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).


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


Hermes Management Consulting T: +54 11 4393 2019 www.hermesmc.com.ar 3

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


Sales origination

Needs Assessment


Booking and sales



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



Costs were allocatedboth in the traditional

way and by activity

4

Sales origination

Needs assessment


Booking and sales




Business Agencies

EXAMPLE OF ACTIVITIES AND PROCESSESExhibit 2

Sales origination

Needs assessment


Booking and sales





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


Booking and sales





• 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



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



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.



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.

