(d) (i) Benefits
The proposed arrangement with Snooty Hotels offers accommodation that is
appropriate to the customer base (as it has been used previously) but this year is
offered at a significant discount
There is a cross branding facility whereby the luxury brand of Snooty Hotels is
linked with that of TT as an upmarket provider of leisure services.
Risks
The key risk is that the price reduction will not be sufficient to increase demand
from last year’s level of 1,000 room nights to 1,600 room nights. As a
consequence, TT will need to pay for the shortfall
At 1,600 room days at $200 the total cost is $320,000. At last year’s rate it would
be 1,000 room days at $300 per day which is $300,000. This may imply a
maximum probable exposure of $20,000. However, with declining sales volumes, it
would be wrong to assume that last year’s sales volumes could be sustained. The
risk exposure could therefore be far greater than $20,000.
(ii) Managing the risks
SHC operates in a number of cities and resorts. If TT has in the past recommended
alternative accommodation in these locations then it may be advisable to push customers
towards SHC instead. This would ensure that the minimum target was achieved, and thus
no penalties would arise.
More generally, given the potential exposure to low demand, TT could attempt to persuade
customers to take trips to these locations instead of other locations.
If closer to the departure date there were excess rooms with SHC then they could be sold
off down to cost price of $200. Indeed, ultimately even a price below $200 at the last few
days would yield some contribution rather than TT pay the full guaranteed price. |
