverage to deliver for their clients when something goes wrong or the ability to provide an amenity the client would not be able to get otherwise. In this example revenue from the supplier is not the number one driver of the preferred supplier relationship but it doesn’t mean that isn’t critical to the agent’s thinking. The revenue is derived from their ability to charge a higher service fee or upsell the client to a more luxury supplier which pays them a higher commission. The point though is that the purpose of the preferred supplier is not revenue it is the relationship.
A second example where the preferred supplier could conflict with the best interest of the client is if the agency is trying to reach certain revenue goals. The agent may know that the client would have a better experience on supplier A or that they could receive a better deal on supplier B but they book them on supplier C simply because they are trying to help their consortia reach revenue goals with supplier C.
o Vicki Freed: Having a preferred supplier relationship makes sense as long as you have once again selected a small amount of suppliers in each category (contemporary, premium, deluxe, luxury and/or budget. The reason travel agents should want to have a preferred supplier relationship is that it gives them “clout “and value when an issue or special favor is brought up. The more productivity a travel agent has with a supplier helps when issues/special requests/upgrades are brought up.
o Dondra Ritzenthaler: Preferred suppliers to me break the tie. If a customer is open to suggestions and you qualify them and a couple of choices work then the preferred and best partner should win!
o Paula Hayes: The purpose of a “preferred supplier” is to ensure that there are contractual commitments between said supplier and the agent to:
Pay competitive commissions in a timely manner
Fund marketing efforts
Ensure financial security
Resolve any issues in a fair and timely manner
Provide sales support
o John Lovell: Having preferred relationships actually act in the best interest of your clients. If there is a problem, better offers, stronger promotions or what have you, this enables you, was the agent, to ultimately get your client the best deal possible, or to work through any conflict resolution. The preferred supplier relationship actually enhances your ability to satisfy your customer’s needs.
To sum up the answers to this question, there are many reasons for preferred supplier relationships. Most executives see it as a way for the agent to be in stronger position to work with the supplier to provide extra service for the consumer as well as secure better offers than many otherwise be available. However, as indicated by Isaac’s response, these agreements can result in certain agents guiding the client to book with a supplier for the agent’s financial gain, not necessarily in the consumer’s best interest.
If a client wants to purchase from a non-preferred supplier, should the agent make the sale?
Most of the executives said that the agent should make the sale. John Lovell and John Chernesky were most definitive on this question. John Lovell stated “Absolutely. That means the client has done their research and feels confident in the product that they want you to book. Although we would like to see all sales going on to our preferred suppliers it is ultimately the client that makes the decision.” John Chernesky’s response was “Absolutely. As stated earlier, the needs of the client should be the priority of any travel agent. Because the vast majority of beds within the cruise industry are on cruise lines already considered preferred, the volume of non-preferred bookings should be minimal so there is limited risk for making these bookings. The fact I’m saying this may seem strange since I work for a preferred supplier, but I truly believe the happiness of the client should be the top priority of any travel agent. While the agent should do their best to make recommendations (based on the agent’s personal experience or knowledge from in-depth training), there should never be a forced sale that goes against the wishes of the client.”
Dondra and Paula both responded that the agent should make the sale, but only after asking why, qualifying the client and taking the time to differentiate what the preferred supplier has to offer. Vicki took this position as well, but went further in saying that the agent should explain why the particular supplier is not preferred, including the possibility that “maybe the supplier is not ethical, or their reputation is questionable, etc.”.
Isaac took a stronger view of selling the non-preferred supplier. His response included the following:
“Since I believe the agent is acting as the client’s broker, yes, they should be selecting the supplier that fits their need the best. However, I don’t believe that means an agency who chooses not to sell outside their preferred supplier network is wrong. In most cases they will be able to fit the need of the customer to a preferred supplier.
When a customer is insistent on a specific supplier that is not in their preferred network, and they cannot convince them to purchase the trip from a preferred supplier when a comparable option is available I would argue that the customer does not fit their business and would only cause problems for them down the line. Not all customers are a fit for your agency and it’s important for agencies to decline business when it doesn’t fit their model. That’s fair to both your agents and your customers. If you choose to be strict about only selling preferred suppliers that are a business decision you are making and have to understand that it also means you are choosing to turn away some business.”
Is the current norm of most travel agent compensation coming from suppliers in the best interest of consumer?
Everyone did seem to agree that the system works, but there were some concerns raised.
o John Lovell: It is a time-tested model and one that I don’t see changing in the near term. The way the current system is set up it allows for a very level playing field across the distribution system. I would hate to see it if it were the other way around. Issues such as price gouging, poor service and inflated service charges would then be the norm and would actually undermine the confidence that the traveling public has in the distribution channel.
o Dondra Ritzenthaler: Sure! You work hard for your money and in most cases the customer doesn’t pay you.
o Paula Hayes: If the agent is diligent in only promoting and selling suppliers that:
Have a consistent, high level of customer satisfaction
Have a track record of reliability in terms of problem resolution
Have a solid financial base
Have an infrastructure that can respond in the event of an emergency, event, etc.
Compensates the agent in a fair and profitable manner (so that the agent/agency can staff to deliver excellent customer service)
The client is likely not at risk, and will have their “best interests” served.
o John Chernesky: If you started this industry from scratch tomorrow, would the compensation model be the exact same? Probably not, but overall I think it works and it’s fair. The agency carries the burden of running their business (wages, insurance, office space, etc.) so there is a cost to be in the game. The suppliers are in the business of delivering their products and services – not necessarily selling them. Yes, you can always buy a sales force, but there are costs associated with that. If a cruise line were to only sell direct (perish the thought), they would restrict access to a large segment of the population that likes to work with a travel agent, plus the costs of marketing to such a wide audience would go up (as you lose the benefit of marketing that comes from each agency). The relative cost associated with rewarding a diverse and disparate sales force of travel agents via commission and other payments is fair when compared to the value received. As long as the travel agent follows the golden rule of respecting the needs of their client, the current compensation model works.
o Isaac: This is a complicated question because you have to factor in how compensation from consortia has evolved over the past few years and the supplier channel. For example, we know that many agencies cannot survive solely on the compensation provided by the cruise lines so they need to generate revenue in other ways not tied to the supplier (ie: service fees). My initial reaction based on feedback is to say that, no, this does not carry as much weight in decision making anymore. Even that point, however, complicates the argument because a shift in compensation from 1-2% points could have a dramatic impact on a single agencies decision to sell one cruise line over another. In my mind, the key factor to look at here is how preferred supplier compensation from the consortia has affected decision making at the agency level. I believe this has more of an impact on determining “best interest to the consumer” than compensation directly between the agency and supplier. Many agencies rely on the year-end profit sharing/back-end payouts that come from preferred supplier sales volume, along with elite status, and/or higher individual commissions from the supplier based on a negotiated structure with that consortia. While consumer press focuses on front-end
commissions they rarely if ever touch on this point and I believe it has much more of an impact on the agencies decision on which suppliers to “push” than the individual commission on a booking depending on the type of trip.
So Isaac is concerned not so much about the direct commission but the “back-end” payments that come from suppliers or consortia that could affect an agent’s objectivity. If the agent knows that they need a few more dollars in revenue to meet the goals, that agent may sway a client to that supplier.
Personal Experience & Observations
Having owned an agency for over 20 years, I have had my own experiences and observed industry situations where bias has come in to play. On an industry-wide level, I remember when the Carnival Triumph fire took place around the same time that there was a fire on Royal Caribbean’s Grandeur of the Seas. The Carnival situation took place at a time when agents were dismayed by Carnival’s push for direct business, while Royal Caribbean was heavily marketing to book through agents. And the agency community seemed to provide much more support for Royal Caribbean at the time. As stated in the Huffington Post at the time, “By having strong relationships with the distribution system, Royal Caribbean had the relationships in place to deal with this issues with consumers (both prospects and existing customers).” [5] Did these relationships result in agents unfairly swaying consumers to Royal Caribbean or was it truly in the consumers best interest because of the way that company handled the situation?
I have attended various conferences, supplier and consortium events where there was a heavy push to sell a particular supplier’s product, with an emphasis on meeting goals for back-end commissions. While I realize that the intent is to work with those suppliers and market their product together for incremental sales, I also have seen where some agents (particularly large agencies) will take that to another level, offering rebates or amenities at such a high level that they take a loss on the sale. They believe that it makes financial sense to help reach the goals and secure the back-end bonus. Is this heavy push in the consumer’s best interest? Clearly that customer got a great deal, but it does beg the question of whether that agent also pushed that particular supplier aggressively, even if not the right fit for the client to make their goal.
In my agency, our philosophy is to always put the customer first. We have had many bookings on non-preferred suppliers if that is what they wanted. However, the vast majority of our bookings are with our preferreds. What’s more, I do believe there is a natural bias for those suppliers you work with regularly and have relationships with. But while we may have that bias, we always listen to the client and work to meet their needs. We may recommend our preferreds when asked, but ultimately want the client satisfied. It is only when they seek our advice that we give our recommendations, and if it is between a preferred supplier and non-preferred, we will naturally recommend the preferred because we have the experience with that supplier to know that they will give our client the experience we expect. As Dondra indicated in her response to question two above, all things being equal the preferred relationship breaks the tie.
Conclusion
Naturally, we in the industry all want to believe that agents ultimately work for the clients and not the suppliers. However, it is complicated. This industry has evolved over the last 30-50 years, and the distribution system is now entrenched. This issue goes back a long time, and if we could start over it would probably end up looking very different than what is in place today.
The industry views preferred supplier agreements as methods to develop relationships between suppliers and agencies, ultimately to better negotiate for the customer. The intent is not to direct customers to purchase products they don’t want, but to offer a product that is right and have an inside track with that supplier and get them the most for their money.
From the consumer’s standpoint, having the supplier pay the commission to the agent does force the agent to be more loyal to the suppliers. Some agents now charge fees to clients which mitigates that issue. But since most agents still depend on commission from suppliers as their primary source of income, the consumer gains the benefit of the services of an agent at no additional cost. The cost benefit to the consumer probably outweighs any influence the supplier has gained over the agent.
Ultimately, it is up to the agent/agency to decide how they will run their business and to whom they show their allegiance. Agents have a fiduciary duty to act in their client’s best interest, and those that belong to industry associations are expected to act in this manner under the respective code of ethics. Based on my experience and the responses from the executives in the industry that did respond to my questions, I do believe that most agents put the client first and act in their best interest above the personal interest of compensation. Those agents may market a particular supplier to increase sales and meet goals, but that will not interfere in recommending another supplier that is a better fit for a particular customer. However, I also believe that there are agents and agency owners out there, particularly with large agencies that can receive substantial additional compensation for exceeding supplier goals, that will sway customers to the product they want to sell, not necessarily in their best interest. These are the exceptions, as just like any other industry there will always be a few bad apples who put themselves over the well being of their customers. In the long run, those agents will not survive. I truly believe that the only way to be successful in any business, including the travel agent business, is to put the customer’s needs first.
In summary, I believe that agents work for the supplier and the customer. The supplier influences agent preferences since they are controlling the compensation. But it is the client that is making the final purchase through the agent, and the client that selects the agent to utilize. So it is up to the agent to make the customer happy.
Acknowledgements
Thank you to Vicki Freed, Dondra Ritzenthaler, John Chernesky, Isaac Cymrot, Paula Hayes and John Lovell for the valuable responses to my questions. This paper was heavily dependent on their input.
References
[1] Dunfee, Thomas & Black, Bruce, Ethical Issues Confronting Travel Agents, The Journal of Business Ethics, The Wharton School Legal Studies Department, 1996, page 208.
[2] Dunfee, Thomas & Black, Bruce, Ethical Issues Confronting Travel Agents, The Journal of Business Ethics, The Wharton School Legal Studies Department, 1996, page 209.
[3] ARTA Code of Ethics, ARTA Heaquarters Code of Ethics, www.arta.travel/code.
[4] ASTA’s Ethics for Travel Advisors Manual, ASTA, 2017, page 12.
[5] Humphery, Lin, Royal Caribbean, Investing in Long Term Relationships, The Huff Post, June 3, 2013, https://www.huffingtonpost.com/lin-humphrey/post_4868_b_3363099.html.
