Understanding Travel Agency Cost Drivers and Ways to Optimize Business in Argentina and Mexico

					Understanding Travel Agency Cost Drivers and Ways to Optimize Business in Argentina and Mexico

Hermes Management Consulting

T: +54 11 4393 2019

www.hermesmc.com.ar

A White Paper by Hermes Management Consulting April 2005

Understanding Travel Agency Cost Drivers and Ways to Optimize Business in Argentina and Mexico Abstract
This white paper summarizes the research conducted by Hermes Management Consulting (Hermes) in Argentina and Mexico in order (a) to better understand Latin American travel agencies’ cost drivers and (b) to evaluate ways to optimize the travel agency business. As well as communicating the results of the research, this paper describes the methodology used.

Introduction
Travel agencies in Latin America usually do not take advantage of the full GDS potential
Although the Global Distribution Systems (GDSs) can help with almost all services a travel agency offers, in Latin America this aspect of a GDS is not yet fully understood, and a GDS is therefore considered indispensable only for air ticket sales. An added challenge to the travel agency business model is the ever decreasing commission payment from airlines. In this context, Hermes - in partnership with Amadeus, the leading technology provider in the travel industry - conducted a research project (a) to understand travel agencies’ operational cost structure better and (b) to quantify how Amadeus solutions can add value to their business in terms of time and money. In order to identify opportunities to add value to different types of travel agencies in Argentina and Mexico, a two-phase process was implemented (Exhibit 1).
• Added value (processing time, cost,

Exhibit 1 OBJECTIVES OF THE PROJECT
Objectives
Identify opportunities to add value to travel agencies

Phases
• Phase 1: Activity-Based Costing

Deliverables
• Activity-based costing report for each
market segment

• A report describing the adjustments
for intra-segment variations (e.g.: country and volume)

Measure the value generated by selected Amadeus solutions

• Phase 2: Measuring added value

revenues, etc.) for each measurement scenario

• A report describing the adjustments
for intra-segment variations (e.g.: country and volume)

• Measurement methodology in a form
of a working procedure

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A White Paper by Hermes Management Consulting April 2005

To identify value gain opportunities for travel agencies, an activitybased costing was carried out (phase 1), followed by measurements of the processing time saved by employing Amadeus solutions (phase 2)

Phase 1
In Phase 1 Hermes (a) studied the market generally, then (b) selected travel agencies that would participate in the study, and (c) carried out an activity-based costing (ABC) analysis. How was this done? It was done through an exhaustive analysis of activities in fourteen representative travel agencies in Argentina and Mexico. According to their business orientation and sales levels per activity area, these agencies were classified as Business Large, Business Medium, and Leisure. Hermes then prepared an activity-based costing report for each market segment and also a report describing the adjustments needed for intra-segment variations (e.g. country and volume). This evaluation allowed a comprehensive analysis of the cost per travel agency activity and, at the same time, provided an interesting measurement of each travel agency’s efficiency rating compared to the market in which it operates.

Phase 2
Phase 2 consisted of measuring the time needed to perform some of the same tasks using selected Amadeus solutions. The outcome of this investigation was (a) the measured value added (mainly processing time but also costs, increased revenues, etc.) for each measurement scenario, (b) a report for each scenario in each travel agency, (c) a measurement methodology in the form of a working procedure and (d) a comparison of the most and the least efficient agencies.

Project methodology
Phase 1 consisted in 1. Questionnaire 2. Process analysis 3. Cost allocation
Phase 1 used three steps:

1) Information request
A detailed and thorough questionnaire was sent to each agency, requesting information regarding revenue, breakdown of expenses, the company’s organization chart, points of sale, IT and software as well as communication equipment.

2) Process analysis
This step consisted of a thorough assessment of the business processes in order to understand them in-depth. Interviews with agency employees were carried out to help understand the main activities performed within each agency and to identify the

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A White Paper by Hermes Management Consulting April 2005

resources used in each activity. During this research, we found that business and leisure agencies differ somewhat in their business systems. Based on this information, processes were mapped for both types of agencies at three different levels. Level 1 presents a description of the main processes of the agency (Exhibit 2), Level 2 breaks these processes down into subprocesses. Finally, Level 3 consists of a detailed description of the activities performed within each subprocess, using flow charts. The latter was initially disregarded since, at this level, there were wide variations among agencies.
Product and package development Sales origination

Exhibit 2 EXAMPLE OF ACTIVITIES AND PROCESSES
Business Agencies
Reporting, planning and monitoring Search, proposal and negotiation Invoice, collection and payment

Sales origination

Needs assessment

Booking and sales

Execution and follow up

Leisure Agencies
Reporting, planning and monitoring Search, proposal and negotiation Invoice, collection and payment

Needs assessment

Booking and sales

Execution and follow up

3) Cost allocation
ABC methodology was used in order to determine the cost of each activity during the process, to identify cost reduction opportunities and, finally, to establish the differences between the most and the least efficient agencies. Two cost allocation exercises were performed: A traditional one with a generic division across all the accounts (such as Operating Personnel, Administrative Personnel, Communication, Systems, Infrastructure, Marketing and Other). Activity-based costing, where the traditional accounts were allocated to each activity (Exhibit 3). This allocation considered the amount of resources (cost drivers) used for each activity. With
Personnel total Operations & Marketing Administration Communication Systems Infrastructure Marketing Other TOTAL

Costs were allocated both in the traditional way and by activity

Exhibit 3 PRESENTATION OF THE STRUCTURE OF ABC RESULTS
(using disguised figures)

Leisure agencies
Reporting, planning and monitoring 8 Product and package development 1 Sales origination 2
Product and package development Sales origination

Needs assessment 3
Needs Assessment

Search, proposal and negotiation 4
Search, proposal and negotiation

Booking and sales 5

Invoice, collection and payment 6
Execution and follow up

Execution and follow up 7
Reporting, planning and monitoring

Booking and sales

Invoice, collection and payment

TOTAL

1
0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.1

2
1.3 1.0 0.3 0.1 0.0 0.1 0.6 0.3 2.4

3
1.2 1.1 0.1 0.0 0.0 0.1 0.0 0.2 1.5

4
2.0 1.7 0.3 0.1 0.1 0.3 0.0 0.3 2.8

5
1.9 1.7 0.2 0.1 0.1 0.1 0.0 0.2 2.4

6
2.0 1.8 0.2 0.1 0.0 0.2 0.0 1.0 3.3

7
0.6 0.4 0.2 0.0 0.0 0.0 0.0 0.0 0.6

8
0.8 0.2 0.6 0.0 0.0 0.0 0.0 0.2 1.0 9.9 8.0 1.9 0.4 0.2 0.7 0.6 2.2 14.1

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these cost drivers the costs were traced to activities. Then the activities were assigned to tickets. This exercise was performed by first gathering information (revenues, costs, time dedicated to each activity, space, systems) using different sources of information (accounting reports, interviews with managers and agents, time measurements, etc.). In Phase 2, the value added by Amadeus solutions to the travel agencies was determined.

In order to determine the value added by Amadeus solutions, time measurements were taken in Argentina and Mexico

Travel requests/scenarios’ processing time was measured with travel professionals in Argentina and Mexico; for each Amadeus solution used (Amadeus solutions were supplied and implemented wherever they were not previously available), specific travel scenarios were created, and the travel agents were trained in the use of Amadeus solutions. Then the processing time of each solution was compared against the processing time of existing competing alternatives. As a result, productivity increase and cost reduction were
Average 4.0 Travel request 1 Travel request 2 Travel request 3 Travel request 4

Exhibit 4 SOLUTION 2 MEASUREMENT – CAR IN VISTA (GUI) VS. NON-GDS
In minutes
Car in Vista (GUI)
3.5 4.5 4.6 3.4 16.5 10.6 21.9
EXAMPLE Complex travel requests

Non-GDS
7.9 25.5

Difference
4.4 21.1 6.1 18.5 (56%) (83%) (57%) (84%)

12.5 (76%)

measured following a strict scientific approach (Exhibit 4). These measurements are

• Without using a GDS, car bookings require 76% more time • When the customer asks for the cheapest car rental (travel requests 2 & 4) Vista
generates the highest time savings (19.8 minutes on average)

• Cheapest car rental bookings require phone calls to each company in the non-GDS
scenario

now part of the Amadeus “Show Me The Value” database and are the quantitative expression of the value proposition of Amadeus solutions.

Results
In synthesis, the most important results derived from the Activity-Based Costing in phase 1 were the following (Exhibit 5).

Average agency cost structure
The average cost per ticket sold is US$ 35.50 in Argentina, and US$ 50.70 in Mexico. In Argentina, personnel accounts for 70% of the total cost and in Mexico for 58%.
Mexico Argentina

Exhibit 5 COMPARISON BETWEEN MEXICO AND ARGENTINA
Cost per activity - In US$/ticket
Product and package development Sales origination Needs assessment Search, proposal and negotiation Invoice, Booking and collection sales and payment Execution and follow up Reporting, planning and monitoring

1.2

17.0

10.4

18.1

16.9

23.6

5.8

7.1

35.5

2.7

12.0

7.8

26.1

16.4

27.2

3.1 4.8 50.7

100% =

• Agencies in Argentina spend more resources in “Sales origination”, “Execution
and follow up” and “Reporting, planning and monitoring” than agencies in Mexico

• Mexican agencies dedicate more resources to “Search, proposal and negotiation”
and “Invoice, collection and payment” than Argentine agencies

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A White Paper by Hermes Management Consulting April 2005

Communication costs are not significant since they have been gradually reduced during the last years through increasing use of e-mail, internet, etc.

Differences in cost structure per country
Even though in Mexico the cost per employee is 35% higher than in Argentina, it is lower relative to the total cost structure, because infrastructure, marketing, communication and system expenses are much higher.

Cost distribution per activity
“Invoice, collection and payment” is by far the most personnel cost-intensive activity. “Search, proposal and negotiation” and “Booking and sales” come next. Mexican agencies dedicate more resources to “Search, proposal and negotiation” and “Invoice, collection and payment” than agencies in Argentina, while the latter spend more resources on “Sales origination”, “Execution and follow up” and “Reporting, planning and monitoring”. In almost all cases, these costs could be reduced by increasing the use of Amadeus solutions, especially in ground services. In fact, agencies that make intensive use of GDSs and Enterprise Resource Planning (ERP) are more efficient, especially in performing these activities.

Profitability analysis
Argentine agencies are more profitable than Mexican agencies, mainly due to the reduction in airline commission payments and higher operating costs in the Mexican market. This trend will reach Argentina in the near future. The gradual reduction in commission payments clearly forces travel agencies to streamline their businesses in order to guarantee their continued profitability; and cost reductions can be obtained through optimizing and automating administrative processes. In addition to the already identified issues, like market pressure and countryspecific cost structure, many opportunities for adding value to travel agencies were found. Indeed, GDSs can add considerable value with products and services. Areas where Amadeus solutions could make a considerable difference: ground services training travel agency personnel back office consulting services on sales origination, business processes, organizational structure, Management Information System (MIS), etc travel packages and groups help desk service

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Agencies are increasingly forced to streamline their businesses, especially the high personnel-cost activities

The most important conclusion to be drawn from the time measurements in phase 2 is the fact that Amadeus solutions are more efficient than existing competing alternatives: Normally complex car and hotel bookings show the highest time savings. We measured around 12.5 minutes saved per car booking and 6.5 minutes per hotel booking. Especially in the car rental area, searching for best offers requires long processing times because companies have to be contacted one at a time by phone. When making hotel bookings, point of reference selections and facilities research are particularly time consuming and cost more money without the help of a GDS. Although car reservations show the highest time savings (12.5 minutes), the value added by a GDS is in fact not as important (US$ 249 – 769 per year) due to the low share of car bookings in the agencies’ total business in those markets (0.3% in Argentina and 0.6% in Mexico). Hotel bookings with a time saving of only 6.5 minutes per transaction show nevertheless the highest value (US$ 1,944 – 11,360 per year) due to a higher share in hotel bookings overall in both markets (13.0% in Argentina and 4.7% in Mexico). Traveler Profile Management makes a significant impact (US$ 2,986 – 5,593 per year) because it applies to air, car and hotel bookings. Air in Amadeus Vista, the Amadeus universal browser-based point of sale platform, adds seemingly minor value (US$ 406 – 760 per year) because agents already use GDSs for airbooking and have simply upgraded. A travel agency can earn up to US$ 27,000 in additional EBIT (Earnings Before Interests and Taxes) per year with Amadeus solutions. The calculation of a potential EBIT increase is simple: more bookings with less resources = less cost per booking. Obviously this means that the increase in productivity can also be expressed in terms of cost reduction. Depending on the solution, a travel agency can save from US$ 800 11,500 per scenario on a yearly basis (these cost savings are calculated by adding the savings in personnel, infrastructure and communication costs). In addition, a clear improvement in customer service levels was noted since the average response time could be significantly reduced.
Note: figures are based on the agencies tested, and the results will change depending on the profile / activities / size of the travel agency.
Solution

Exhibit 6 SUMMARY OF MEASUREMENTS AND VALUE ADDED ESTIMATIONS
Country Base case time (Min.)
10.7 10.7 5.0 4.9 4.1 16.5 16.5

Time savings (Min.)
6.5 6.5 1.9 1.5 0.3 12.5 12.5
61% 61% 38% 31% 6% 76% 76%

Hotel Hotel Travel Choice Cryptic Travel Choice Vista Functions Car Car

Argentina Mexico Mexico Mexico Mexico Mexico Argentina

Amadeus solutions are more efficient than existing competing alternatives

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About Hermes Management Consulting
Hermes Management Consulting (Hermes) is a Latin American management consulting firm specialized in strategy, organization, operations and valuation studies. Hermes was founded in late 1994 by Osvaldo Gallo and Hernán Goyanes. Both founders are former senior members of McKinsey & Company, having worked extensively for leading companies in Europe and Latin America. Hermes has been very active in sector analyses, company valuations, mergers, development of corporate strategy and business plans, and identification and implementation of operating improvements. These projects have focused on payment systems, supermarket, retail, consumer goods, health care, energy, logistics, apparel, telecommunications, tourism, entertainment and real estate sectors. Not only has Hermes developed a wide experience in those industries but also has helped assess a great variety of acquisition opportunities in numerous other sectors. Hermes has performed strategy, organization, operating improvement and valuation projects in Argentina, Brazil, Colombia, Costa Rica, Chile, Dominican Republic, Ecuador, France, Guatemala, Mexico, Paraguay, Peru, Spain, United States, Uruguay and Venezuela.

Hermes Management Consulting

T: +54 11 4393 2019

www.hermesmc.com.ar

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