More airlines and tour operators are cutting out middlemen, and travellers are going it alone too. Where next, asks Shane Hegarty?

As a way of answering the challenges that the travel industry is facing, the Thomson travel group has come up with an ingenious approach. Before you go somewhere, goes its thinking, why not visit it first? So, in a couple of its stores, it is piloting virtual-holiday headsets, through which prospective tourists can take in the sounds, sights and even smells of, say, Egypt before they decide to go.

As customers take three-minute tours of the country, including the Valley of the Kings, the temples of Karnak and the Red Sea riviera, scents such as the musty aroma of a pharaoh's tomb waft across their nostrils. (The company that provides the smell also conjured the fragrance of Kylie Minogue's breath for her waxwork at Madame Tussauds.)

Even if your local travel agent is unlikely to offer you the whiff of a Turkish bazaar any time soon, these are challenging times for travel companies, as high-street shops battle with competition from the Internet and from airlines and tour operators that sell direct to customers. In management speak the fear is over disintermediation. In plain language that means getting rid of the middleman.

A million Irish people book package holidays each year, but many of them now avoid travel agents. Short-hop flights are almost exclusively bought online, and weekend breaks are often assembled by buying through hotels and airlines directly. In the UK, one survey recently concluded, more people are booking online than through agents, and there has been a sharp fall in the number of high-street outlets.

The situation has changed so much that Thomas Cook last month announced that it was reviewing up to 15 per cent of its British stores to see whether they were viable. As a step forward it opened two concept stores that it has billed as the future of high-street travel agencies.

One is designed for people with money, time and a taste for adventurous, tailored holidays. It features a wood and leather interior and is designed to make browsing through brochures a more relaxing experience. A host greets customers, takes details of their holiday requirements, then matches them with specialist agents. The concept is aimed at older tourists, giving them time to choose their ideal holidays.

The second concept store targets people who want basic packages and have little time to hang around. If they leave details of what they're looking for an agent will get in touch with suggestions later. The stores include Internet terminals at which customers can research holidays.

In Ireland the changing culture is beginning to hit the bottom line: agents are being squeezed by falling commissions from airlines and, more recently, tour operators, which prefer to sell flights and package holidays directly. Budget Travel has just halved the commission it pays to high-street stores, from 9 to 4.5 per cent, alarming agents.

Their counterparts across the world have faced similar issues as airlines such as KLM and Austrian Airlines have either halved or done away with commissions altogether.

The public, meanwhile, is shopping around. One survey of package holidays showed that in most cases it is cheaper to buy flights and accommodation separately than to book through an agent. The industry is surprisingly bullish, however. "The Internet was perceived as the death knell of the business," says Michael Doorley, president of the Irish Travel Agents Association, "but many travel agents have embraced it. While Aer Lingus are correct in saying that 75 per cent of bookings are taken online, about 30 to 40 per cent of those are still through travel-agent offices."

He claims that many of the cheapest flights are still only available through travel agents, especially when connections are involved, and that a travel agent might save you money by making sure you go to the right airport.

Travel agents are cautiously optimistic, he says, on the back of a good 2004. He knows of only one agency that went out of business last year, and he adds that many are adapting to the new market by launching their own websites. Although the UK has lost about 10 per cent of its high-street agents over the past five years, he says, the damage hasn't been so severe here. "Compared with the UK we're doing a heck of a lot better. Is that down to adapting better? Being better businesspeople? I'm not really sure."

Thirteen per cent of package holidays are now booked on the Internet, according to his association, which points out that customers often use the Web as a research tool rather than as somewhere to buy a holiday.

Ironically, it might be holidaymakers' increasingly adventurous tastes that will save the agents. The buzz phrase for tailoring holidays to suit the individual rather than selling off-the-shelf deals is "dynamic packaging", and there is a feeling within the industry that no matter how confident people get they will still need travel agents to knit together such trips. "The Web is great for booking a flight from Dublin to London or a simple package deal," says Michael Collins, editor of Abroad magazine, "but not if you're booking a honeymoon which includes a week in Tuscany, driving to Rome and then flying from there to the Caribbean."

Collins says the industry believes that although the Web has caught the public's imagination in recent years, it could soon swing back towards the high-street store. "Travel agents are going through a period of change, but that certainly doesn't mean that they'll disappear for good. It'll shake things up, and the weak will fall out, but those travel agents who are well organised, aggressive and strong, with a good product range and client base, will do well."

Travel agents still argue that they can offer a degree of security in case of unexpected problems. Airlines are not bonded as agents and tour operators are, which means that, if one goes bust or is grounded, tourists can be left stranded.

But now the Internet has made researching destinations so easy, and given how well travelled we have become, some people may feel travel agents have little to offer them. Collins disagrees. "A good agent will have experienced people who know the destinations well, because they have been there. If you go into a travel agent and they're in their 30s or 40s, then they're likely to be experienced." But beware, he says. "Those who rely on young, cheap staff with no experience are of no help."

Among the survival strategies recommended by some within the industry is for travel agencies to branch out by selling travel books and accessories as well as holidays. Michael Doorley disagrees, citing his experience with his own Shandon Travel Group shops. "I've tried it and it didn't work. It didn't seem part of what is expected as part of a travel agency."

It seems that although travellers are increasingly adventurous, they don't expect the same yet of their travel agent.

How agencies could fight back