(b) Evaluation of performance in the context of the industry
TT Performance
TT is trading in difficult market conditions, hence the decline in performance must be judged
against this background. In common with many industries, companies operating in upmarket
sectors are suffering more than those in mid-market and downmarket sectors as people ‘trade
down’ in the recession.
The market demand for the services of travel agents is a derived demand from the market
demand for holidays/tours. Performance can therefore be explained, in part, by the changes in
market demand for holidays/tours.
The industry data provided indicates that there was a modest decline of 1% to 2% in the value of
trips in both 2008 and 2009. The number of trips shows a more severe decline of 5% in 2008,
although the 2009 fall of 1.7% is broadly in line with the fall in value. The discrepancy between the
fall in value and volume in 2008 is explained by the increase in the value per trip from $532 to
$549 (3.2%).
By contrast, the data for TT indicates that there was a more substantial decline of 6.6% in 2008
and 7.1% in the value of trips in 2008 and 2009 respectively. This may indicate that TT has
performed poorly in attracting new customers compared to the industry average or it may indicate
that the upmarket sector is performing poorly as a whole by comparison to the industry. A more
valid comparison might be how well TT is performing relative to upmarket competitors (ie in the
same sector of the travel market).
For any given level of demand for holidays, travel agents face competition, not only from each
other, but also from direct on-line bookings between the consumer and the tour operator. In a
recession, when market conditions are difficult, the level of competition is likely to be more severe
and this may take the form of price competition, putting pressure on travel agents’ commission
levels.
In terms of the industry, % commissions have fallen from 12% to 11% then to 10% over the period
2007-2009. This means there have been reductions of around 10% in each year in commission,
which amplifies the fall in volumes of trade already considered.
The percentage commissions (i.e. commissions to trip value) of TT were lower than the industry
average at the start of the period and they have maintained this gap, falling broadly in line, from
10% down to 8% over the same period. The lower level of the commissions to value % is likely to
be due to the fact that the value per trip for TT is far greater than the industry average. Thus, for
instance, the average value per trip in 2007 was $3,000 for TT compared to the industry average
of $532 (ie 5.6 times greater). The commission per trip booked is therefore far larger for TT than
the industry average, despite the lower commission to value %.
Nevertheless, the significant fall in volumes, combined with the reduction in % commission rates,
has caused a very severe reduction in the overall absolute value of commission income for TT.
Overall commissions from holiday sales have fallen from $9 million in 2007 to $6.24 million in
2009 – a 30.7% reduction in primary income in two years.
Two areas where there is a better performance are “Outlet21” and sundry commissions. Outlet21
has a flat level of performance of $3 million each year. This means it has not suffered from the
recession. More detail is need on commission rates and volumes, but if these have changed the
changes have compensated each other. Whilst performance in these conditions can therefore be
regarded as good, and has a stabilising effect on overall revenue, there is a risk that such a high
proportion of income now comes from one source (at $3 million it is almost half of the core
commissions on holidays of $6.24 million generated by the other 20 outlets).
Sundry commissions have performed very well with a 10% increase in 2008 to $1.1 million and
maintaining revenues at this higher level in 2009. The performance has been all the more
creditable as it has been achieved against a reducing volume of trips on the core business. Thus,
for instance, in 2008 the number of trips fell by 10% and sundry commissions rose by 10%, so the
sundry commissions per trip increased by 22%.
Overall the table below shows that revenue has fallen by 10.3% in 2008 and 11.3% in 2009. Them
sundry commissions and outlet21 have reduced the effect of the reduction in core commissions
but dependency on these areas in future is uncertain as they depend on the core business to
generated customers for sundry commissions and to enhance reputation.
Thus the poor performance in terms of revenues may be due to market conditions, in whole or in
part, but in assessing the performance of the business, as opposed to the performance of the
managers of the business, there has been a very severe reduction in trade and a poor
performance.
Additional key information required
Details of performance of rival companies in the same sector as a benchmark
Breakdown of performance for each brand
Detailed analysis of costs. Given that all the 20 outlets have high fixed costs and are
maintained in operation, then the impact of a downturn on profit is likely to be much more
severe than that on revenue as operating gearing is high.
Breakdown between sectors (e.g. business and leisure)
Industry projections
