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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.



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



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



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



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



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



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



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



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%



November 2007

12

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%



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



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



November 2007

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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


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



November 2007

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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


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



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.



November 2007

18

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


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%



November 2007

19

• 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.



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



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.



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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.



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.



November 2007

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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.



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


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



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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


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


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



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

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