Amadeus-commissioned study identifies new growth opportunities for the Saudi travel sector

The study carried out by Hermes Management Consulting (Hermes) in the Kingdom of Saudi Arabia, cites reductions in airline commissions, rapid expansion, growth of low-cost carriers and a shift towards online distribution channels, as the key reasons for this change.

Hermes together with Amadeus Saudi Arabia classified the travel agencies according to their main business focus, i.e. leisure and business, and carried out an exhaustive analysis of activities based on a balanced mix of size, location, level of automation and main Global Distribution System (GDS) provider. Within the leisure segment, two types of travel agency were identified, cash driven and service driven travel agencies.

The key highlights of the study included:

• Commissions still account for 74.6% of the gross margin among the Saudi travel agencies. This finding has caused some debate of how the business model adopted by the agencies should evolve, in the face of a reduction in airline commissions, expected to drop from the current level of 7% to zero.

• Business travel agencies' average revenues per ticket are €343, which is nearly 27% higher than that of leisure travel agencies. This could be explained by the fact that business agencies sell more expensive international tickets and offer lower discounts than leisure agencies.

• The average cost of ticket in Saudi Arabia is the lowest among the countries studied. For leisure agencies, the cost of ticket is 17.3€, whereas for business agencies, the cost of ticket is 18.0€. This is due to high productivity and low personnel costs per Full Time Equivalent (FTE).

• In relation to productivity, business agencies generate more tickets per FTE (1,306 tickets/FTE) than leisure agencies (1,167 tickets/FTE).

• Profitability for business agencies in Saudi Arabia in terms of EBIT/total revenues is one of the highest when compared to other countries, and almost doubles that for leisure agencies (24.7% vs 11.9%). Leisure agencies have similar levels of profitability as the UK and Latin American leisure agencies.

• For business and leisure travel agents, marketing costs' share is lower in comparison with travel agencies in other countries. It was found that in Saudi Arabia, the most important and effective marketing channel is the word of mouth and relationship marketing, with minimal investment in other marketing channels such as TV, newspaper, magazines, among others.

"The study, which is the first-of-its-kind in Saudi Arabia or even in the rest of the Middle East, represents a new window of opportunity for travel agencies in the region. Its purpose was to understand the dynamics behind one of the biggest markets in the region. The whole exercise has been an eye-opener for us and we are pleased to share the results along with the recommendations on how travel agencies can more effectively tailor their IT strategy to better meet the needs of their customers," said Nashat M. Bukhari, General Manager for Amadeus Saudi Arabia.

Hermes Management Consulting Associate, Santiago Bugallo added, "of all the research that Hermes has completed with Amadeus, the Saudi study has been one of the most interesting and timely. With the probable move to zero commission, the massive investment in tourism and readiness and enthuasiam shown by travel agencies to embrace new technologies to stay ahead of the competition, this initiative should have enormous relevance for Saudi Arabia and the Middle East region."

According to this study, in order to effectively streamline their business and guarantee long-term sustainability, Saudi travel agencies should re-engineer their operations and can take the following steps to achieve that:

• Integrate all travel components through a single platform, and link their technology functionalities with employee incentives, helping to increase the rate of cross-selling.

• Integrate mid and back office systems to automate back-office activities, allowing for the reduction in manual errors leading to increased revenue.

• Implement service fee management solutions, which will support travel agencies in the transition from a commission-based revenue model to a management and transaction/service-fee based model.

• Implement Customer Relationship Management (CRM) to help travel agencies understand, store and track their travelers' profiles, design programmes to increase customer satisfaction and eventually carry out segmented marketing campaigns.

• Evaluate online booking tools and ensuring that travel agencies can harness the business resulting from the uptake of internet booking by Saudi travellers.Amadeus, a global leader in technology and distribution solutions for the travel and tourism industry.