understanding travel agency cost drivers and ways to ...€¦ · the total spending by uk...

UUnnddeerrssttaannddiinngg TTrraavveell AAggeennccyy CCoosstt DDrriivveerrssaanndd WWaayyss ttoo OOppttiimmiissee BBuussiinneessss

iinn tthhee UUKK aanndd IIrreellaanndd

A summary of research conducted byHermes Management Consulting and UPS

Understanding Travel Agency Cost Driversand Ways to Optimise Business in the UK and Ireland

August 2006

Index

AAbbssttrraacctt 33

IInnttrroodduuccttiioonn 33

RReessuullttss ooff tthhee ssttuuddyy 77

Activity-bbased costing 7Average agency revenue structure 7Average agency cost structure 7Cost distribution per activity 8Profitability & productivity analysis 10

Value measurements 1100Air 11Hotel and Car 12

MMaaiinn ccoonncclluussiioonnss aanndd rreeccoommmmeennddaattiioonnss 1144

AAppppeennddiixx 1177

MMeetthhooddoollooggyy 1177Activity-based costing 17Value measurements 20

AAbboouutt...... 2233

Hermes Management Consulting 23UPS Professional Services 23

AbstractThis white paper summarises the independent research conducted in 2005 and 2006 by

Hermes Management Consulting (Hermes) and UPS Professional Services (UPS) in the

United Kingdom (UK) and Ireland. The research has been commissioned by Amadeus in

order to (a) better understand travel agencies’ cost drivers and (b) identify opportunities

to add value to the travel agencies. The purpose of this paper is to explain the

methodology used, and more importantly communicate the results of the research with

recommendations on how travel agencies can optimise their business.

IntroductionThe total spending by UK travellers for outbound travel has grown at a compound annual

growth rate (CAGR1) of 9.8% in the last six years, fuelled by a 6.4% growth in the

spending per traveller and a 3.2% growth in the number of travellers (Chart 1). This

UUnnddeerrssttaannddiinngg TTrraavveell AAggeennccyy CCoosstt DDrriivveerrssaanndd WWaayyss ttoo OOppttiimmiissee BBuussiinneessssiinn tthhee UUKK aanndd IIrreellaanndd


August 2006

36.7 36.540.4

46.6

55.5 58.4

2000 2001 2002 2003 2004 2005

Spending in US$ billions

UUKK OOUUTTBBOOUUNNDD TTOOUURRIISSMM EEVVOOLLUUTTIIOONN

CAGR: 9.8%

## ooff ttrraavveelllleerrss(millions)

5566..88 5588..33 5599..44 6611..11 6644..22

SSppeennddiinngg ppeerr vviissiitt(US$) 664455 662266 668811 775599 886644

33..22%%

66..44%%

CCAAGGRR

CChhaarrtt 11

Source: National statistics (UK), 2006; Hermes Management Consulting analysis, 2006

6666..44

888800

1 All CAGR calculations are in $ (USD) to ensure consistency and comparability of the UK and Ireland results with the global figures.

UK outbound tourismhas grown 9.8%

in the last five years,27% more than the

world's tourismspending growth

3

growth is 60% higher than that of the inbound spending (CAGR: 6.0%) and is 27%

higher than the world's total tourism spending growth for the same period (CAGR:

7.7%).

According to UK travel trends research in 2004, almost 80% of the total UK travellers

journeyed by air, while 14% travelled by sea and the remaining 7% used the Eurotunnel.

Air transport has grown by 6% per year (in number of passengers carried) in the last five

years, while other means of transportation have decreased by 3% per year. Spain, France

and the US are the most popular outbound destinations both in number of visits and in

total spending. The US shows the highest spending per traveller, mainly because of longer

trips.

Similarly, the total spending by Irish travellers for outbound travel has grown at a

compound annual growth rate (CAGR) of 18.1% in the last six years, fuelled by a 10.4%

increase in the number or travellers and a 6.9% growth in spending per traveller (Chart

2). This growth is almost twice the inbound spending growth (CAGR: 9.7%) and it more

than doubles the world's total tourism spending growth (CAGR: 7.7%) for the same

period.

According to Ireland's Central Statistics Office in 2004, 84% of total passengers travelled

by air and 16% by sea. In the last five years the number of passengers travelling by air has


August 2006

4

2.6 2.93.7

4.75.2

5.9

2000 2001 2002 2003 2004 2005

Spending in US$ billions

IIRREELLAANNDD OOUUTTBBOOUUNNDD TTOOUURRIISSMM EEVVOOLLUUTTIIOONN

CAGR:

18.1%

## ooff ttrraavveelllleerrss(millions)

SSppeennddiinngg ppeerr vviissiitt (US$)

33..88 44..22 44..66 55..00 55..55

668855 669933 881100 994444 995500

1100..44%%

66..99%%

CCAAGGRR

CChhaarrtt 22

Source: Central Statistics Office Ireland 2006; Hermes Management Consulting analysis, 2006

66..22

995588

Irish outbound tourismhas grown 18.1%

in the last five yearsand more than doubles

the world's tourismspending growth

increased at a CAGR of 6% while the number of passengers travelling by sea has

decreased by 3% per year. The main destination for outbound travellers is the UK (42%),

as it is often used as the point of departure for other destinations. Only 6% of travellers

use the transatlantic route directly.

Despite these positive trends, travel agencies in the UK & Ireland are increasingly seeing

their business models challenged by changes occurring in the travel industry; one

significant change being the airline commission cuts. As a consequence of this, a key

challenge facing travel agencies in the UK & Ireland has been to maintain high net

margins (agency income / total passenger spending) in spite of the reduction of their

traditional revenue stream. Our research shows that in 2004 and 2005 the UK was one of

the markets achieving the highest net margin (10.7%) compared with other countries

within Europe and Latin America where the same research was conducted. Reasons

behind this were the successful shift in agency income from commissions to transaction

fees, management fees, service fees and Service Level Agreements/preferred agreements.

Aside from this, in an effort to meet changing consumer shopping behaviour, the travel

industry appears to be migrating towards a "Do-it-Yourself" concept through the

introduction of web platforms and self-booking-automation tools. Travel consultants are

becoming advisors and fulfilment agents for do-it-yourself transactions as well as

destination specialists. They are increasingly moving towards centralised call centres in

order to realise operational cost savings through economies of scale. Travel management

companies have also significantly reduced the number of implant positions in an effort to

streamline their businesses. Service-based pricing schemes as opposed to transaction-

based pricing are also gaining strength among travel agencies and may become the norm

in the near future.

This change in business practice means travel agencies have to consider the impact of

new technology and identify cost-efficient tools to meet their business requirements. With

technology evolving rapidly, another key challenge for travel agencies is to keep pace with

the technological changes and find the best option to integrate systems and automate

processes to provide a seamless customer experience. This is particularly difficult for retail

travel agencies that traditionally relied on legacy systems such as Viewdata; the lack of in-

house expertise and the necessary resource to invest in new technology becomes a barrier

for change. In this instance, there is an identifiable need for technology providers to offer

advice and guidance in the technology procurement and change management process.

In this context, leading travel technology provider Amadeus commissioned an

independent research to (a) better understand travel agencies' operational cost structure


August 2006

5

and (b) investigate how Amadeus solutions could add value to the agencies' business.

Chart 3 outlines the project objectives and deliverables of the research phases.

The project consisted of two phases; phase 1 was focused on the UK only while phase 2

was focused on the UK and Ireland.

Phase 1 included an overall market overview, a sample selection, and an activity-based

costing (ABC) analysis. The ABC study analyses the financial data of the participating

travel agencies together with an in-depth analysis of the business processes performed

on-site in order to identify and evaluate the main cost drivers. The sample comprised of 6

business travel agencies, 4 retail leisure travel agencies and 5 consolidators specialised in

air bookings.

Phase 2 was carried out by UPS Professional Services and consisted of measuring the time

needed to perform typical agency tasks when using functionalities within the Amadeus

GDS and comparing those to competing solutions. The sample of this research was

composed of 263 measurements involving 46 travel consultants in 11 business and

leisure travel agencies.

A detailed explanation of these two phases of the research can be found in the appendix.


August 2006

6

• Phase 1: Activity-Based Costing –UK only

PPRROOJJEECCTT OOBBJJEECCTTIIVVEESS

Deliverables

• Activity-based costing report for each market segment

• A report describing the adjustments for intra-segment variations

• Identification of the most efficient management models for travel agencies

PhasesObjectives

Identify opportunities to add value to travel agencies

Measure the value generated by selected Amadeus solutions

Partner

• Added value (processing time, etc) for each evaluated scenario

• Work plan description for analysis methodology

• Hermes Management Consulting

• Phase 2: Measuring added value – UK & Ireland

• UPS Professional Services

CChhaarrtt 33

Source: Hermes Management Consulting & UPS Professional Services, 2005-2006

To identify opportunitiesto add value to travelagencies, an activity-

based costing analysiswas carried out (phase

1), followed by ananalysis of time savedby the use of Amadeus

solutions (phase 2)

Results of the studyIn summary, the main results from phase 1 were as follows:

AAccttiivviittyy-bbaasseedd ccoossttiinngg

Average agency revenue structureLeisure travel agencies usually sell packages to individual clients. A package generally

includes an air ticket, accommodation, and some additional services.

Business travel agencies generally sell air and rail tickets, sometimes with a hotel room

or a car rental attached (only on an infrequent basis do they sell some leisure or

incentive packages). On average, UK business travel agencies sold 19 hotel units and 2

car rental units for every 100 air/rail tickets.

In both leisure and business travel agencies, train tickets are mostly stand-alone sales

with no additional services attached to them.

Consolidators sell air tickets (to select destinations) mainly to travel agencies. However,

they sometimes service individual customers as well. When dealing with end

customers, consolidators may also offer some accommodation services, but this

happens very rarely.

Business travel agencies earned on average 53.8% of their revenue from service fees.

The remaining revenue came from commissions (25.1%) and volume bonuses (21.1%).

Leisure travel agencies' main source of revenue comes from marking up of leisure

packages usually acquired from tour operators. They also receive commissions,

transaction fees and to a lesser extent, volume bonuses for their component sales of

air tickets, rail tickets and accommodation services.

Consolidators, on the other hand, usually receive net fares from airlines and generate

their main source of revenue through a mark up being applied on these fares.

Leisure travel agencies' average gross sales per ticket (£424/ticket) are nearly 30%

higher than that of business travel agencies (£330/ticket). The average transaction in

leisure travel agencies is higher because they sell almost exclusively packages.

Average agency cost structureCosts are represented in £ (GBP) per ticket. A ticket unit includes a combination of all

services provided by the travel agencies and represents the average transaction per

customer (including an airline or a rail ticket and attached products).


August 2006

7

Successful shift inagency income from

commissions to servicefees has enabled UK

business agenciesto achieve the highestnet margin comparedwith other countries

within Europe and Latin America

The following results were obtained by analysing the cost per billing item (Chart 4).

UK leisure travel agencies have a higher cost per ticket sold (£41.8/ticket) than

business travel agencies (£32.4) and consolidators (£23.1) because they handle the

least experienced customers and have the most complex set of products. At the other

end of the scale, consolidators have the lowest average cost per ticket because they

are usually focused on a simplified set of product portfolio (one destination/area) and

have the most experienced customers (travel agencies).

UK consolidators spend less in communications (3.2%) than UK business travel

agencies (4.5%) and UK leisure travel agencies (3.5%). This is because consolidators'

customers, i.e. travel agencies, make reservations directly on the consolidators'

systems through internet portals or through GDS terminals installed by the

consolidator, thus making minimal use of voice & facsimile communications. Leisure

travel agencies spend relatively less in communications than business travel agencies

because a higher percentage of their clients are attended to in person.

UK consolidators' spending in marketing is the highest in the market, and almost

triples that of the business travel agencies. Leisure travel agencies have a very similar

total spending in marketing compared to consolidators (£2.5 per ticket vs. £2.8 for

consolidators) but these represent a much smaller share of the total cost (6% for

leisure travel agencies vs. 12% for consolidators).


August 2006

8

45.8%38.4%

50.9%

20.3%20.0%

10.2%

6.0%12.2%3.0%13.6%11.7%11.5%3.5%3.2 %4.5% 2.8%2.7% 2.2%13.0%12.3%12.2%

100% =

Operations& Marketing

Other costs*

Administrative

Infrastructure

Marketing

CommunicationsSystems

Personnel

£32.4

UK –Business

AAddmmiinniissttrraattiivvee ppeerrssoonnnneell// ttoottaall ppeerrssoonnnneell ((%%)) 3300..77%% 1166..77%%

UK –Leisure

£ 41.8

UK –Consolidators

3344..33%%

£ 23.1

In £ per ticketAAVVEERRAAGGEE AAGGEENNCCYY CCOOSSTT SSTTRRUUCCTTUURREE CCOOMMPPAARRIISSOONN

CChhaarrtt 44

Source: Hermes Management Consulting, 2005-2006

Leisure travel agencies show higher infrastructure costs because of their extensive

retail branches.

Cost distribution per activityDespite the fact that the activities carried out by the participating agencies were

practically the same in each analysed segment, there were certain differences in the

distribution of resources for each activity due to the varying business models.

The key results drawn from this analysis are presented in Chart 5.

"Booking and sales" was the main activity for both business travel agencies and

consolidators, where they have a very similar cost (£5.4/ticket and £5.2/ticket

respectively) representing as much as 16.6% and 22.5% of their total costs,

respectively. In the case of leisure travel agencies, the main activity was "Search

proposal and negotiation", representing 32% of their total costs (£13.4/ticket). This is

explained by the difference in customers served by each segment; while consolidators

are usually focused in one area and business clients usually have repetitive flights to

the same destinations, leisure customers are usually the most flexible regarding dates

and destinations, therefore making the search and proposal activity much longer than

the booking itself.


August 2006

9

TTeecchhnnoollooggyy ddeevveelloopp -mmeenntt

HHuummaann rreessoouurrcceess mmaannaaggee -mmeenntt

FFiirrmm iinnffrraassttrruucc -ttuurree

MMaarrkkeettiinngg aanndd ssaalleess oorriiggiinnaattiioonn

NNeeeeddss aasssseessssmmeenntt

SSeeaarrcchh,, pprrooppoossaall aanndd nneeggoottiiaattiioonn

BBooookkiinngg aanndd ssaalleess

IInnvvooiiccee,, ccoolllleeccttiioonn aanndd ppaayymmeenntt pprreeppaarraattiioonn

EExxeeccuuttiioonn aanndd ffoollllooww uupp

PPrroodduucctt aanndd ppaacckkaaggee ddeevveellooppmmeenntt

PPrrooccuu -rreemmeenntt

0.3

0.7

4.1

4.8

2.1

5.1

5.2

13.4

5.4

6.4

4.4

2.8

1.9 4.9

4.1

0.3 3.3 1.7 3.2 5.2 2.8

0.8

0.90.3

0.6

0.52.5

2.0

1.9 1.4

0.5

1.2

2.8

Marketing-related activitiesCore reservation processAdministration and support

32.4Business

Consolidators

Leisure 41.8

23.1

Activity-Based Costing, in £ per ticketCOST COMPARISON BY ACTIVITY

Chart 5


(0.9%) (12.7%) (6.4%) (16.2%) (16.6%) (13.5%) (5.7%)(1.5%)

(7.8%) (3.6%) (15.2%)

(12.3%)(2.2%)(8.6%)(1.3%)

(4.1%)(12.0%)(22.5%)(14.0%)(7.2%)(14.4%)(1.5%)

(32.0%)(12.1%)(11.4%)(1.6%) (15.2%) (6.6%)(1.9%)

(1.3%)(4.6%)

(3.4%) (9.8%)

"Core reservation processes" account for 39% of the total costs for business travel

agencies (£12.6), 44% of the total costs for consolidators (£10.1) and 59% of the

total costs for leisure travel agencies (£24.8). The core reservation processes

represented the most significant expense in both leisure travel agencies and

consolidators. Moreover, lower usage of automated booking tools, e.g. GDS, in leisure

travel agencies increases the time of the core reservation activities and therefore the

costs.

UK business travel agencies allocated 41% of their total costs to "Administration and

Support" activities while UK consolidators' share was 36% and the UK leisure travel

agencies' share was only 25.7%. This is mainly fuelled by larger-sized business travel

agencies with a heavier overhead structure, often reporting to parent companies.

Leisure travel agencies and consolidators, on the other hand, are usually family-owned

and managed, supporting a lighter overhead structure without the need to report to

stakeholders.

UK business travel agencies spend 57% more in back-office activities than

consolidators and leisure travel agencies (£4.4 per ticket in business travel agencies vs.

£2.8 in leisure travel agencies and consolidators) due to more complex and

bureaucratic processes (e.g. in leisure travel agencies and consolidators only one

person controls the Billing & Settlement Plan (BSP) and the Airline Debit Memos

(ADMs) while in business travel agencies there are usually a few additional controls).

Profitability & productivity analysisIn the UK, productivity in terms of tickets per Full Time Equivalent (FTE) is 16% and

109% higher for consolidators (1,410 tickets/FTE) when compared to business (1,212

tickets/FTE) and leisure travel agencies (645 tickets/FTE) respectively. This is due to the

fact that consolidators are more focused on airline tickets, usually operating with

fewer destinations and their customers' (mainly smaller travel agencies) requirements

are more specific. Moreover, the use of advanced web tools makes the consolidators'

process more efficient. However, since consolidators' total income per ticket is the

lowest (£32.2 vs. £35.2 in business travel agencies and £43.5 in leisure travel

agencies), the average income/FTE is 6% and 54% higher than business and leisure

travel agencies' respectively.

UK consolidators' lower costs result in a higher EBIT (Earnings Before Interests and

Taxes) margin (28.1%) than the business (7.7%) and leisure travel agencies' (3.9%).

VVaalluuee mmeeaassuurreemmeennttssThe main results from phase 2 were as listed below. Please note that as measurements are

calculated on a sample, statistical validation is required to ensure that the results can be

safely extrapolated to the total market. This validation is expressed with a confidence


August 2006

10

level. Confidence levels reflect the probability that the results obtained for a given sample

would be the same if the measurement were done for the total market. Overall, the time

measurement differences in this study were validated with confidence levels exceeding

90%, with an error margin of less than 5%.

The following charts are selected results from several booking scenarios comparing the

Amadeus GDS with Galileo's and Sabre's systems. As a result of the analysis performed, it

was clear that the features of the Amadeus product enabled travel consultants to book

travel arrangements in less time than competing products.

AirThe first scenario consisted of a travel consultant booking two passengers for round trip.

Results concluded that the Amadeus GDS product was 56% faster than its closest

competitor. The advantage typifies the value of speed mode and intelligent PNR

functionality inherent in the Amadeus system (Chart 6).

When looking at a business air return for 1 passenger, it is faster to book and service the

itinerary in Amadeus than in Sabre and Galileo. This demonstrates that business travel

consultants can create air bookings, reserve preferred seats and provide flight information

66% faster on Amadeus than on its closest competitor. This shows the added value of its

intuitive and unique dual city pair, speedmode, intelligent PNR and profiles functionality

(Chart 7).


August 2006

11

CChhaarrtt 66MMUULLTTII PPAASSSSEENNGGEERR MMUULLTTII SSEEGGMMEENNTT

01:35

01:29

00:38

00:00 00:30 01:00 01:30 02:00

Minutes

Amadeus

Sabre

Galileo

Source: UPS Professional Services, 2005

Travel consultants canmake a typical air

booking at least 56 %faster using Amadeus

Hotel and CarThe final scenarios compared standard hotel and car booking processes among GDS

products. This included finding a hotel within a specific distance from a particular location

and booking preferred hotel room features based on the traveller's requirements. Once

again Amadeus demonstrated efficiency advantages over the competition through

superior functionality. The functionality of Amadeus' hotel multimedia and point of

reference features allowed hotel bookings to be processed 27% faster on average than

the competition due to ease of use (Chart 8).


August 2006

12

CChhaarrtt 88SSTTAANNDDAARRDD HHOOTTEELL BBOOOOKKIINNGG

01:12

01:06

00:48

00:00 00:30 01:00 01:30

MMiinnuutteess

Amadeus

Sabre

Galileo


CChhaarrtt 77

BBUUSSIINNEESSSS AAIIRR RREETTUURRNN BBOOOOKKIINNGG

03:05

02:28

00:50

00:00 01:00 02:00 03:00 04:00

MMiinnuutteess

Amadeus

Sabre

Galileo


In addition, Amadeus displays more alacrity in car booking using features which reduce

administrative and processing times for travel consultants by as much as 30% (Chart 9).


August 2006

13

CChhaarrtt 99CCAARR BBOOOOKKIINNGG

01:01

00:42

00:00 00:30 01:00 01:30

MMiinnuutteess

Amadeus

Galileo


Main conclusions and recommendations

The reduction in commissions paid by airlines has forced travel agencies to streamline their

businesses to guarantee sustained, long-term profitability. This can be accomplished by

shifting their commission-based revenue models to management and transaction fee

models, and by reducing costs through concentration in fewer locations (call centres) and

the automation of administrative processes (Chart 10).

In addition to previously discussed issues such as market trends and segment-specific

business models, many opportunities for adding value to travel agencies were identified:

Travel agencies incur high administrative expenses, especially in back-office activities

(invoicing, collection and payment preparation), which account for 13.5%, 12% and

6.6% respectively for UK business travel agencies, consolidators and leisure travel

agencies. We believe that through the integration of mid- and back-office systems,

agencies could automate these administrative activities and thereby significantly reduce

associated expenses. Amadeus Sales Management Solution (Vista + ACE) offers these

productivity gains and cost efficiency savings through full integration of front-office

sales, with mid- and back-office accounting functions.

Travel agencies often suffer from insufficient planning and monitoring of company


August 2006

14

IINNDDUUSSTTRRYY EEVVOOLLUUTTIIOONN AANNDD EEXXPPEECCTTEEDD TTRREENNDDSSCChhaarrtt 1100

Source: Hermes Management Consulting, 2006

• Commission• Override

• Travel consultants in payroll

• Associates• Implants

• Paper tickets • Messengers• Personalised service

• Steep fall in commissions • Service level agreements• Override• Fees (management &

transaction)

• Travel consultants and associates (concentration in fewer locations, moving to call centre organisation)

• Reduction in implant positions

• E-tickets• E-mail delivery of pre-trip

documentation• Telephone service• High personnel costs

• SLA• Reduction in override• Activity-based

transaction pricing (by type and channel)

• Concurrent multiple selling channels

• Business and leisure self-booking tools

• Travel consultants as support for do-it- yourself transactions

• Web platforms• Reporting, planning and

monitoring tools• Activity and transaction

based costing

TTrraaddiittiioonnaall eennvviirroonnmmeenntt

CCoommmmii -ssssiioonnss

rreedduuccttiioonnssIInndduussttrryy rreessppoonnssee EE- ppllaayyeerrss

ggrroowwtthh

MMuullttiippllee sseelllliinngg cchhaannnneellss aanndd ee-ttrraavveell eemmppoowweerrmmeenntt

RReevveennuuee ssoouurrcceess

OOrrggaanniissaattiioonnaallssttrruuccttuurree

UUnniiqquuee mmaarrkkeett cchhaarraacctteerriissttiiccss ffaacciilliittaattiinngg eevvoolluuttiioonn

Agencies areincreasingly forcedto streamline their

business, particularlywith respect to

personnel-intensiveactivities

performance (budgeting process, balanced scorecard, profitability goals per service,

etc.), which could be addressed through Amadeus' consulting services focusing on

sales origination, business processes, organisational structure and Management

Information Systems (MIS) among others and/or the development of a business

intelligence tool.

The market shows a limited penetration of online booking tools with reporting

capabilities and corporate profile features, which, in a price-sensitive environment,

represents a unique opportunity for agencies to introduce online booking tools such as

Amadeus e-Travel Management (Aergo). These tools would provide travel agencies

with reporting and profile capabilities and would significantly increase their efficiency.

Many agencies have already developed their own in-house proprietary booking tools,

but these often require significant support from agency staff because of the lack of

automation and integration with other systems (GDSs, back-office, etc).

The high costs associated with the "Needs assessment" activities (ranging from 6% in

business travel agencies to 12.1% in leisure travel agencies) could be significantly

reduced by training employees and providing them with a systematic approach to

assessing customer needs (e.g. scripts with questions to ask the customers or creating

e-forms that the customers can complete with details of their requests prior to

speaking with a travel consultant).

Travel agencies dedicate limited resources to client database file and satisfaction

monitoring. We believe that through the introduction of Customer Relationship

Management (CRM) systems and the use of tools such us Amadeus Travel Preferences

Manager (Travel Choice) and Amadeus Customer Profiles or integrated profile

management applications, travel agencies could add significant value to their business,

growing in the number of new and repeat customers and increasing customer

satisfaction.

The difference in productivity among leisure travel agencies (tickets/FTE) was mainly

due to a low penetration of GDS terminals in small and medium sized branches, as

well as a low usage of GDS within the branches that did have GDS terminals.

Costs associated with core reservation processes (which account for 39% of total costs

for business travel agencies, 43% of total costs for consolidators and 59% of total

costs for leisure travel agencies) could be significantly reduced by trialling and

introducing GDSs in all the leisure travel agencies' branch offices, and by training travel

consultants to use the system. Additionally, by offering a single source of content and

increasing the usage of technology to search and book all travel components

(air/car/hotel/rail/cruise, etc.) through a single front-office offering, the core reservation

processes costs could be further reduced.

The fact of integrating all travel components through Amadeus Selling Platform (Vista),

with the introduction of multimedia tools and higher process automation (e.g. content

integration; commission clearing for hotels) will also help travel agencies in the UK to


August 2006

15

increase cross-selling and up-selling of services such as hotel rooms and car rentals.

Travel agencies should link their technology functionalities and their incentives to

employees to drive sales of additional products and services to customers (through

reminder functionalities in the GDSs and development of incentive programmes).

Finally, the integration of all travel components will also provide travel agencies with a

single solution to service the full travel experience, avoiding the need for customers to

talk with three different operators to book air, hotel accommodation and car rental

(which occurs in agencies working with product cells which are specialised in booking

only one product).

Other areas in which Amadeus solutions can make a considerable difference were

found to be:

o continued professional development for agency personnel

o help-desk services

Based on these results, a UK business-oriented travel agency (with around 150,000 air

segments, 37,500 hotel segments and 3,000 car segments) using Sabre could increase its

yearly income by £199,700 by implementing Amadeus solutions. This increase in

productivity can also be expressed in terms of cost reduction. In other words, this travel

agency could make yearly savings of £57,900 (calculated as the sum of personnel and

infrastructure costs).

A leisure travel agency (with around 30,000 air segments, 9,500 hotel segments and 600

car segments) using Galileo could increase its yearly income by £15,400 or make yearly

savings of £5,700 by implementing Amadeus solutions.

In the case of a consolidator in the UK (with around 120,000 air segments and 5,000 car

segments) using Galileo, it could increase its yearly income by £62,200; or make yearly

savings of £20,900 by implementing Amadeus solutions.

Finally, a travel agency in Ireland (with around 12,000 air segments, 1,200 hotel segments

and 1,200 car segments) using Galileo could increase its yearly income by €12,000 or

make yearly savings of €5,800 by implementing Amadeus solutions.

In addition to the calculated savings shown above for both the UK & Ireland, we can

assume further savings due to the lower voice & facsimile communication costs when

using an automated search and booking platform such as a GDS.

At the conclusion of this analysis, it was clear that by implementing the right technology

that is scaled to their business operation, travel agencies could save money and therefore

improve their bottom line profit due to greater business efficiency, improved employee

productivity and reduced administrative costs.


August 2006

16

Travel agencies cansave a considerableamount of money by

using Amadeus

Appendix

Methodology

AAccttiivviittyy-bbaasseedd ccoossttiinnggPhase 1 focused on the UK market only. Hermes (a) carried out an overall market study,

(b) selected travel agencies to participate in the project (together with Amadeus Marketing

(UK) Ltd), and (c) conducted an activity-based costing (ABC) analysis.

How was this done?

An initial, exhaustive analysis of activities in fifteen representative travel agencies in the UK

was carried out. The sample was selected with a balanced mix of agencies in terms of size,

location, automation level, and main-GDS provider in order to produce market-wide

significant results. These agencies were classified according to their main business focus:

business travel agencies, retail leisure travel agencies and consolidators specialised in air

bookings.

Hermes then prepared an activity-based costing report also including the characteristics of

each sector, revenue structure and profitability. This comprehensive analysis of the cost

per activity within each travel agency provided important information on their efficiency in

relation to their market segment.

Phase 1 included three steps:

1) Information request

A detailed and thorough questionnaire was sent to each agency, requesting

information related to income, breakdown of expenses, the company's organisational

chart, points of sale as well as IT, software and communications equipment.

2) Process analysis

This step consisted of an in-depth assessment of travel agencies' business processes.

Interviews with agencies' employees were carried out in order to help understand the

main activities performed within each agency and to identify resources used in each

activity. One of the findings of this study was that business travel agencies, leisure

agencies and consolidators differed somewhat in their business systems because of the

nature of their businesses and because of the differences between the markets that

they serve. The processes were documented and analysed at two levels for each type of

agency.


August 2006

17

Phase 1 consisted of: 1. Information request

2. Process analysis3. Cost allocation

Level 1 provided a description of the main processes used by the travel agencies while,

at level 2, these main processes were divided into sub processes (Chart 11). For

example, "Product and package development" (level 1 activity) included "Market

analysis and monitoring to identify opportunities", "Product and target customer

definition", "Feasibility analysis" and "Package final definition" (all level 2 activities);

and each level 2 activity has a level 3 description with all the sub-sub-activities involved

(not illustrated in Chart 11); in the case of "Market analysis and monitoring to identify

opportunities" these would be "Analysis of existing offers from competitors,

"Identification of attractive destinations", and "Identification of customer segments

with unsatisfied needs".

3) Cost allocation

An activity-based costing methodology was used 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 costing, in which accounts were divided generically (Operating and

Marketing Personnel, Administrative Personnel, Communication, Systems,

Infrastructure, Marketing and Other).


August 2006

18

• Marketing and advertising:– Institutional– Products/

packages• Proactive

sales campaign:– Accounts– Services

• Reactive sales:– At offices– Inbound

calls– E-mail– Web based– Bidding

application

Marketing and sales origination

Needs assessment

Search, proposal and negotiation

Booking and sales

Invoice, collection and payment preparation

Execution and follow up

• Contact and identification of customer

• Access, creation and/or modification of customer profile

• Understanding of customer needs*

• Additional services offering

• Checking of availability and rates

• Checking of additional information

• Day to day relationship with suppliers

• Information to customer, revision and final proposal

• Additional services offering

• Generation & monitoring of reservations

• Client final confirmation and client payment in advance

• Final confirmation to suppliers and payment in advance

• Travel changes management

• Issuance and provision of pre-trip documents and information

• Invoicing• Client

collections• Air tickets

payment preparation

• Commissions collections

• Agreements analysis and control:– Customers– Suppliers

• On-trip assistance

• Non fulfillment investigation and compensation

• Refunding• Client

database file• Clients

satisfaction monitoring

Main activities

Primary activities

Product and package development

• Market analysis and monitoring to identify opportunities

• Product and target customer definition

• Feasibility analysis

• Package final definition

Firm infrastructure

Procurement

Human resources managementTechnology management

Support activities

EEXXAAMMPPLLEESS OOFF AACCTTIIVVIITTIIEESS AANNDD PPRROOCCEESSSSEESSCChhaarrtt 1111

Generic travel agency

Source: Hermes Management Consulting, 2006

Costs were allocatedtraditionally and

by activity

An activity-based costing in which traditional accounts were allocated to each

activity (Chart 12), taking into account the amount of resources (cost driver) used

for each and then allocated to tickets generated (issued). Data (income, costs, time

dedicated to each activity, space occupied by each department, and systems costs -

IT, phone system, etc) was gathered using different sources of information

(accounting reports, interviews with managers, travel consultants etc).

In the ABC study, costs were presented in £ (GBP) per ticket. A ticket unit includes a

combination of all services provided by the travel agencies and represents the average

transaction per customer (including an airline or a rail ticket and attached products). By

using this method, the study provides simple, standardised results and allows comparison

to be drawn between travel agencies.

Business travel agencies generally sell air and rail tickets, sometimes with a hotel or a car

rental attached (only on an infrequent basis they sell some leisure or incentive packages).

On average, UK business travel agencies sold 19 hotel units and 2 car rental units for

every 100 air/rail tickets.

Leisure travel agencies usually sell packages to individual clients. A package generally

includes an air ticket, accommodation, and some additional services.


August 2006

19

PPeerrssoonnnneell ttoottaall

�Op. & Mrkt. personnel

�Administrative personnel

CCoommmmuunniiccaattiioonn ccoossttss

SSyysstteemmss

IInnffrraassttrruuccttuurree

MMaarrkkeettiinngg

OOtthheerr ccoossttss

TToottaall

Total

Marketing and sales origination

Needs assessment

Search, proposal and negotiation

Booking and sales

Invoice, collection and payment preparation

Execution and follow up

Product and package development

Firm infrastructure

Procurement

Human resources managementTechnology management

SSTTRRUUCCTTUURREE FFOORR TTHHEE AABBCC AANNAALLYYSSIISS RREESSUULLTTSSCChhaarrtt 1122

Business travel agencies, in £ per ticket

1 2 3 4 5 6 7

89

1011

1 2 3 4 5 6 7 8 9 10 11

00..22

0.1

0.1

00..00

00..00

00..00

00..00

00..00

00..33

22..55

1.9

0.5

00..11

00..00

00..33

11..00

00..22

44..11

11..66

1.5

0.1

00..11

00..00

00..33

00..00

00..11

22..11

33..99

3.8

0.0

00..44

00..00

00..77

00..00

00..33

55..22

44..00

3.8

0.2

00..33

00..00

00..77

00..00

00..33

55..44

22..44

1.3

1.0

00..22

00..00

00..66

00..00

11..33

44..44

11..44

1.1

0.2

00..11

00..00

00..33

00..00

00..11

11..99

00..44

0.1

0.3

00..00

00..00

00..00

00..00

00..00

00..55

11..22

0.1

1.1

00..11

00..99

00..22

00..00

00..22

22..55

00..88

0.4

0.4

00..00

00..00

00..11

00..00

00..22

11..22

33..22

0.6

2.6

00..11

00..00

00..55

00..00

11..22

44..99

2211..44

14.9

6.6

11..55

00..99

33..77

11..00

44..00

3322..44


In both business and leisure travel agencies, train tickets are mostly stand-alone sales with

no additional services attached to them.

Consolidators sell air tickets (to select destinations) mainly to travel agencies. However,

they sometimes service individual customers as well. When dealing with end customers,

consolidators may also offer some accommodation services, but this happens very rarely.

VVaalluuee mmeeaassuurreemmeennttssPhase 2 of the research was conducted by UPS Professional Services and consisted of

measuring the time needed to perform typical agency tasks, comparing the Amadeus GDS

front office product with other GDS front office products from Sabre and Galileo. Through

this process, predetermined booking scenarios were developed which captured various

combinations of how travel arrangements are booked by an agent using a GDS product.

Scenarios consisted of booking air travel with hotel and car, setting up customer profiles,

and entering frequent flyer information among others. Travel consultants were then

observed collecting information for each scenario using a GDS; this was done to

determine which system travel consultants would prefer as well as to compare overall

travel consultant productivity.

UPS Professional Services used the process of "Elemental Time Study" in order to capture

scenario data for each GDS product, a process that UPS has deployed for internal

operations for over 40 years. "Elemental Time Study" is a work measurement technique

for establishing an allowed time standard to perform a given task. The technique is based

on measurement of work content of the prescribed methods with allowance for fatigue

and for personal and unavoidable delays. Through hand-held technology and software, an

elemental time study template was developed which incorporated possible combinations

of each scenario illustrated in Chart 13.


August 2006

20

CChhaarrtt 1133 OOVVEERRVVIIEEWW OOFF SSCCEENNAARRIIOOSS TTEESSTTEEDD

Net Fare Driven Reservation(Internet fare built in GDS booking engine)

Multi -ppassenger Multi -ssegment(Multi-passenger international air booking with multiple segments and a cancellation)

PNR Creation(Air, hotel, and car booking with profile creation)

PNR Creation(Air, hotel, and car booking with fare quotation)

Galileo and Sabre GDS products-results statistically valid-

PNR Creation (Air and hotel booking with fare quotation)

Profile Management (Traveller profile created)

Galileo and Sabre-results not statistically valid-

Amadeus (Selling Platform Cryptic)

-results statistically valid-

Profile Management(Company profile created)

Solution testedType of scenario


In order to determinethe value added byAmadeus solutions,

263 time measurementswere taken in 11 travel

agencies by 46 travelconsultants in both the

UK and Ireland

As travel consultants booked travel and navigated through GDS screens according to each

scenario, time was captured by each element which enabled the comparison among GDS

products. Chart 14 depicts a typical template created for the use of measuring agent

performance.

UUPPSS PPrrooffeessssiioonnaall SSeerrvviicceess PPrroojjeecctt MMeetthhooddoollooggyy

The project methodology was a three-stage procedure consisting of the following

elements:

1) Develop

The development stage was focused on identifying all aspects of the GDS front office

functionality. This included the Amadeus GDS as well as Galileo and Sabre with the

goal to understand what the degree of differentiation was among the three systems.

This was followed by defining and documenting all the activities, processes, and

transactions that could occur during field testing of the GDS products. This enabled the

creation of a proper time study template suitable for data capture. Once the template

was created, data capture tools were then configured.


August 2006

21

Time starts when agent notes information on PNR. Time stops when PNR is updated.

Agent notes information on PNR

Update PNR

Time starts when agent checks availability.Time stops when finished reserving flight.

Agent confirms reservationSell

Time starts when agent begins flight data search.Time stops when agent pulls flight info table up.

Agent researches flight alternatives

AvailabilityConsolidator

Time starts when agent displays commission on screen.Time stops when agent begins subsequent step.

Agent computes commission on booking

Commission

Time starts when agent secures reservation. Time stops when finishes cruise arrangements.

Agent confirms reservationBooking

Time starts when agent applies preferences.Time stops when agent begins sell.

Agent verifies customer options

Sell

Time starts when agent begins cruise data search.Time stops when agent pulls cruise info tab up.

Agent researches cruise and ship availability

SearchCruise

Time starts when agent secures reservation. Time stops when finished reserving vehicle.


Time starts when agent begins vehicle data search.Time stops when agent pulls vehicle info table up.

Agent researches vehicle options and availability

AvailabilityCar reservation

Time starts when agent reserves room.Time stops when finished reserving accommodation.


Time starts when agent begins accommodation data search.Time stops when agent pulls hotel info table up.

Agent researches accommodation availability

AvailabilityHotel reservation

Time starts when agent secures reservation. Time stops when finished reserving flight.


Time starts when agent begins flight data search. Time stops when agent pulls flight info table up.

Agent researches flight availability

AvailabilityAir reservationBooking

Time starts when opening a PNR. Time stops when agent finished.Agent records relevant customer data

Personal Data

Start time is when call from customer is received. Stop time.Agent acknowledges customer on phone

In callA new customer

SSttaarrtt && eenndd ppooiinntt ddeeffiinniittiioonnLLeevveell 44LLeevveell 33LLeevveell 22LLeevveell 11

EElleemmeenntt ddeessccrriippttiioonnLLeevveell ssttrruuccttuurree

Level 1 structure:Leveraged to break down elements into sub tasks –lower levels roll-up to higher levels

Element description –definition of the element at various levels

Start and end point definitions: Description of the element start and finish – need to ensure that the start and end are measurable

Chart 14 VALUE MEASUREMENT TEMPLATE


Phase 2 consisted of: 1. Develop

2. Test and prepare3. Execute and analyse

2) Test and prepare

Beta testing was then conducted to further familiarise engineers with each GDS front

office product as well as test tools and techniques in preparation for live field studies.

Beta testing also provided an opportunity to update/fine tune the wording of each

scenario to ensure the agent being observed completely understood the dynamics of

the scenario and how it should be recorded. A complete examination of GDS features

and capabilities also took place to ensure that work measurement engineers

understood how the agent should use the system to properly leverage the GDS

solution with the goal of optimising total booking time.

3) Execute and analyse

Following the Beta Test, field studies were performed within multiple agencies using

the three GDS products. Travel consultants were observed booking travel arrangements

according to each pre-defined scenario using Amadeus, Galileo, and Sabre. At the

conclusion of the studies, all results were assessed and data was analysed to determine

which GDS product enabled greater agent efficiency and utilisation through superior

system functionality.


August 2006

22

AAbboouutt......

Hermes Management ConsultingHermes Management Consulting (Hermes) is a Latin American consulting firm specialisingin strategy, organisation, operations and valuation studies. Hermes was founded in late1994 by Osvaldo Gallo and Hernán Goyanes. Both founders are former senior members ofMcKinsey & Company, and have worked extensively for leading companies in Europe andLatin America.

Hermes has been very active in sector analyses, company valuations, mergers, corporatestrategy and business plan development, as well as the identification and implementationof operational improvements. These projects have focused on the payment systems,supermarket, retail, consumer goods, health care, energy, logistics, apparel,telecommunications, tourism, entertainment and real estate sectors. Not only does Hermeshave extensive experience in these sectors, it has also helped assess a variety of acquisitionopportunities in numerous other industries.

Hermes has carried out strategy, organisation, operational improvements and valuationprojects, in Argentina, Brazil, Colombia, Costa Rica, Chile, Dominican Republic Ecuador,France, Guatemala, Italy, Mexico, Paraguay, Peru, Poland, Spain, United States of America,Uruguay, United Kingdom and Venezuela.

To learn more about Hermes Management Consulting please visit their website at http://www.hermesmc.com.ar

UPS Professional ServicesUPS Professional Services (PSI) is a wholly owned subsidiary of United Parcel Service andhas been in business supporting clients from an engineering and technology perspectivefor approximately 15 years. Clients who wish to leverage UPS's intellectual capital toachieve operational excellence engage UPS Professional Services to improve quality andproductivity within their supply chain. PSI specialises in several areas including BusinessProcess Reengineering (BPR), Supply Chain Design and Transportation Optimisation,Package Engineering, and Fleet Services.

Founded in 1907 as a messenger company in the United States, UPS has grown into a $36billion corporation by clearly focusing on the goal of enabling commerce around theglobe. Today UPS is a global company with one of the most recognised and admiredbrands in the world. UPS has become the world's largest package delivery company and aleading global provider of specialised transportation and logistics services. Every day, UPSmanages the flow of goods, funds, and information in more than 200 countries andterritories worldwide.

To learn more about UPS Professional Services, please visit their website athttp://www.ups-psi.com/


August 2006

23

UPS, the UPS brandmark and the color brown are trademarks that are used with permission by its owner,United Parcel Service of America, Inc. All rights reserved.

understanding travel agency cost drivers and ways to ...€¦ · the total spending by uk...

Documents