Travel agents and investment bankers

The more I think about it, the more I’m convinced that travel agents perform a very similar role to investment bankers. In the olden days, not everyone had access to financial markets. In order to buy or sell stocks, one had to go through a brokerage company, who would be paid a hefty commission for his services. The markets weren’t that liquid, and they were definitely not transparent, so the brokers would make a killing on the spread. With the passage of time, advent of electronic trading and transparency in the markets brokers aren’t able to make the same spreads that they used to. Customers know the exact market price for the instruments they are trading, and this results in brokers not able to make too much out of these trades.

It is a similar case with travel agents. Vacation markets (flights, hotels, etc.) are nowhere as liquid as financial markets, and will never be. Sometimes, when you are booking holidays to a strange place, you know little about it, and hence commission a travel agent to find you a place to stay there. Given that you know little about that place, the agent can charge you hefty commissions, and make a nice spread. Of course, nowadays such opportunities are diminishing for agents, as you have websites such as Agoda which allow you to book hotels directly. Now, at one place you can compare the prices of different hotels, and have better information compared to what the agents traditionally offer you. The spread is on the downswing, I must think.

Then, don’t you think package tours are very similar to structured products? Structured products are nothing but a package of several risks packaged together. By acting as a counterparty on a structured product, a bank (even now ) can afford to charge fairly hefty fees. Structured products are illiquid, ¬†and there is no publicly available “market price”, so it is easy for banks to make themselves good spreads on such products. However, all it takes to defeat this is an intelligent customer. All the customer needs to do is to try and understand the risks himself, and start “unbundling” them. Once he unbundles the risks, he can now trade each of them independently, on more liquid markets, and get a much better price than what bankers will offer him. The catch here is that he’ll need to put in that effort in unbundling.

It’s the same with package tours. Given the bundles, it is easy for the agents to make higher spreads. However, if you as a customer simply unbundle the package (hotels, transport, food, etc.), you can find out the price of each (available on sites like agoda and elsewhere) and find out for yourself the spread that the agent is making. And then you compare the agent’s premium with the “cost” of making all the bookings yourself and make an informed choice.

Apart from communication, among the greatest boons of the internet has to do with dismantling middleman monopolies. It is incredible how much use a little information can be of!

The “Per Person” catch

Every time a travel agent sends you an itinerary for a tour package, look for the units of the cost. Usually it’s quoted in US Dollars per person. The funny thing is that this is how it is quoted even when it is just an accommodation package where two or three of you are going to share a room.

I wonder if this is a way to encourage more spending, since the customer perceives the total cost to be a much smaller number when he sees “per person” than when he sees an all-inclusive number.

Like for a forthcoming trip, the travel agent sends me an email saying “the hotel will send a taxi to pick you up at the airport at a cost of EUR 50 per person”!!

On a similar note, I realize travel agents love to bundle. When costs across several hotels and trains and taxis are bundled together and presented to you as an aggregate (“per person”, again), it is easy for them to pass on overheads to you without you figuring out where exactly that overhead went.

There have been times in the past when I’ve received packages from travel agents, then tried to purchase each component of that package online, and found that the total cost of buying the parts separately is approximately half the bundled cost that travel agents impose!