Download - 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
Understanding Travel Agency Cost Driversand Ways to Optimize Business
in Argentina and Mexico
AbstractThis 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.
IntroductionAlthough 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).
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Travel agencies inLatin America usuallydo not take advantage
of the full GDSpotential
2
OBJECTIVES OF THE PROJECT
Deliverables
• Activity-based costing report for each market segment
• A report describing the adjustments for intra-segment variations (e.g.: country and volume)
PhasesObjectives
Identify opportunities to add value to travel agencies
• Phase 1: Activity-Based Costing
• Phase 2: Measuring added value
Exhibit 1
Measure the value generated by selected Amadeus solutions
• Added value (processing time, cost, 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
A White Paper by Hermes Management ConsultingApril 2005
Understanding Travel Agency Cost Drivers andWays to Optimize Business in Argentina and Mexico
Phase 1In 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 2Phase 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 methodologyPhase 1 used three steps:
1) Information requestA 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 analysisThis 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
A White Paper by Hermes Management ConsultingApril 2005
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Phase 1consisted in
1. Questionnaire2. Process analysis
3. Cost allocation
To identify value gainopportunities for travel
agencies, an activity-based costing was
carried out (phase 1),followed by
measurements of theprocessing time saved
by employing Amadeussolutions (phase 2)
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.
3) Cost allocationABC 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
Sales origination
Needs assessment
Search, proposal and negotiation
Booking and sales
Invoice, collection and payment
Execution and follow up
Product and package development
Reporting, planning and monitoring
Product and package development
Sales origination
Needs Assessment
Search, proposal and negotiation
Booking and sales
Invoice, collection and payment
Execution and follow up
Reporting, planning and monitoring TOTAL
Personnel total 0.1 1.3 1.2 2.0 1.9 2.0 0.6 0.8 9.9
Operations & Marketing 0.1 1.0 1.1 1.7 1.7 1.8 0.4 0.2 8.0
Administration 0.0 0.3 0.1 0.3 0.2 0.2 0.2 0.6 1.9
Communication 0.0 0.1 0.0 0.1 0.1 0.1 0.0 0.0 0.4
Systems 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0 0.2
Infrastructure 0.0 0.1 0.1 0.3 0.1 0.2 0.0 0.0 0.7
Marketing 0.0 0.6 0.0 0.0 0.0 0.0 0.0 0.0 0.6
Other 0.0 0.3 0.2 0.3 0.2 1.0 0.0 0.2 2.2
TOTAL 0.1 2.4 1.5 2.8 2.4 3.3 0.6 1.0 14.1
PRESENTATION OF THE STRUCTURE OF ABC RESULTS(using disguised figures)
Exhibit 3
1 2 3 4 5 6 7
8
1 2 3 4 5 6 87
Leisure agencies
A White Paper by Hermes Management ConsultingApril 2005
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Costs were allocatedboth in the traditional
way and by activity
4
Sales origination
Needs assessment
Search, proposal and negotiation
Booking and sales
Invoice, collection and payment
Execution and follow up
Reporting, planning and monitoring
Business Agencies
EXAMPLE OF ACTIVITIES AND PROCESSESExhibit 2
Sales origination
Needs assessment
Search, proposal and negotiation
Booking and sales
Invoice, collection and payment
Execution and follow up
Product and package development
Reporting, planning and monitoring
Leisure Agencies
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.
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
measured following a strict
scientific approach (Exhibit
4). These measurements are
now part of the Amadeus “Show Me The Value” database and are the quantitative
expression of the value proposition of Amadeus solutions.
ResultsIn synthesis, the most important results derived from the Activity-Based Costing in phase
1 were the following (Exhibit 5).
Average agency cost
structureThe 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%.
1.2
2.7
17.0
12.0
10.4
7.8
18.1
26.1
16.9
16.4
23.6
27.2
5.8
3.1
7.1
4.8
Cost per activity - In US$/ticket
Argentina
Mexico
35.5
50.7
100% =
Sales origination
Needs assessment
Search, proposal and negotiation
Booking and sales
Invoice, collection and payment
Execution and follow up
Product and package development
Reporting, planning and monitoring
• 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
COMPARISON BETWEEN MEXICO AND ARGENTINAExhibit 5
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In order to determinethe value added by
Amadeus solutions, timemeasurements weretaken in Argentina
and Mexico
Car in Vista (GUI) Non-GDS Difference
3.5
4.5
4.6
3.4
Travel request 1
16.5
4.0
12.5
Average
7.9
25.5
10.6
21.9
Travel request 2
Travel request 3
Travel request 4
4.4
21.1
6.1
18.5
(56%)
(83%)
(57%)
(84%)
(76%)
In minutes
• 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
Complex travel requests
SOLUTION 2 MEASUREMENT – CAR IN VISTA (GUI) VS. NON-GDSExhibit 4
EXAMPLE
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 countryEven 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 analysisArgentine 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 country-
specific 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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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.
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10.7
10.7
5.0
4.9
4.1
16.5
16.5
Base case time Time savings
Car
Car
Hotel
Hotel
Travel Choice
Cryptic Travel Choice
Vista Functions
Country
Argentina
Mexico
Mexico
Argentina
Mexico
Mexico
Mexico
Solution
6.5
6.5
1.9
1.5
0.3
12.5
12.5
(Min.) (Min.)
76%
76%
61%
61%
38%
31%
6%
SUMMARY OF MEASUREMENTS AND VALUE ADDED ESTIMATIONS
Exhibit 6
Agencies areincreasingly forced to
streamline theirbusinesses, especially
the high personnel-costactivities
Amadeus solutions aremore efficient thanexisting competing
alternatives
Note: figures are based on the agencies tested, and the results will change depending on the profile /activities / size of the travel agency.
About Hermes Management ConsultingHermes 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.
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