Understanding Travel Agency Cost Drivers
and Ways to Optimize Business
in Argentina and Mexico
Hermes Management Consulting T: +54 11 4393 2019 www.hermesmc.com.ar

A White Paper by Hermes Management Consulting
April 2005
Understanding Travel Agency Cost Drivers and
Ways to Optimize Business in Argentina and Mexico
Abstract
This white paper summarizes the research conducted by Hermes Management Consulting
(Hermes) in Argentina and Mexico in order (a) to better understand Latin American travel
agencies’ cost drivers and (b) to evaluate ways to optimize the travel agency business. As
well as communicating the results of the research, this paper describes the methodology
used.
Introduction
Although the Global Distribution Systems (GDSs) can help with almost all services a travel
Travel agencies in
agency offers, in Latin America this aspect of a GDS is not yet fully understood, and a
Latin America usually
GDS is therefore considered indispensable only for air ticket sales.
do not take advantage
of the full GDS
An added challenge to the travel agency business model is the ever decreasing
potential
commission payment from airlines.
In this context, Hermes - in partnership with Amadeus, the leading technology provider in
the travel industry - conducted a research project (a) to understand travel agencies’
operational cost structure
better and (b) to quantify
Exhibit 1
how Amadeus solutions OBJECTIVES OF THE PROJECT
can add value to their Objectives Phases Deliverables
business in terms of time • Activity-based costing report for each
Identify opportunities • Phase 1: market segment
and money. • A report describing the adjustments
to add value to travel Activity-Based
for intra-segment variations (e.g.:
Costing
agencies
country and volume)
In order to identify
• Added value (processing time, cost,
opportunities to add value revenues, etc.) for each
Measure the value measurement scenario
• Phase 2:
generated by • A report describing the adjustments
to different types of travel Measuring added for intra-segment variations (e.g.:
selected Amadeus value country and volume)
solutions • Measurement methodology in a form
agencies in Argentina and of a working procedure
Mexico, a two-phase
process was implemented (Exhibit 1).
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To identify value gain Phase 1
opportunities for travel In Phase 1 Hermes (a) studied the market generally, then (b) selected travel agencies that
agencies, an activity- would participate in the study, and (c) carried out an activity-based costing (ABC) analysis.
based costing was
How was this done?
carried out (phase 1),
It was done through an exhaustive analysis of activities in fourteen representative travel
followed by
agencies in Argentina and Mexico. According to their business orientation and sales levels
measurements of the
per activity area, these agencies were classified as Business Large, Business Medium, and
processing time saved
Leisure.
by employing Amadeus
Hermes then prepared an activity-based costing report for each market segment and also
solutions (phase 2)
a report describing the adjustments needed for intra-segment variations (e.g. country and
volume).
This evaluation allowed a comprehensive analysis of the cost per travel agency activity
and, at the same time, provided an interesting measurement of each travel agency’s
efficiency rating compared to the market in which it operates.
Phase 2
Phase 2 consisted of measuring the time needed to perform some of the same tasks
using selected Amadeus solutions.
The outcome of this investigation was (a) the measured value added (mainly processing
time but also costs, increased revenues, etc.) for each measurement scenario, (b) a report
for each scenario in each travel agency, (c) a measurement methodology in the form of a
working procedure and (d) a comparison of the most and the least efficient agencies.
Project methodology
Phase 1 used three steps:
Phase 1
consisted in 1) Information request
1. Questionnaire A detailed and thorough questionnaire was sent to each agency, requesting
2. Process analysis
information regarding revenue, breakdown of expenses, the company’s organization
3. Cost allocation
chart, points of sale, IT and software as well as communication equipment.
2) Process analysis
This step consisted of a thorough assessment of the business processes in order to
understand them in-depth. Interviews with agency employees were carried out to help
understand the main activities performed within each agency and to identify the
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resources used in each activity. During this research, we found that business and
leisure agencies differ somewhat in their business systems. Based on this information,
processes were mapped
Exhibit 2
for both types of agencies EXAMPLE OF ACTIVITIES AND PROCESSES
at three different levels. Business Agencies
Reporting, planning and monitoring
Level 1 presents a Search, Invoice,
Sales Needs Booking and Execution
proposal and collection
origination assessment sales and follow up
negotiation and payment
description of the main
processes of the agency Leisure Agencies
(Exhibit 2), Level 2 breaks Reporting, planning and monitoring
these processes down Product and Search, Invoice,
Sales Needs Booking and Execution
package proposal and collection
origination assessment sales and follow up
development negotiation and payment
into subprocesses. Finally,
Level 3 consists of a
detailed description of the activities performed within each subprocess, using flow
charts. The latter was initially disregarded since, at this level, there were wide
variations among agencies.
3) Cost allocation
ABC methodology was used in order to determine the cost of each activity during the
process, to identify cost reduction opportunities and, finally, to establish the
differences between the most and the least efficient agencies.
Costs were allocated
both in the traditional Two cost allocation exercises were performed:
way and by activity A traditional one with a generic division across all the accounts (such as Operating
Personnel, Administrative Personnel, Communication, Systems, Infrastructure,
Marketing and Other).
Activity-based
Exhibit 3
costing, where PRESENTATION OF THE STRUCTURE OF ABC RESULTS
(using disguised figures)
the traditional Leisure agencies
accounts were Reporting, planning and monitoring 8
Product and Search, Invoice,
Sales Needs Booking and Execution
allocated to each package proposal and collection
origination assessment sales and follow up
development negotiation and payment
1 2 3 4 5 6 7
activity (Exhibit 3). Product and Search, Invoice, Reporting,
package Sales Needs proposal and Booking and collection and Execution and planning and
TOTAL
This allocation
development origination Assessment negotiation sales payment follow up monitoring
1 2 3 4 5 6 7 8
Personnel total 0.1 1.3 1.2 2.0 1.9 2.0 0.6 0.8 9.9
considered the Operations & Marketing 0.1 1.0 1.1 1.7 1.7 1.8 0.4 0.2 8.0
amount of Administration 0.0 0.3 0.1 0.3 0.2 0.2 0.2 0.6 1.9
0.1
Communication 0.0 0.1 0.0 0.1 0.1 0.0 0.0 0.4
resources (cost Systems 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0 0.2
drivers) used for Infrastructure 0.0 0.1 0.1 0.3 0.1 0.2 0.0 0.0 0.7
Marketing 0.0 0.6 0.0 0.0 0.0 0.0 0.0 0.0 0.6
each activity. With Other 0.0 0.3 0.2 0.3 0.2 1.0 0.0 0.2 2.2
TOTAL 0.1 2.4 1.5 2.8 2.4 3.3 0.6 1.0 14.1
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these cost drivers the costs were traced to activities. Then the activities were
assigned to tickets. This exercise was performed by first gathering information
(revenues, costs, time dedicated to each activity, space, systems) using different
sources of information (accounting reports, interviews with managers and agents,
time measurements, etc.).
In Phase 2, the value added by Amadeus solutions to the travel agencies was determined.
Travel requests/scenarios’ processing time was measured with travel professionals in
In order to determine
Argentina and Mexico; for each Amadeus solution used (Amadeus solutions were
the value added by
supplied and implemented wherever they were not previously available), specific travel
Amadeus solutions, time
scenarios were created, and the travel agents were trained in the use of Amadeus
measurements were
solutions. Exhibit 4
taken in Argentina
SOLUTION 2 MEASUREMENT – CAR IN VISTA (GUI) VS. NON-GDS
In minutes
and Mexico EXAMPLE
Then the processing time of Complex travel requests
Car in Vista (GUI) Non-GDS Difference
each solution was compared
(56%)
Travel request 1
against the processing time 3.5 7.9 4.4
(83%)
Travel request 2 4.5 25.5 21.1
of existing competing
Travel request 3 (57%)
4.6 10.6 6.1
alternatives. As a result, Travel request 4 (84%)
3.4 21.9 18.5
productivity increase and 16.5 12.5
cost reduction were 4.0
(76%)
Average
measured following a strict • Without using a GDS, car bookings require 76% more time
• When the customer asks for the cheapest car rental (travel requests 2 & 4) Vista
scientific approach (Exhibit generates the highest time savings (19.8 minutes on average)
• Cheapest car rental bookings require phone calls to each company in the non-GDS
scenario
4). These measurements are
now part of the Amadeus “Show Me The Value” database and are the quantitative
expression of the value proposition of Amadeus solutions.
Results
In synthesis, the most important results derived from the Activity-Based Costing in phase
1 were the following (Exhibit 5).
Average agency cost
Exhibit 5
structure COMPARISON BETWEEN MEXICO AND ARGENTINA
Cost per activity - In US$/ticket
The average cost per
Search,
ticket sold is US$ Product and Invoice, Execution Reporting,
Sales Needs proposal Booking and
package collection and follow planning and
origination assessment and sales
development and payment up monitoring
negotiation
35.50 in Argentina,
and US$ 50.70 in
35.5
Argentina 1.2 17.0 10.4 18.1 16.9 23.6 5.8 7.1
Mexico. In Argentina,
personnel accounts
Mexico 2.7 12.0 7.8 26.1 16.4 27.2 3.1 4.8 50.7
for 70% of the total
cost and in Mexico 100% =
for 58%. • Agencies in Argentina spend more resources in “Sales origination”, “Execution
and follow up” and “Reporting, planning and monitoring” than agencies in Mexico
• Mexican agencies dedicate more resources to “Search, proposal and negotiation”
and “Invoice, collection and payment” than Argentine agencies
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Communication costs are not significant since they have been gradually reduced
during the last years through increasing use of e-mail, internet, etc.
Differences in cost structure per country
Even though in Mexico the cost per employee is 35% higher than in Argentina, it
is lower relative to the total cost structure, because infrastructure, marketing,
communication and system expenses are much higher.
Cost distribution per activity
“Invoice, collection and payment” is by far the most personnel cost-intensive
activity.
“Search, proposal and negotiation” and “Booking and sales” come next.
Mexican agencies dedicate more resources to “Search, proposal and negotiation”
and “Invoice, collection and payment” than agencies in Argentina, while the latter
spend more resources on “Sales origination”, “Execution and follow up” and
“Reporting, planning and monitoring”.
In almost all cases, these costs could be reduced by increasing the use of Amadeus
solutions, especially in ground services. In fact, agencies that make intensive use of
GDSs and Enterprise Resource Planning (ERP) are more efficient, especially in
performing these activities.
Profitability analysis
Argentine agencies are more profitable than Mexican agencies, mainly due to the
reduction in airline commission payments and higher operating costs in the
Mexican market. This trend will reach Argentina in the near future.
The gradual reduction in commission payments clearly forces travel agencies to
streamline their businesses in order to guarantee their continued profitability; and
cost reductions can be obtained through optimizing and automating administrative
processes.
In addition to the already identified issues, like market pressure and country-
specific cost structure, many opportunities for adding value to travel agencies were
found. Indeed, GDSs can add considerable value with products and services. Areas
where Amadeus solutions could make a considerable difference:
- ground services
- training travel agency personnel
- back office
- consulting services on sales origination, business processes, organizational
structure, Management Information System (MIS), etc
- travel packages and groups
- help desk service
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The most important conclusion to be drawn from the time measurements in phase 2 is
Agencies are
the fact that Amadeus solutions
increasingly forced to Exhibit 6
are more efficient than existing SUMMARY OF MEASUREMENTS AND VALUE ADDED
streamline their ESTIMATIONS
competing alternatives:
businesses, especially
Normally complex car and Solution Country Base case time Time savings
(Min.) (Min.)
the high personnel-cost
hotel bookings show the Hotel Argentina 61%
10.7 6.5
activities highest time savings. We 61%
6.5
10.7
Hotel Mexico
measured around 12.5 38%
Travel Choice 1.9
5.0
Mexico
Cryptic Travel 31%
1.5
Mexico 4.9
minutes saved per car Choice
6%
0.3
Vista Functions Mexico 4.1
booking and 6.5 minutes 76%
12.5
Car Mexico 16.5
per hotel booking. 76%
12.5
Car Argentina 16.5
Amadeus solutions are
Especially in the car rental
more efficient than
area, searching for best offers requires long processing times because companies
existing competing
have to be contacted one at a time by phone. When making hotel bookings, point
alternatives
of reference selections and facilities research are particularly time consuming and
cost more money without the help of a GDS.
Although car reservations show the highest time savings (12.5 minutes), the value
added by a GDS is in fact not as important (US$ 249 – 769 per year) due to the
low share of car bookings in the agencies’ total business in those markets (0.3% in
Argentina and 0.6% in Mexico).
Hotel bookings with a time saving of only 6.5 minutes per transaction show
nevertheless the highest value (US$ 1,944 – 11,360 per year) due to a higher share
in hotel bookings overall in both markets (13.0% in Argentina and 4.7% in
Mexico).
Traveler Profile Management makes a significant impact (US$ 2,986 – 5,593 per
year) because it applies to air, car and hotel bookings.
Air in Amadeus Vista, the Amadeus universal browser-based point of sale platform,
adds seemingly minor value (US$ 406 – 760 per year) because agents already use
GDSs for airbooking and have simply upgraded.
A travel agency can earn up to US$ 27,000 in additional EBIT (Earnings Before Interests
and Taxes) per year with Amadeus solutions. The calculation of a potential EBIT increase is
simple: more bookings with less resources = less cost per booking.
Obviously this means that the increase in productivity can also be expressed in terms of
cost reduction. Depending on the solution, a travel agency can save from US$ 800 -
11,500 per scenario on a yearly basis (these cost savings are calculated by adding the
savings in personnel, infrastructure and communication costs).
In addition, a clear improvement in customer service levels was noted since the average
response time could be significantly reduced.
Note: figures are based on the agencies tested, and the results will change depending on the profile /
activities / size of the travel agency.
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About Hermes Management Consulting
Hermes Management Consulting (Hermes) is a Latin American management consulting
firm specialized in strategy, organization, operations and valuation studies. Hermes was
founded in late 1994 by Osvaldo Gallo and Hernán Goyanes. Both founders are former
senior members of McKinsey & Company, having worked extensively for leading
companies in Europe and Latin America.
Hermes has been very active in sector analyses, company valuations, mergers,
development of corporate strategy and business plans, and identification and
implementation of operating improvements. These projects have focused on payment
systems, supermarket, retail, consumer goods, health care, energy, logistics, apparel,
telecommunications, tourism, entertainment and real estate sectors. Not only has Hermes
developed a wide experience in those industries but also has helped assess a great variety
of acquisition opportunities in numerous other sectors.
Hermes has performed strategy, organization, operating improvement and valuation
projects in Argentina, Brazil, Colombia, Costa Rica, Chile, Dominican Republic, Ecuador,
France, Guatemala, Mexico, Paraguay, Peru, Spain, United States, Uruguay and Venezuela.
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