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1
Understanding Travel Agency Cost Drivers and Ways to Optimise Business in Greece
November 2007
2
Index
Abstract .........................................................................................3
Research methodology..................................................................3
Introduction ...................................................................................3
Travel sector in Greece – macro environment ...............................4
Low Cost Carriers (LCCs) .............................................................8
Online............................................................................................8
Travel agencies in Greece.............................................................9
Results of the study.....................................................................10
Activity-based costing..................................................................10
Average agency revenue structure..............................................10
Average agency cost structure ....................................................13
Cost distribution per activity.........................................................15
Profitability & productivity analysis...............................................18
Main conclusions and recommendations.....................................20
Opportunities for the Greek market..............................................21
Appendix .....................................................................................24
Methodology................................................................................24
About Hermes Management Consulting ......................................27
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
3
Understanding Travel Agency Cost Drivers and Ways to Optimise Business in Greece Abstract
This White Paper reviews the results of independent research conducted in 2007 by
Hermes Management Consulting (Hermes) in Greece. The research was commissioned
by Amadeus in order to:
• Better understand travel agencies’ cost drivers.
• Identify opportunities to add value to travel agencies.
The purpose of this paper is to explain the methodology used and - more importantly -
communicate the results of the research along with recommendations on how travel
agencies can more effectively meet the needs of their customers. It is the first time that a
study of this kind has been conducted in Greece and thus represents a new window of
opportunity for travel agencies in the region.
Research methodology
The project included a market overview, a sample selection of travel agencies and an
activity-based costing (ABC) analysis. The ABC study reviewed the financial data of the
participating travel agencies and examined - in minute detail - the business processes
performed by the agencies. This allowed the main cost drivers to be identified. The
sample comprised of eight business travel agencies and four tour operators.
A detailed explanation of the research methodology is provided in the appendix.
Introduction
According to the United Nations World Tourism Organization (UNWTO), total world
international travel has been rising at a compound annual growth rate (CAGR) of 4% from
2000 to 2006. Europe accounts for 51% of the world’s total tourism income and Greece
generates 2% of this.
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
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Travel sector in Greece – macro environment
Tourism in Greece has become a very important part of the economy; in 2006 the direct
spending was 6% of the total gross domestic product (GDP), comparable with countries
such as Thailand and Austria with a high dependence on tourism1.
The Greek economy has enjoyed sustained growth for 13 years (2003-2007), almost
doubling that of the EU as a whole. This is a key factor in the growth of Greek travel in
recent years and an underlying reason why Greeks are changing their travel habits. As
shown in chart 1, the total number of travellers (inbound and outbound) had a compound
growth of 10%2 (reaching 25 million).
Domestic travel (i.e. Greeks travelling in their own country) shows a CAGR of 11%.
1 Source, World tourism organization.
2 The numbers expressed in the text are rounded
In millions of travellers
GREEK TOURISM FLOW EVOLUTION
CAGR ’04-’06
Chart 1
• Total tourism flow has grown at a compound annual rate of 10% since 2004 while the world’s total tourism grew at a rate of 5% during the same period
• Incoming tourism accounts for 64% of total tourists
2004 2005 2006
62.1% 64.2%
64.3%Incoming
23.825.0
20.7
32.130.5
30.1Domestic
Outgoing 5.6
5.85.3
9.9%
6.9%
10.7%
9.8%
Source: General Secretariat of National Statistical Service of Greece, survey on tourism demand; Hermes’ analysis
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
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As shown in Chart 2, outbound travel is growing at a 7% annual compound rate, showing
a higher rate than the rest of the world (5%) during the same period. Within the outbound
travel category, long stay trips (4+ nights) have enjoyed a 13% annual growth rate while
short stays have decreased by 4%.
Tour operators and agencies are becoming more important in outbound trips3. Their
share in outbound trips grew from 28% in 2004 to 31% in 2006. The sale of packages has
grown at an 80% annual growth since 2004 and represents 40% of the demand in
outbound travel. (See chart 3)
Expenditure on outbound and domestic trips is also growing fast, with average rates of
23% (domestic4) and 20% (outbound). The average expenditure per person per trip has
reached €1,000 for outbound and €399 for domestic trips.
3 Source: General Secretariat of National Statistical service of Greece.
4 Greek citizens travelling inside of Greece.
48%
18 17
87 7
23 20 22
55%55%
21
1.2 1.4 1.3100% =
GREEK OUTGOING FLOW EVOLUTION BY PURPOSE
2004 2005 2006
Business*
Tourists (4+ nights)
Visiting family or friends (4+ nights)
Holidays (1-3 nights)
CAGR ‘04-’06
6.9%
4.2%
13.5%
-2.4%
-3.7%
Outbound travel is growing mainly due to the increase in long stay holidays (14% annual growth rate) which is doubling total outgoing tourism
* Doesn’t include incentive trips, congresses and conferences
Source: General Secretariat of National Statistical Service of Greece, survey on tourism demand; Hermes’ analysis
In millions of travelers
Outgoingleisure
Chart 2
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
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This positive scenario is making the Greek tourism industry very attractive. Greek
agencies have grown their volumes and opened new branches in the last three years, a
fact confirmed by the study. Business trips grew at the same rate as the gross domestic
product (GDP) and companies are giving incentive trips to their customers and sales
forces - making this product one of the most dynamic in the market.
Agencies and tour operators
2006, in thousand of travelers
GREEK OUTGOING TOURISTS EVOLUTION BY PRODUCT*
CAGR ’04-’06
Chart 3
Agencies and tour operators grew in the market as a value added service for tourism, offering packages and taylor-made services
27.5% 27.7% 31.3%
2004 2005 2006
Packages
FIT and business 78.2% 75.4%
40.1
21.8
24.6
59.9%
280
366
494 16.4%
79.9%
-21.1%
* Only for bookings through travel agencies and tour operators
Source: General Secretariat of National Statistical service of Greece, survey on tourism demand; Hermes’ analysis
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
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Trends that are making travel agencies re-define their role in other part of the world are
starting to affect the Greek market. Commission reductions became a fact of life in 2006
and Greek travel agencies have slowly developed service fees as a substitute income
source. Additionally, most of the agencies use the Internet as an information source.
Online distribution channels are just developing, however, mainly due to low Internet
penetration in Greece compared to other European countries.
Recent research shows that agencies find the security issues - and perceived risk when
performing transactions online - as the main barrier to using the internet5.
To extrapolate a possible market evolution in Greece, we can look at the market situation
in the US. During the 1990s, several important airlines in the USA began reducing their
base commissions, reaching zero by 2004. This forced travel agencies to examine their
business mix, transaction size, and sources of income. As a result of this change, the
market consolidated. While total volume booked grew 6% between 2000 and 2004, the
number of agencies declined by 36%. This resulted in a 64% increase in revenues per
agency location (see chart 4). As a result of both this consolidation and better technology,
the number of travel agents dropped by 41%. Meanwhile, sales per agent rose by 78%
over the same period.
5 Source: Technological Education Institute of Serres
MARKET EVOLUTION FOR TRAVEL AGENCIES IN USA
Source: US Travel Agency Surveys, CSFB, Department of Labor; Hermes Management Consulting analysis
Total volume of reservations (US$ B)
# of agencies (‘000)
# of travel agents (‘000)
# travel agents per agency
Revenue/point of sale* (US$ million)
Revenue/travel agent (US$ million)
2000
140
33.4
124.0
3.7
4.2
1.13
00-04 variation %
6%
-36%
-41%
-8%
64%
78%
2004(E)
148
21.5
73.6
3.4
6.9
2.01
Chart 4
• The total volume of reservations grew by 6%• The number of travel agencies dropped by 36% due to a consolidation of the most
efficient, resulting in an increase of sales per branch of 64%• The number of travel agents fell in line with the number of agencies, with a drop of 41%• Technology and consolidation lead to a 78% increase in income per travel agent
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
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Low Cost Carriers (LCCs)
The penetration of Low Cost Carriers (LCCs) in Greece is still low (10%) compared to
Europe (16%) and are below the global penetration (12%). The annual growth was 2.4
percentage points, almost the same as the average in EU in the same period.
There are no local LCCs in Greece but Easyjet acquired GB Airways6 in October 2007,
expanding its coverage to Mykonos, Corfu, Iraklion and Rhodes. There is also a
governmental interest in luring low cost airlines to encourage Greeks to travel abroad
inexpensively and also to foster inbound tourism. A good example of this came in
November 2007 when the Greek Tourism Development Minister Aris Spiliotopoulos met
with Ryanair Deputy CEO Michael O’ Leary for talks on ways to attract Ryanair to the
Greek market.
Online
Today internet penetration in Greece reaches 34% and the number of Greek Internet
users has grown at a CAGR of 21% since 20007. Broadband penetration is also growing
fast as the cost per MPS (megabit per second) declines due to state policies designed to
improve the telecommunications infrastructure.
6 Franchise partner of British Airways Plc
7 Source: Internet World Stats
19%
16%
8%
12%
LOW COST CARRIERS MARKET SHARE BY REGION
July - December 2006
Source: OAG, Eurocontrol; Hermes’ analysis
In number of flights In number of seats
In USA
In Europe
In Asia & the Pacific
Globally
28%
23%
8%
16%
LCCs showed major penetration at a global level, having the highest level of participation in more
mature markets such as the USA and Europe
Chart 5
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
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Some 65% of travel agencies now have at least a web page, but these sites are used for
information purposes – not for online booking. Meanwhile, 23% of Greek travellers are
already buying on the internet8.
Greek travel agencies are slowly moving towards centralised call centres in order to
realise operational cost savings through economies of scale. By the end of 2006, most
sales were made by telephone.
The research found some agencies were considering the establishment of call centres to
improve productivity and enhance customer service. In addition, most of the agencies in
the study had plans to develop an online presence during 2008.
Travel agencies in Greece
The research covered two main segments, with a sub-segment
• Tour operators
All tour operators in the study handle outbound travel. They also typically work as
business travel agencies. On the tour operating side of their businesses, they primarily
prepare their own packages and sell them to other travel agencies as well as directly to
group or individual customers.
• Leisure agencies
Low entry barriers to open a travel agency result in a highly granulated leisure market
with small agencies (3 FTE´s on average) selling packages provided by the tour
operators.
• Business agencies
When looking at the travel agencies in Greece, it is important to note that business travel
agencies usually also transact leisure business, making them not exclusively business
agencies, but rather “mixed” agencies. They also include products with a higher margin
than air tickets such as incentive trips, which are trips that companies subsidize for their
employees. This has been taken into consideration during the analysis of the results. In
order to analyse and make the agencies comparable, non corporate sales were taken
out.
8 Observatory for the Greek information society
The research revealed
agencies in Greece
have high leverage in
corporate accounts
and some develop tour
operating and leisure
clients
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
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Results of the study
Activity-based costing
Average agency revenue structure
Revenues are presented in Euro per ticket. A ticket unit includes a combination of all
services provided by the travel agency and represents the average transaction per
customer. For example, apart from the air ticket, a ticket can include hotel bookings, car
rentals and insurance coverage among others. In the case of tour operators, the average
ticket is a package.
• Tour operators’ average sales9 per ticket (€556/ticket) are nearly 20% higher than
that of business travel agencies (€462/ticket) because of sales of packages, which
are usually more expensive than air tickets.
• Business travel agencies occasionally sell leisure or incentive packages, but they
rarely sell ground services outside those packages. Tour operators are selling
packages and ground services mainly, with higher profitability than air products. (See
chart 7).
9 Sales: total payment received of tour and travel services. Revenue: total income minus direct expenses, Gross margin: revenue/sales
10.8%
50.0
462.2
Tour operatorsBusiness
REVENUE ANALYSIS
2006, in €/ticket
Chart 6
12.2%
68.0
555.6Sales
Revenue*
Gross margin* (revenue/sales)
* Net commissions considered (total commissions – discounts)
Source: Hermes Management Consulting analysis
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
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• Revenue as a percentage of sales is high as a result of the participation of ground
services and packages with profitability at around 15%. Business agencies sell
incentive trips with low costs and high margins, resulting in an 11% revenue/income
ratio, one of the highest from all the studies
Airlines in Greece started commission cuts back in 2006. Travel agencies used to enjoy
full 9% commissions. Commissions were reduced to 6% (on average) and are expected
to continue falling, with industry experts forecasting zero commissions in approximately
four years.
As a consequence, the key challenge for travel agencies will be to maintain high net
margins (agency revenue/total passenger spending) in spite of the reduction of their
traditional revenue stream.
As shown in chart 8, commissions account for 71% of business travel agencies revenues
and achieved total revenue of 11% over gross sales in business agencies.
It was not easy initially for the public to accept the shift in practice (from commissions to
fees and mark-ups), but now Greek customers are starting to get used to paying service
fees - and are beginning to understand that travel agencies are offering more value than
just providing tickets.
39%
24%
7661
Revenue/Sales*Revenue/Sales*
64%
47%
36
53
BREAKDOWN OF INCOME AND TOTAL REVENUE BY SERVICE TYPE
* Simple average among sample** Includes hotels and cars, insurance, visa application and other
Source: Participating agencies; Hermes Management Consulting analysis
RevenueSales
2006, in percentages
(%)100%
Air
100%
RevenueSales
(%)100%
Air
100%
10.8% 12.2%
Packages and ground
services**
Chart 7
Business Tour Operator
15.5%
15.4%
7.3%
10.8%
Packages and ground
services**
8.2%
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
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Override/SLA*
74.6%81.0%
71.6%
46.7%
25.1%18.5%
12.0
14.3
4.0
21.1
8.8
7.014.1
49.3 53.8
72.7
25.4
0.0
Commissions
• Commissions still account for 71.6% of the gross margin
• The business model of travel agencies in Greece could soon be impacted by a reduction in airline
commissions, following the trend seen in other markets
REVENUE MIX FOR BUSINESS TRAVEL AGENCIES
2004/2006
100% 100%
Market trend
100% 100%
Chart 8
Fees and mark up
Revenue/income(%)
Latin America
UK Business
Saudi Arabia Business
Malaysia Scandinavia Business
7.0% 10.7%9.0% 7.7% 10.7%
100%
* Includes GDS incentives
Source: ABC Studies; Hermes Management Consulting analysis
Greecebusiness
10.8%
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
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Average agency cost structure
The following results were obtained by analysing the cost per ticket (see charts 9a, 9b).
• Greek business travel agencies, like their Scandinavian counterparts have the
highest cost per ticket. Administrative personnel costs as a percentage of total costs
are the highest in the sample, mainly due to less-advanced back office technology
development.
• The average spending on systems is one of the lowest and comparable with the least
developed countries
Business travel
agencies have a
lower cost per ticket
sold (€43.9/ticket)
than tour operators
(€65.1/ticket).
AVERAGE AGENCY COST STRUCTURE COMPARISON
2005-2006, business agencies, in €/ticket
100% =
Fixed
Other costs*
Variable
Infrastructure
Marketing
CommunicationsSystems
Personnel
* Includes bank expenses, professional services, travel expenses, office supplies, couriers and other
Source: ABC Studies; Hermes Management Consulting analysis
Administrative personnel costs/ total personnel
costs (%)
48%
69%59% 62%
11
10
11 9
4
158
1711
1
10
0
1
7
7943
4
69
2
21
43.0
Scan
16.7%37.2%
43.9
Poland
31.0%
Greece
22.9
Chart 9a
34.3
41.4%
Italy
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
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• Tour operators have higher costs per ticket sold compared to business agencies for
two reasons: because tour operators have a more complex set of products and
packages and business bookings are simpler (more focused on air tickets).
• Greek tour operators have higher cost per ticket than in Poland10
. The administrative
personnel cost over total personnel costs is also high, reflecting the limited
investment in the back office systems and other accounting processes.
• As mentioned before, spending on systems to support business and tour operators
are the lowest compared with other countries’ averages. Because of this low
investment in technology and lack of integration between front and back office
systems, tour operators have poor automation of processes and the procedures
needed to complete a sale are mostly manual.
10
Tour operators are compared with Poland which is the country where the study was conducted with a similar segment
Personnel costs in
Greece account for
41.4% and 32.8% of
business and tour
operators total costs
respectively.
30%
53%
22
19
1219
1
5
16
145
3
2
AVERAGE AGENCY COST STRUCTURE COMPARISON2005-2006, Tour operators, in €/ticket
100% =
Fixed
Other costs*
Variable
Infrastructure
Marketing
CommunicationsSystems
Personnel
* Includes bank expenses, professional services, travel expenses, office supplies, couriers and other
Source: ABC studies; Hermes Management Consulting analysis
Administrative personnel costs/ total personnel
costs (%)
Greece
32.8%
Poland
32.2%
65.137.0
Chart 9b
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
15
Cost distribution per activity The key results drawn from this analysis are presented in chart 10a for the business
segment and in chart 10b for tour operator segment
• “Core reservation processes” account for 41% of the total costs for business travel
agencies - and 35% of the total costs for tour operators, representing the most
significant expense in both. Tour operators have lower share of cost as a result of the
direct sales to agencies of their packages.
• Cost distribution in the "Core reservation” process varies between business and tour
operators. While business travel agencies allocate 17% to "Search proposal and
negotiation” and 13% to "Booking and sales", tour operators allocate 14% and 12%
respectively. Business agencies have multiple clients with different demands, while
tour operators service many clients with similar requests with a standardized offer
and make group bookings.
COST COMPARISON BY ACTIVITY
2004/2006 Activity based costing, in percentage of €/ticket
Technology
develop-
ment
Human
resources manage-
ment
Firm
infrastruc-
ture
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
Procu-rement
Source: Hermes Management Consulting analysis
Chart 10aMarketing-related activities
Core reservation process
Administration and support
11.4%
5.9%
12.2%
16.8%
30.9%
18.5%
12.6%
10.9%
13.8%
18.1%
8.6%
13.2%
12.9%
14.9%
13.1%1.8%
0.3%
1.8%
0.0%
13.6%
13.8%
13.8%
14.1% 7.4% 18.8% 16.6% 10.6%
4.3%
4.3%
7.1%
4.4%
1.0%
1.6%
2.3%
1.7%
5.1%
3.9%
13.7%
4.9%3.9%
2.1%
3.6%
2.5%
7.1%
43.9
34.3
22.9
43.0
Poland
Italy
Greece-
Scandinavia
• Invoice, collection and payment preparation accounts for a larger proportion of costs than all
other countries, due to the lack of efficient back office systems and integrated front-mid-back office systems
• Technology development has the lowest proportion in cost per ticket, showing lack of
automation and systems orientated management
• They also show the second largest proportion in firm infrastructure activities given their low
level of automation in back office activities
BUSINESS
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
16
Invoice and collection
costs in Greece are the
highest in all the studies,
due to duplicated tasks
and manual labor.
• Marketing and sales activities differ significantly between segments: 20% in business
agencies and 34% in tour operators. In the business agencies, marketing-related
activities are tied to the number of account and prospect managers, while tour
operators invest most of their marketing budget in advertising, promotion and trade
marketing. In Greece, interpersonal relationships are key due to the importance of
personal trust , rather than institutional trust.
• Business and tour operators in Greece generally do not generate client databases or
profiles, so they spend more time on the “Needs assessment” activities and run the
risk of losing their clients’ information when a travel agent leaves the company.
• With relation to “Invoice collection and payment preparation” activities, Greek
agencies register a significantly larger cost, mainly because travel agencies spend a
large proportion of their resources on manual and duplicated checking of the
invoices, the information between the provider, the sales operator and the back office
is not linked and differs in some occasions.
COST COMPARISON BY ACTIVITY
2006 Activity based costing, in percentage of €/ticket
Technology develop-
ment
Human resources
manage-ment
Firm
infrastruc-
ture
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
Procu-rement
Source: Hermes Management Consulting analysis
Chart 10bMarketing-related activities
Core reservation process
Administration and support
9.3% 13.9% 11.5% 13.7% 10.8%7.0%
3.8%
23.7%
32.7% 9.3% 15.2% 7.1% 6.9% 1.9%
3.2%
5.3%
2.0%2.5%
3.8%1.8%
2.3%
12.2%
65.1
33.3
Greece
Poland
• Tour operators in Greece allocate 5% less of resources to marketing related activities, because part of the advertising of their products is made by the smaller travel agencies working as an alternative
distribution channel
• Invoice, collection and payment preparation and Booking and sales account for a larger proportion
of costs than in Poland, due to the lack of efficient back office systems and integrated front-mid-back office systems and pre-trip documents preparation and delivery
• Procurement has lower proportion of total costs than in Poland, meaning that negotiations
focusing on price and conditions with suppliers is not still a key activity for Greek Tour Operators
TOUR OPERATOR
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
17
• "Execution and follow up" have similar proportion of total costs in business travel
agencies and in tour operators (5% vs. 4% respectively). Business agencies allocate
more resources to the execution in incentive trips. Tour operators do not dedicate
their own resources to execution activities but outsource these activities to third
parties in the destinations.
• Technology development is among the least important
activities, representing approximately 4% of total costs in
business agencies and 3% in tour operators. Compared
with other countries where this study was conducted,
Greek business travel agencies costs share is similar to
that of Latin America (4%), Malaysia (3%) and Saudi
Arabia (5%). This low figure in Greece is partly because
technology is used mainly for back office and accounting
applications. There is not much investment in Internet
applications or in management and performance tools.
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
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Profitability & productivity analysis
The key results drawn from this analysis are presented in Chart 11.
• Business agencies generate more tickets per Full Time Equivalent employee (FTE)
(1,065 tickets/FTE) than tour operators (733 tickets/FTE). Business agencies have
more automated processes and have email contact - instead of telephone – and thus
spend less time per client.
• Due to a lower productivity, tour operators have lower revenues per FTE than
business agencies although they show higher revenue per ticket than tour operators,
50€/ticket vs. 68 €/ticket respectively. (See chart 6)
• Average personnel cost per FTE is higher in Greece (aprox. 26.000 €/FTE/year) in
comparison with Poland (aprox 11.000 €/FTE/year) but much lower than in
Scandinavia (aprox. 49.000 €/FTE/year) and UK (aprox. 44.000 €/FTE/year).
• Due to a low level of automation in administrative activities, business travel agencies
and tour operators in Greece show a lower productivity in administrative personnel
than agencies in Europe.
EBIT/Total revenue
ANALYSIS OF PRODUCTIVITY AND PROFITABILITY OF GREEK TRAVEL AGENCIES
2006
Source: Hermes Management Consulting analysis
Chart 11
1,065
733
Business
Tour operator
492.0
407.1
53.2
49.8
26.3
25.4
(#)
Tickets/ FTE
(´000 €)
Gross Sales/FTE**
(´000 €)
Total revenue/ FTE
(´000 €)
Personnel cost/ FTE
(%)
12.2%
4.3%
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
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• Business agencies have higher EBIT over revenues (Earnings before interest and
taxes (13%) than tour operators (4%). This is mainly because:
o Incentive trips help business travel agencies to get a higher margin (11%)
than other European countries; Scandinavia (10%), Poland (9%).
o Tour operators pay 10% commission to small agencies acting as
distribution channel for them, selling their packages at the same price.
o Lower personnel costs due to higher productivity in business travel
agencies (1,065 tickets/FTE) compared with tour operators (733
tickets/FTE). Incentive trips are normally managed by one or two persons,
with average groups between 50 and 100 passengers, while packages are
sold on an individual basis.
o Lower marketing expenses. Packages need more marketing investment
than air tickets.
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
20
Main conclusions and recommendations
Chart 12 shows the different phases that travel agencies’ markets have experienced
worldwide. Greece is entering Phase 2 and leaving what can be called the ”traditional
environment” in which the main revenue sources of travel agencies are airline
commissions. In more developed countries, travel agencies have already moved to the
following phases and Greek travel agencies will need to manage the transition into the
Phase 2 which is described below:
In Phase 2, the reduction in commissions paid by airlines worldwide has forced travel
agencies to streamline their businesses in order to guarantee sustained and long-term
profitability. This can be achieved by shifting commission-based revenue models to
management and transaction-fee models. It can also happen by reducing costs through
concentration in fewer locations (using call centres), the automation of administrative
processes and the development of online sales tools.
INDUSTRY EVOLUTION AND EXPECTED TRENDS
Chart 12
Source: Hermes Management Consulting
• 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
Traditional
environment
Commi-
ssions
reductions
Industry
responseE-players
growth
Multiple selling
channels and
e-travel empowerment
Revenue
sources
Organisational
structure
Unique market
characteristics
facilitating
evolution
Stage
1 2 3
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
21
In Phase 3, efforts are made to accommodate changing shopping behaviour. The travel
industry appears to be veering towards a "do-it-yourself" concept by introducing Web
platforms and automatic self-booking tools. Airlines are especially aggressively in
pursuing the development of direct channel sales online, which makes them a fierce
competition for travel agencies. Travel agents are becoming consultants - as well as
fulfilment agents for do-it-yourself transactions and destination specialists. They are
increasingly moving towards the use of centralized call centres in order to realize
operational cost savings through economies of scale. Travel management companies
have also significantly reduced the number of implants in an effort to streamline their
businesses. Service-based pricing schemes as opposed to transaction-based pricing are
also gaining momentum among travel agencies and, in the near future, may become the
norm.
These changes in business practice mean that 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. Finding the best option to integrate
systems and automate processes will contribute to providing their customers with a
seamless booking experience. Clearly, there is an identifiable need for technology
providers to offer advice and guidance in technology procurement and the change
management process
Opportunities for the Greek market Specifically for the Greek market, many opportunities were discovered for travel agencies
to add value to their business through the timely deployment of new technology. They
include:
Greek travel agencies incur high administrative costs, especially in back-office activities
(invoicing, collection and payment preparation), which account for 18.1% of total costs for
business agencies, and 13.7% for tour operators
• Through the integration of mid and back office systems, agencies could automate
these administrative activities and thereby significantly reduce associated expenses.
State-of-the-art back office systems offer 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
performance (budgeting process, balanced scorecard, profitability goals per service, etc.).
• Travel agencies need to focus on sales origination, business processes, and
organisational Structure and Management Information Systems (MIS) among others.
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
22
The marketplace is getting more and more competitive and travel agencies need to
develop customer loyalty.
• In the business segment, travel agencies should consider the development of
automated web-based/extranet reporting solutions to generate reports for each
customer. This, together with online access to figures and statistics could increase
customer satisfaction and loyalty.
Costs associated with core reservation processes (which account for 41% of total costs
for business agencies, and 35% of total costs for tour operators) are among the lowest
registered in the Activity Base Costing studies.
• Travel agencies in Greece could further reduce costs by trialling and introducing mid
office systems, and by training travel consultants to better 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/cruise, etc.)
through a single front-office solution, the core reservation processes costs could be
further reduced. Keeping core reservation processes costs optimised will be key for
the travel agencies’ objective to grow their current business and sell ground services
outside packages.
For the most part customer relationship management (CRM) systems are not utilised by
Greek travel agencies to systematically track customer satisfaction and new customer
wins. Loyalty programmes and an integrated marketing approach are in general not
prevalent in this market.
• Through the introduction of CRM systems and the use of integrated profile
management applications, travel agencies could add significant value to their
business, growing in the number of new and repeated customers and increasing
customer satisfaction. Also, agencies will be able to track clients’ travel records in
order to proactively offer new travel services.
• The implementation of call centre solutions can help large Greek travel agencies to
enhance the productivity of the travel consultants by concentrating sales staff and
integrating the call centre system with all point of sales activities. It also assists in
identifying clients’ waiting time and answering time and analysing the answered calls
hit ratio.
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
23
• The implementation of innovative loyalty programmes - designed exclusively with a
given traveller profile in mind - will give travel agencies the competitive edge over
their competitors and other booking channels.
• Through integrated marketing, travel agencies can further strengthen the strong
bonds built during one-on-one marketing through effective PR, events and
advertising. In the future, online marketing will become more important and agencies
should try to gain a first mover status in this regard.
The Internet represents an opportunity for Greek travel agencies as Internet penetration
grows rapidly.
• The growing of the Internet penetration in Greece, currently at 33.5%, could show a
slow, but progressive penetration of online booking tools with reporting capabilities
and profile features which, in a price-sensitive environment, represent a unique
opportunity for agencies to introduce online booking tools.
• With Internet invoicing, costs can be reduced by using electronic invoices. The cost of
couriers and the time spent generating paper invoices could be reduced significantly
as Internet invoicing becomes more broadly adopted.
Tour operators don’t have distribution tools for their packages, so Web applications
should be developed and used to reduce costs.
• Most tour operators use email - or have telephone contacts - to distribute their
packages. Travel agencies can’t book directly and always contact the tour operator
for information. This represents a great opportunity to reduce time and costs through
Internet distribution.
Travel agencies in Greece can benefit from key learnings from elsewhere in the world,
thanks to independent studies like this, carried out in other countries.
• Especially for business agencies which still rely heavily on commissions, the
reduction in commissions paid by the airlines and the increase in competition will
force travel agencies to develop complicated mark-up schemes and administrative
processes to ensure revenue. This shift in revenue structure is key to guarantee
sustained, long-term profitability. This can also be accomplished by reducing costs
through concentration in fewer locations (more call centres) and the automation of
sales and administrative processes.
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
24
Appendix
Methodology
Hermes (a) carried out an overall market study, (b) selected travel agencies to participate
in the project together with Amadeus Hellas (Greece), and (c) conducted an activity-
based costing (ABC) analysis.
How was this done?
Initial, exhaustive analysis of activities in nine representative travel agencies in Greece
was carried out. The analysed agencies were mainly operating in Athens. 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
and incoming tour operators.
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.
The project included three steps:
1) Information request
A detailed and thorough questionnaire was sent to each agency, requesting
information related to revenue, breakdown of expenses, the company’s
organisational chart and points-of-sale, as well as IT, software and communication
equipment.
2) Process analysis
This step consisted of an in-depth assessment of travel agencies’ business
processes. Interviews with agency 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 and tour operators had somewhat similar business systems in terms
of their general activities (with small variations among agencies and segments). Tour
operators and business agencies differed somewhat in their business systems
because of the nature of their businesses and because of the differences between
the markets that they serve.
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
25
The processes were documented and analysed at two levels for each type of agency:
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 16).
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 12); 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 efficient and 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)
• Marketing and advertising:– Institutional– Products/
packages• Proactive
sales campaign:– Accounts– Services
• Reactive sales:– At offices– Inbound
calls– Email– 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 management
Technology management
Support
activities
EXAMPLES OF ACTIVITIES AND PROCESSES
Chart 12
Generic travel agency
Source: Hermes Management Consulting
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
26
• An activity-based costing in which traditional accounts were allocated to each activity
(Chart 13), taking into account the amount of resources (cost driver) used for each
and then allocated to tickets generated (issued). Data (revenue, costs, time dedicated
to each activity, space occupied by each department, and system costs – IT, phones,
etc.) was gathered using different sources of information (accounting reports,
interviews with managers and agents, etc.)
In the ABC study, costs were presented in €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 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 both standalone air tickets and air tickets within
packages; they rarely sell a hotel or car attached to air tickets. On average, business
travel agencies sold 47 ground services for each 100 air tickets.
Tour operators sell packages more often to their clients (61 packages for every 100 air
tickets). A package generally includes an air ticket, accommodation and some additional
services.
Personnel total
• Op. & Mrkt. personnel
• Administrative personnel
Communication costs
Systems
Infrastructure
Marketing
Other costs
Total
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 management
Technology management
STRUCTURE FOR THE ABC ANALYSIS RESULTSChart 13
Business travel agencies, in € per ticket
1 2 3 4 5 6 7
8
9
10
11
1 2 3 4 5 6 7 8 9 10 11
0.5
03
0.2
0.0.
0.0
0.0
0.1
0.0
0.8
1.9
1.3
0.5
0.1
0.0
0.3
3.1
0.6
6.1
3.4
3.0
0.4
0.2
0.0
0.8
0.0
0.5
5.0
5.2
5.1
0.0
0.3
0.0
1.1
0.0
0.8
7.4
Source: Hermes Management Consulting analysis
3.9
3.5
0.3
0.2
0.0
0.8
0.0
0.6
5.5
5.4
0.7
4.7
0.3
0.0
0.9
0.0
1.3
7.9
1.3
1.1
0.3
0.1
0.0
0.2
0.0
0.2
1.9
0.6
0.1
0.5
0.0
0.0
0.0
0.0
0.1
0.7
0.7
0.1
0.1
0.0
0.1
0.2
0.0
0.2
1.7
0.9
0.1
0.1
0.0
0.0
0.1
0.0
0.1
1.1
2.4
0.1
2.3
0.1
0.0
0.3
0.0
2.8
5.7
26.4
15.4
10.1
1.4
0.6
4.9
3.2
7.4
43.9
Understanding Travel Agency Cost Drivers
and Ways to Optimise Business in Greece
November 2007
27
About Hermes Management Consulting
Hermes Management Consulting (Hermes) is a Latin American consulting firm
specialising in strategy, organisation, 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, and have worked extensively for leading
companies in Europe and Latin America.
Hermes has been very active in sector analyses, company valuations, mergers, corporate
strategy and business plan development, as well as the identification and implementation
of 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
Hermes have extensive experience in these sectors, it has also helped assess a variety
of acquisition opportunities in numerous other industries.
Hermes has carried out strategy, organisation, operational improvements and valuation
projects, in Argentina, Brazil, Colombia, Costa Rica, Chile, Dominican Republic Ecuador,
France, Guatemala, Italy, Malaysia, Mexico, Paraguay, Peru, Poland, Saudi Arabia,
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