Understanding ethnic travel agencies cost drivers and business optimization opportunities in North America

Understanding ethnic travel agencies cost drivers and business optimization opportunities in North America April 2011 1

Index Abstract...3 Research methodology...3 Introduction...4 General market overview...4 Ethnicity in North America...5 Airlines...10 The ethnic travel agencies...11 Overview of participants...13 Results of the study...16 Average revenue structure for an ethnic retail agency...16 Average revenue structure for an ethnic agency with consolidator characteristics...18 Average agency cost structure...19 Traditional costing analysis Ethnic retail agencies...19 Traditional costing analysis Ethnic agencies with consolidator characteristics...20 Activity based costing (ABC) analysis Ethnic retail agencies...21 Marketing-related activities...22 Core reservation process activities...23 Administration and support activities...24 Activity based costing (ABC) analysis Ethnic agencies with consolidator characteristics...24 Fare management activities...26 Sales activities...27 Back-office and support activities...28 Profitability and productivity analysis...29 Main conclusions and recommendations...32 Ethnic retail agencies...32 Revenue diversification...32 Cost control...33 Ethnic agencies with consolidator characteristics...34 Revenue diversification...35 Cost control...36 Appendix...38 Methodology...38 About Hermes Management Consulting...40 2

Understanding ethnic travel agencies cost drivers and business optimization opportunities This White Paper reviews the results of the independent research study of ethnic agencies conducted in 2010 by Hermes Management Consulting (Hermes) in the United States and Canada. The financial data used in the study is from 2009. The aim of the study is to: Better understand ethnic travel agencies Analyze ethnic travel agencies business models, processes, cost drivers and productivity levels Identify opportunities to add value and optimize business The purpose of this paper is to communicate the results of the research, and offer recommendations on how ethnic travel agencies can improve their margins and better meet the needs of their customers. Research methodology The project includes a market overview, a sample selection of ethnic travel agencies and an Activity-Based Costing (ABC) analysis. Activity-Based Costing (ABC) is used to identify, describe and assign costs, and to report on agency operations. Since ABC costing allows you to determine the true cost of a product or service, it is more effective at identifying opportunities to improve business processes than traditional accounting. ABC principles are used: (1) to focus management attention on the total cost of producing a product or service, and (2) as the basis for full cost recovery. In order to identify the main cost drivers of the travel agencies, the project includes an exhaustive revision of the financial data and a deep analysis of the business processes of the participating travel agencies. A detailed explanation of the research methodology is provided in the appendix. 3

Introduction General market overview The world tourism market grew 12.1% per annum between 2003 and 2008, declining by 9.7% in 2009 as a result of the world economic crisis. Total income generated by tourism accounted for $852 billion in 2009 (US dollars; all subsequent references are to US currency). Growth until 2008 was driven by a 5.9% increase per annum on average spending per tourist in $ (partially fueled by the depreciation of the American dollar against other currencies), and by the growth in tourist arrivals of 7.4% per annum. In 2009, the dual effect of fewer tourists and lower consumption per tourist led to the 9.7% decrease in the market (see Chart 1). Chart 1 WORLD TOURISM MARKET EVOLUTION 2003-2009 Income* (US$ Bn) CAGR**: 12.1% -9.7% 857 944 852 745 633 676 533 '03 '04 '05 '06 '07 '08 '09 x Tourist arrivals (MM) CAGR: 7.4% -4.6% 694 764 802 853 904 922 880 '03 '04 '05 '06 '07 '08 '09 Income per tourist (US$) CAGR: 5.9% -5.5% 768 828 843 873 948 1,024 968 '03 '04 '05 '06 '07 '08 '09 * Includes visitor expenditures on accommodation, food, drink, local transport, entertainment, shopping, etc. ** CAGR: Compound annual growth rate Source: World Tourism Organization; Hermes analysis The US accounts for 19.4% of international tourism income and 15.9% of total international arrivals. Its income per tourist accounts for $1,183, 22% above the world average of $968 (see Chart 2). 4

Chart 2 WORLD TOURISM BREAKDOWN BY REGION 2009 by destination Income per tourist (US$/tourist) 100% = Other* America 852 880 8.4 11.2 19.4 15.9 723 968 1,183 Asia-Pacific 23.8 20.6 1,121 Europe 48.4% 52.3% 897 Income (U$S Bn) * Includes Africa and Middle East Source: World Tourism Organization; Hermes analysis Tourist arrivals (MM) In terms of income, the US is the top destination of world tourism with 11.1% of the total income. Its average income per tourist of $1,716 is 77% above the world average. The US is also the second country in terms of international expenditure, with 8.6% of the total world expenditure. Ethnicity in North America We define an ethnic retail traveler as an individual who is part of a particular ethnic group traveling home to visit family or friends. Ethnicity is considered to be a characteristic of an individual who has a background or cultural affiliation. Someone who is considered ethnic was not necessarily born outside of the country he lives in; this person is merely identified with a group. In this overview, individuals of interest are those who are considered ethnic and foreign-born. There are more than 38 million foreignborn individuals living in the United States, making up nearly 13% of the total population There are more than 38 million foreign-born individuals living in the United States, comprising nearly 13% of the total population. Foreign-born share is approaching levels reached at the beginning of the 20th century (see Chart 3), recovering after the Great Depression and the two World Wars saw a decline in immigration (which, together with the mid-20th century baby boom, decreased the foreign-born share to a historical minimum). 5

Chart 3 EVOLUTION OF FOREIGN-BORN POPULATION IN THE US Number of foreign born, in millions % of total population 15% 14% 15% 13% 14% 13% 10% 13% 12% 9% 7% 5% 5% 6% 13% 11% 38 8% 31 20 2 4 6 7 9 10 14 14 14 12 10 10 10 14 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2008 Source: U.S. Census Bureau; Hermes Analysis Following amendments to the Immigration Act in 1965 (the national origins quota system was abolished), new waves of immigrants began arriving in the United States, mainly from Latin America and Asia. Immigrants from these regions account for 81% of the foreign-born population, with a share significantly higher than that of Europe and North America (see Chart 4). Chart 4 EVOLUTION OF FOREIGN-BORN POPULATION IN THE US BY ORIGIN In millions of people 100% = Other Asia Latin America Northern America 9.7 9.6 14.1 19.8 30.7 38.1 1 1 2 3 3 5 4 9 9 19 26 26 10 19 27 9 33 Europe 75 62 7 39 44 4 23 52 54 3 2 16 13 1960 1970 1980 1990 2000 2007 Source: U.S. Census Bureau; Hermes Analysis 6

Latin American immigrants account for 54% of the foreign-born population in the US, Mexico being the main country of origin (58% of the Latin American foreign-born population in the US). As shown in Chart 5, people migrating from Asian countries account for 27%, with China, the Philippines and India accounting for 51% of the total Asian foreign-born population in the US. Latin American immigrants account for 54% of the foreign-born population in the US, while people coming from Asian countries account for 27% Chart 5 FOREIGN-BORN POPULATION IN THE US BY COUNTRY OF ORIGIN 2007, in millions of people North America Africa and Oceania Europe 100%= 38.1 Asia 3 4 13 27 Japan Taiwan Korea Other Pakistan Iran 3 33 4 10 Vietnam 100% = 10.1 16 19% 11 15 17 India China Philippines 100% = 20.4 Latin America 54% Other Colombia Guatemala 3 3 4 5 Dominican Republic El Salvador Cuba 22 5 58% Mexico Source: U.S. Census Bureau; Hermes Analysis New York, Los Angeles, Miami, Chicago, San Francisco, Houston, Dallas and Washington, all located in the 15 most populous US metropolitan areas, are also the cities with the highest foreign-born populations, accounting for almost 50% of the total foreign-born population in the US. As shown in Chart 6, New York, Los Angeles, Miami, San Francisco and Houston all show foreign-born population shares above 20%. 7

Chart 6 METROPOLITAN AREAS WITH HIGHER FOREIGN-BORN POPULATION IN THE US 2007 Foreign-born population Million people (% of total) % of total population (%) New York 5.3 (14%) 28% Los Angeles 4.5 (12%) 35% Miami 2.0 (5%) 37% Chicago San Francisco 1.7 1.2 (4%) (3%) 48% 18% 30% Houston 1.2 (3%) 21% Dallas 1.1 (3%) 18% Washington 1.1 (3%) 21% Riverside 0.9 (2%) 22% Phoenix 0.7 (2%) 18% Source: U.S. Census Bureau; Hermes Analysis Many of the metropolitan areas with the fastest and most recent gains in their foreignborn populations are clustered in the Southeast, a relatively new immigrant destination. Some of these new destinations have high growth rates partly because they started out the decade with small foreign-born populations. However, other new destination areas such as Nashville, Indianapolis, Las Vegas and Orlando, with more than 80,000 foreignborn people, have attracted immigrants in great numbers recently. Chart 7 shows the foreign-born population distribution by state in 2007. Chart 7 FOREIGN-BORN POPULATION BY STATE IN THE US 2007 US average: 12.6% Fewer than 100,000 immigrants 2.5%-6.1% 6.2%-12.6% 12.7%-17.3% 17.4%-27.4% More than one third of immigrants are recent (after 1999) arrivals Source: U.S. Census Bureau; Hermes Analysis 8

Regarding Canada, it is one of the countries with the highest per capita net immigration in the world. There are about 5.4 million foreign-born individuals living in Canada, accounting for 16% of the total population. Immigrants from the UK, China, India, Philippines, Italy and the US account for 43.2% of the total foreign-born population (see Chart 8). However, while European foreign-born share is declining, the Asian share is growing rapidly, showing that recent immigrants come mainly from countries such as China, India and Philippines. Newcomers mostly settle in major metropolitan areas such as Toronto, Vancouver and Montreal. Toronto accounts for 43% of the total foreign-born population in Canada and this represents 46% of its own population. Vancouver and Montreal account for 15.4% and 13.7% of the country s foreign-born population, respectively. In Vancouver 40% of the population is foreign-born, while in Montreal this share is 21%. Chart 8 FOREIGN BORN POPULATION IN CANADA BY COUNTRY OF ORIGIN AND METROPOLITAN AREA OF RESIDENCE % of population of that area By country of origin (2006) By metropolitan area of residence (2009) Rest 100% 100% UK 10.7% 8.6 China Rest 7% 27.9 Toronto 8.2 India 43.0% 46% 56.8 5.5 4.6 5.6 USA Italy Philippines Montreal 21% 13.7 15.4 Vancouver 40% Source: Census of Canada; Hermes analysis 9

Airlines After 9/11, the total number of passenger boardings grew steadily by 3.1% per annum in the US (see Chart 9), with the international market growing faster than the domestic one (5.8% vs. 2.8%). The recent world crisis negatively affected passenger boardings by 6.0% (2008-2009), with a reduction of 9.7% in the international market. Chart 9 EVOLUTION OF PASSENGER BOARDINGS IN THE US - BREAKDOWN BY DESTINATION In millions International 621.5 10.9 656.7 10.5 714.0 11.1 747.2 11.5 750.8 12.0 776.0 12.1 749.1 12.7 703.9 12.2 CAGR 02-08 CAGR 08-09 (%) (%) 3.1% -6.0% 5.8% -9.7% Domestic 89.1% 89.5% 88.9% 88.5% 88.0% 87.9% 87.3% 87.8% 2.8% -5.5% 2002 2003 2004 2005 2006 2007 2008 2009 Top 6 carriers (American, United, Continental, Delta, Northwest and US Airways) account for 80.3% of the total US market Source: Bureau of Transportation Statistics; Hermes analysis As shown in Chart 10, top 6 carriers (American, United, Continental, Delta, Northwest and US Airways) account for 80.3% of the total US market for international boardings. Chart 10 EVOLUTION OF INTERNATIONAL PASSENGER BOARDINGS IN THE US BREAKDOWN BY CARRIER In millions Other US Airways Northwest Delta Continental United 89.9 24.2 5.1 10.8 11.3 12.2 13.4 94.1 94.9 25.1 23.4 5.3 6.6 10.5 10.9 12.1 13.0 12.6 13.1 12.7 12.0 CAGR '06-'09 (%) 85.8-1.5% 19.7-2.9% 7.5 12.1% 9.7-5% 14.1 6.1% 14.0 3.1% 12.2-4.6% American 23.8% 23.0% 22.4% 22.8% -2.9% 2006 2007 2008 2009 Source: Bureau of Transportation Statistics; Hermes analysis 10

US airlines have increased the load factor in domestic flights, even after the 2008 crisis, and today it is 10 percentage points higher than in 2000, at 81%. The load factor for international flights has increased from 75% to 77% during the last 10 years in the US. In Canada, the total number of passenger boardings grew steadily by 5.6% between 2002 and 2008. The international crisis resulted in a reduction of 4.6% in passenger boardings between 2008 and 2009. Air Canada and Westjet are the major carriers. Regarding international travel, Air Canada accounts for 39% of the total international capacity to and from Canada. The ethnic travel agencies In general terms the ethnic market has the same structure as other markets. As shown in Chart 11, there are retail travel agencies which sell directly to travelers, and agencies which sell mainly to other agencies, with their business systems showing signs of increasing consolidation activity. Chart 11 TOURISM MARKET STRUCTURE Consolidators Retail travel agencies Ground operators* Tour operators Corporations GDS Airlines GDS Air Ticket Broker** GDS GDS Travel agency Individuals * Hotels, car rental, tours, other ** Including travel agencies with non-iata smaller travel agencies Source: Industry experts interviews; Hermes' analysis Due to the growing ethnic population in North America, ethnic travel has increased significantly. Some successful retail agencies seized this opportunity and started opening new offices. Eventually, due to their significant booking volume, these agencies sold their offices to their managers and began wholesaling to them and other ethnic retail agencies. Their business model has gradually shifted to adapt to this increasing consolidation activity and has differences when compared to that of retail agencies. These differences will deepen as agencies adopting consolidator characteristics continue to grow: Procurement: agencies adopting consolidator characteristics have negotiated fares with airlines 11

Fare upload and management: some of the agencies adopting consolidator characteristics have specific resources assigned to manually upload their fares and to update contract conditions on sites available to all sub-agencies Reservations: agencies adopting consolidator characteristics have small call centers or groups of agents giving support to sub-agencies to complete their bookings Credit control: these agencies have specific resources assigned to check subagencies payments on a daily basis Control activities: in these types of agencies, resources are specifically assigned for data validation, commission tracking and other control activities Even though these agencies are adopting consolidator characteristics and this is reflected in their business system, their level of automation is very low when compared to agencies commonly defined as consolidators. However, as they grow in size, these agencies will need to invest in automation in order to stay competitive. Some of these agencies have other business lines such as online sales for the retail segment (to take advantage of their negotiated fares), or are developing tour operator segments. Apart from increasing revenue sources, this business portfolio expansion enables agencies to diversify and reduce risk in a highly competitive environment. Chart 12 shows the composition of the ethnic travel agencies in North America by country and size. There are about 1,069 ethnic travel agencies in North America, with the US accounting for 79.8% (853 agencies) and Canada accounting for the remaining 20.2% (216 agencies). Regarding size, 63.1% of these agencies are small, with less than 10,000 bookings, 29% have between 10,000 and 25,000 bookings and only 7.9% exceed 25,000 bookings. The average US ethnic travel agency has 10,800 bookings while the average Canadian ethnic travel agency has 7,900 bookings. Chart 12 ETHNIC AGENCIES IN NORTH AMERICA BY COUNTRY AND SIZE 2010, % of ethnic agencies Average booking size (thousand bookings) By country By size 100% = 1,069 100% = 1,069 >25,000 bookings Canada 7.9 20.2 10,000-25,000 bookings 29.0 7.9 79.8% 63.1% <10,000 bookings Source: Hermes analysis USA 10.8 12

Overview of participants This study includes retail travel agencies (business to customer or B2C) and agencies adopting consolidator characteristics (about 50% or more of their sales is business to business or B2B). Charts 13 and 14 include information about the participating agencies. The retail segment includes four participating agencies with an average of 11,500 tickets per year. There are also four participating agencies with consolidator characteristics, with an average of 62,900 tickets per year. The split between both types of agencies is done because agencies which sell primarily to other agencies and not to travelers, have different business systems as they dedicate specific resources to activities which are not performed in retail agencies. Chart 13 HIGHLIGHTS OF PARTICIPATING ETHNIC RETAIL AGENCIES 2009, retail agencies Air Packages/tours Average Agency Focus (% of sales) City of headquarters Tickets ( 000) Agency A N/A* Los Angeles, CA 12.5 Agency B 97% 3 Los Angeles, CA 20.9 Agency C 100% N/M** New York 7.9 Agency D 100% N/M New York 4.6 11.5 * Sells both air tickets and packages but there is no information available on the sales mix ** N/M: Not Meaningful Source: Participating agencies; Hermes' analysis 13

Chart 14 HIGHLIGHTS OF PARTICIPATING AGENCIES WITH CONSOLIDATOR CHARACTERISTICS 2009, agencies with consolidator characteristics Consolidator/B2B Retail/B2C and online sales Average Agency Focus (% of sales) City of headquarters Tickets ( 000) Agency A 60% 40 Miami, FL 29.6 Agency B 98% 2 Los Angeles, CA 118.6 Agency C 90% 10 Los Angeles, CA 78.9 Agency D 48% 52 Toronto, Canada 24.6 62.9 Source: Participating agencies; Hermes' analysis Regarding the retail segment, there are two types of agencies: single-branch and multibranch (see Chart 15). Single-branch ethnic retail agencies sell air-only tickets to travelers. They are family owned and managed, and sell mainly to walk-in clients or by phone. Their level of automation is low. Multi-branch ethnic retail agencies sell both air tickets and a very low share of packages (service which includes air ticket plus other travel items such as hotel accommodation and/or car rental) to final customers. Another difference when compared to single-branch ethnic retail agencies is that multi-branch agencies have semiprofessional management. Agencies with consolidator characteristics are usually larger in number of bookings. Some started as retail agencies, shifting their business model to that of a consolidator once a certain volume of tickets was achieved. Besides differences in their business systems when compared to retail agencies, agencies with consolidator characteristics have professional management and a small call center or group of agents serving travel agencies and travelers. They sell both air tickets and packages to sub-agencies and have two main distribution channels: their own branches and associated branches. They usually share commissions with sub-agencies (e.g. if commission is 10% on average, they usually retain 3%). Due to increasing competition, agencies with consolidator characteristics are now developing other business lines such as online (Business to Customer) or tour operator (both Business to Business and Business to Customer). 14

Chart 15 BUSINESS MODEL OF ETHNIC TRAVEL AGENCIES Single branch ethnic retail agency General structure Family owned and family management Products Air tickets to immigrants Selling channels Walk-in clients and telephone Online bookings Technology Lack of back-office, basic back-office with no interface with GDS, or back-office with interface Multi-branch ethnic retail agency General structure Family owned with semiprofessional management Products Air tickets Hotel and packages Selling channels Walk-in clients and telephone Online bookings Technology Basic back-office with no interface with GDS or backoffice with interface Ethnic agency with consolidator characteristics General structure Family owned with professional management Call center serving travel agencies and regular clients Products Air tickets Hotel and packages Selling channels Telephone Online bookings and sales Technology Basic back-office with no interface with GDS or backoffice with interface Source: Hermes analysis 15

Results of the study This project is based on the exhaustive revision of the financial data and deep analysis of the business processes of the participating agencies. Revenues are expressed in US$ (United States dollars) per ticket. A ticket unit includes a combination of all services provided by the travel agencies and represents the average transaction per customer (air tickets sold on a standalone basis or within a package). The results of the study include: Average agency revenue structure: shows the revenue mix for both types of agencies Average agency cost structure: studied from both a traditional costing and an activity based costing viewpoint where traditional accounts (personnel, marketing, etc.) are broken down and allocated to an agency s core activities Profitability and productivity analysis Average revenue structure for an ethnic retail agency Air tickets account for 99.8% of gross sales and net income, with a net margin of 14.5% in retail agencies The average ethnic retail agency has $4.2 million gross sales and $0.6 million net income. Air tickets account for 99.8% of gross sales and net income (see Chart 16), with a net margin of 14.5%. Packages (service which includes air ticket plus other travel items such as hotel accommodation and/or car rental) represent a significantly smaller share, comprising only 0.2% of total sales and net income. Chart 16 BREAKDOWN OF SALES AND NET MARGIN BY PRODUCT 2009, average ethnic retail agency Net Margin (%) 100% = Packages 11.5 0.3 4,228 612 0.2 0.2 N/M* 14.5% Air 99.7% 99.8% 99.8% 14.5% Tickets ( 000) Gross sales ( 000 US$) Net income ( 000 US$) Note: N/M: not meaningful * Only one agency disclosed packages margins and they had a higher net margin than air products (11.9% vs. 10.7%) Source: Agency sample; Hermes analysis 16

Revenue mix (see Chart 17): Commissions, service fees & mark-ups account for 91.5% of net income in US ethnic retail agencies Ethnic retail agencies only charge service fees to customers when they have no commissions from the airlines (e.g. Delta Airlines domestic flights). Generally, they charge flat service fees, that is, the same fee for every client. Management tools are not used to charge different service fees depending on the type of client, service, fare, etc. GDS incentives comprise 4.3% and airline incentives account for 3.4% US ethnic retail agencies have the highest net margin when compared to leisure agencies in Saudi Arabia, Malaysia and France (other countries where the ABC study was conducted) Chart 17 REVENUE MIX FOR RETAIL TRAVEL AGENCIES 2005-2009 Other Airline incentives GDS incentives 100% 0.0 20.7 0.0 100% 100% 100% 0.9 0.0 0.0 3.4 3.3 0.0 4.3 0.0 0.0 Commissions, service fees and mark-ups 79.3% 91.5% 96.7% * 100.0% Net income/ gross sales (%) 7.2% US ethnic 14.5% Saudi Arabialeisure Malaysialeisure 10.6% Franceleisure 12.7% * Includes GDS incentives and overrides Source: ABC Studies; Hermes analysis 17

Average revenue structure for an ethnic agency with consolidator characteristics Air tickets account for 99.7% of gross sales, with a net margin of 7.2%; packages have a net margin of 11.5% but account for only 0.3% of total sales The average ethnic agency with consolidator characteristics has $26.3 million gross sales and $1.9 million net income. As in the retail segment, air tickets account for 99.7% of gross sales and 99.6% of net income (see Chart 18), with a net margin of 7.2%. Packages represent a significantly lower share comprising only 0.3% of total sales and 0.4% of net income. However, they have a higher net margin than air tickets (11.5% vs. 7.2%). Chart 18 BREAKDOWN OF SALES AND NET MARGIN BY PRODUCT 2009, average agency with consolidator characteristics Net Margin (%) 100% = 62.9 26,316 1,897 7.2% Packages 0.8 0.3 0.4 11.5% Air 99.2% 99.7% 99.6% 7.2% Source: Agency sample; Hermes analysis Tickets ( 000) Gross sales ( 000 US$) Net income ( 000 US$) Revenue mix (see Chart 19): Commissions, service fees & mark-ups account for 92.4% of total sales in agencies with consolidator characteristics GDS incentives comprise 5.5% and airline incentives represent the remaining 2.1% In traditional consolidators, GDS and airline incentives have a significantly larger share than in ethnic agencies with consolidator characteristics (33.4% vs. 7.6%) Ethnic agencies with consolidator characteristics have a higher net margin than traditional consolidators. This is mainly because some ethnic agencies with consolidator characteristics have online sites for their retail segments, which have higher margins. For example, when an agency with consolidator characteristics sells to another sub-agency and commission is 10%, it retains only 3% and the remaining 7% is for the sub-agency. When it sells that same ticket to travelers through their online booking engine, they get the whole 10%. In other words, selling to travelers can give them a better margin from the very same products that they already sell to sub-agencies. 18

Chart 19 REVENUE MIX FOR CONSOLIDATORS 2007-2009 Airline incentives GDS Incentives 100% 2.1 5.5 100% 20.2 13.2 Commissions, service fees and mark-ups 92.4% 66.6% Source: ABC Studies; Hermes analysis Net income/ gross sales (%) US ethnic agencies with consolidator characteristics 7.2% US traditional consolidators 4.9% Average agency cost structure Agencies cost structures are analyzed in two ways: Traditional costing: analysis of accounts as presented in their P&L (personnel costs, marketing costs, communication costs, etc.). Activity based costing (ABC): costs from traditional accounts are allocated to key processes and activities using specific criteria based on cost drivers. Traditional costing analysis Ethnic retail agencies The average cost per ticket for an ethnic retail agency is $36.3 When analyzed from the traditional point of view (see Chart 20), the following results are obtained: The average cost per ticket for an ethnic retail agency is $36.3 Personnel is the main cost, accounting for 49.3% of the total cost per ticket. Operating personnel stands for 67.3% of the total payroll expense Infrastructure and marketing costs are significant, accounting for 18.2% and 18.1% of the total cost per ticket, respectively Communication, Systems and other costs account for the remaining 5.1%, 4.0% and 5.3% of the total cost per ticket, respectively 19

Chart 20 TRADITIONAL COST DISTRIBUTION PER TICKET SOLD 2009, average retail agency, in US$/ticket 49.3% 5.8 6.6 18.2% 1.9 5.1% 1.4 4.0% 6.6 18.1% 1.9 36.3 5.3% 100% 12.0 16.1% 33.2% Operating personnel Admin. Personnel Infrastructure Communications Systems Marketing Other costs Total Source: Agency sample; Hermes analysis Traditional costing analysis Ethnic agencies with consolidator characteristics The average cost per ticket for an ethnic agency with consolidator characteristics is $22.6 The following results are obtained from the traditional costing analysis (see Chart 21): The average cost per ticket for an ethnic agency with consolidator characteristics is $22.6 Personnel is the main cost, accounting for 52.9% of the total cost per ticket. Administrative personnel stands for 58.4% of payroll expenses Marketing is the second most important cost, accounting for 21.9% of the total cost per ticket (mainly due to the fact that two out of four agencies have strong online sales for their retail segments, which need to be heavily marketed) Infrastructure is an important cost, accounting for 8.5% of total costs Communication, Systems and other costs account for the remaining 2.3%, 0.3% and 14.1% of the total cost per ticket, respectively Chart 21 TRADITIONAL COST DISTRIBUTION PER TICKET SOLD 2009, average agency with consolidator characteristics, in US$/ticket 3.2 22.6 1.9 0.5 0.1 14.1% 52.9% 2.3% 0.3% 5.0 8.5% 7.0 5.0 22.0% 21.9% 100% 30.9% Admin. Personnel Operating personnel Marketing Infrastructure Communications Systems Other costs Total Source: Agency sample; Hermes analysis 20

Activity based costing (ABC) analysis Ethnic retail agencies Activity-based costing consists of identifying the core activities of a business and allocating costs to them. A more detailed explanation on the ABC study methodology is provided in the appendix. The main activities identified for ethnic retail agencies are shown in Chart 22. Chart 22 BUSINESS SYSTEM OF ETHNIC RETAIL AGENCIES Level 1 activities Marketing related activities Core reservation process Administration & Support Support activities Primary activities Main activities Product and package development Market analysis and monitoring to identify opportunities Product and target customer definition Feasibility analysis Package final definition Marketing and sales origination Marketing and advertising: Institutional Products/ packages Proactive sales campaign: Accounts Services Reactive sales: At offices Inbound calls Email Web based Bidding application Needs assessment Contact and identification of customer Access, creation and/or modification of customer profile Understanding of customer needs* Additional services offering * Includes helping the customer identify his/her needs ** Required up front payment to suppliers for booking *** In cases where the customer pays at destination (e.g. hotels) Source: Hermes' analysis Firm infrastructure Human resources management Technology management Procurement Search, proposal and negotiation 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 Booking and sales 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 Invoice, collection and payment preparation Invoicing Client collections Air tickets payment preparation Commissions collections*** Agreements analysis and control: Customers Suppliers Execution and follow up On-trip assistance Non fulfillment investigation and compensation Refunding Client database file Clients satisfaction monitoring These activities include: Marketing-related activities: Product and package development, marketing and sales origination, and execution and follow up Core reservation process activities: Needs assessment, search, proposal and negotiation, and booking and sales Administration and support: Invoice, collection and payment preparation, firm infrastructure, human resources management, technology management and procurement 21

The results of the ABC analysis are shown in Chart 23: Chart 23 ACTIVITY COST DISTRIBUTION PER TICKET 2009, in US$/ticket, average retail agency Core-reservation activities= 17.7 (48.9%) 8.4 5.8 16.1% 1.9 3.1 0.3 0.7% 5.2% 8.7% Marketing-related activities* Core reservation process Administration and support** 3.9 36.3 10.6% 26.6% 48.9% 24.5% 9.4 3.5 9.6% 23.2% 100% 25.9% Marketing Needs and sales assessment origination and Product definition Search Booking proposal and sales and negotiation Invoice, Execution collection and and follow-up payment preparation IT Firm infrastructure, HR and procurement Total * Marketing and sales origination, Product definition and Execution and follow-up ** Procurement, HR and Firm Infrastructure Source: Agency sample; Hermes analysis Marketing-related activities Marketing-related activities account for 26.6% of the total cost per ticket Marketing-related activities account for $9.7 or 26.6% of the total cost per ticket. Marketing and sales origination activities are the most expensive among this set. They account for $8.8 or 24.1% of the total cost per ticket. However, agencies spend very little time in product and package development due to the fact that they sell mainly standalone air tickets. Moreover, they do very little execution and follow up. Ethnic retail agencies generally use different marketing channels: direct contact, e-mails, magazines, newspapers, yellow book, flyers, TV, radio, websites. They have high marketing expenditures and managers spend a lot of time on these activities. However, they do not measure the return on marketing investment, which would enable to redirect marketing expenditures to the most efficient channels, thus helping reduce time and money spent on these activities. 22

Moreover, ethnic retail agencies do not use client databases or profile tools to proactively promote their products: most agencies have no proactive sales based on buying habits or clients history. Some agencies manually register customers in databases and use them occasionally to offer clients promotions based on their profiles. In order to boost their business and profitability, in the future travel agencies should: Measure the return on marketing investment and redirect it to the most efficient channels Use client databases or client profile tools Use a customer relationship management (CRM) system Finally, agencies do very little execution and follow up activities. Customer follow-up is not done systematically but only by personal initiative from some travel consultants. These activities account for only 0.7% of the total cost per ticket. However, this is a very important activity to build customer loyalty, and this loyalty reduces the need for such significant marketing expenditures for sales origination. Core reservation process activities Search, proposal and negotiation are the main activities, accounting for 23.2% of total costs per ticket Reservation activities account for $17.7 or 48.9% of the total cost per ticket, with search, proposal and negotiation as the main activities (23.2% of total costs vs. 16.1% for booking and sales and 9.6% for needs assessment). Agents spend less time in needs assessment because their customers already know where they want to go, as most of them are going back to their countries of origin or their parents. Searching, proposing and negotiating with the client takes longer because ethnic travelers main priority is price, and they have no definite travel date, so agents spend time searching for the best combination of travel date/price to fulfill their customers needs. In ethnic retail agencies most managers are involved directly in the selling process. Agents sell mainly air tickets, with non-air services mainly booked outside the GDS, and typically sold within packages. For example, hotel bookings are primarily done directly with hotels or through alternative booking sources such as internet or tour operators. Plus, no additional service offering tools such as programming pop-ups to remind agents to offer other services are used. In order to improve efficiency in these activities, ethnic retail agencies should: Increase their non-air sales and use the GDS for non-air services (provided GDS software is adapted to fulfill their requirements), such as booking hotels and cars Develop reminder functionalities and incentive programs to enhance cross-selling Use customer relationship management (CRM) systems and integrated profile management applications 23

Administration and support activities Administration and support activities account for $8.9 or 24.5% of the total cost per ticket. Invoice, collection and payment preparation activities account for $3.1 per ticket, being the most expensive activity of the set. US ethnic retail agencies have a high level of manual activities, dedicating many resources to enter data manually to the back-office system. Some have no interface between their GDS and their back-office systems or if they do, it is not fully automated. In addition, they do not have interfaces between non- GDS systems and their back-office. In order to improve efficiency in these activities in the future, travel agencies should integrate front, mid and back-office systems and fully automate processes. US ethnic retail agencies do not have quality data about their business performance. In general, reports are manually built by collating information from the back-office system. Furthermore, they do not consider investment in IT as a priority for their business. However, in order for travel agencies to better understand and manage their business, and provided these agencies continue to grow, they should invest in reporting tools and fully integrate operation systems with them to obtain statistics and reports. Smaller agencies should invest in scripts to help with this matter. Most ethnic retail agencies have online booking engines or are planning to have one in the near future, but so far these have only generated a non-meaningful share of their revenues. Increasing online travel purchase opens a new customer base which travel agents can easily access by implementing effective online booking tools. In the future, agencies still offline should develop or invest in effective online booking engines. ABC analysis Ethnic agencies with consolidator characteristics The main activities for traditional consolidators are shown in Chart 24. These activities include: Fare management activities: Content procurement and fare upload & management Sales activities: Distribution and marketing, and reservations Back-office and support activities: Credit control, ticketing and issuing documents, invoicing, collection and payment preparation, reporting & follow-up, and support activities Ethnic agencies with consolidator characteristics are gradually adopting this business system. All of the participating agencies have direct negotiations with suppliers (content procurement), resources dedicated to marketing activities and small call centers or groups of agents assisting sub-agencies and helping them complete their bookings (sales activities). Additionally, all of them have at least one administrative employee checking sub-agencies payments on a daily basis and managing uncollectibles (credit control). 24

They also dedicate significant administrative resources for control activities such as commission tracking. All of them perform back-office activities such as ticketing, issuing documents, invoicing, collecting and payment from/to suppliers and sub-agencies. Reporting is generally done by collating information from their back-office systems. Only some agencies have specific resources assigned to fare upload and to update contract conditions on sites available to all sub-agencies. Chart 24 BUSINESS SYSTEM OF CONSOLIDATORS Level 1 activities Fare management activities Sales activities Back-office and support Support activities Firm infrastructure Human resources management Technology development Primary activities Content Procurement Fare Upload & Management Distribution and Marketing Reservations Credit Control Ticketing and Documents Issuing Invoice, Collection and Payment Reporting & follow up Main activities Public air fares analysis Negotiation of air fares and volumes with suppliers Negotiation of access and rates with 3 rd parties Mark-up management Upload of fares Selection of distribution channels Marketing and advertising Needs assessment Search, proposal and negotiation Booking and sales Credit limit and credit record Manageme nt of delinquency/fraud and uncollectibles Quality control Ticketing/eticketing fulfillment Document issuing/ delivery Invoicing Non fulfillment Client investigation/ collections compensation Air tickets Refunding payment Commission preparation tracking Agreement Reporting on analysis and control volume per airline and volume by TA Source: Interviews; Hermes analysis The results of the ABC analysis are shown in Chart 25: 25

Chart 25 ACTIVITY COST DISTRIBUTION PER TICKET 2009, in US$/ticket, average agency with consolidator characteristics Fare management activities Sales activities Back-office and support 7.0% 47.2% 45.8% Back-office activities= 5.8 (24.6%) 4.4 22.6 6.6 4.1 18.1% 3.0 13.1% 2.5 10.5% 0.2 1.0% 21.2% 100% 0.9 4.0% Content procurement 0.7 3.0% 29.1% Distribution and marketing Fare upload & management Reservations control, Credit ticketing and documents issuing Invoice, collection and payment Reporting and follow up Support activities Total Source: Participating agencies; Hermes analysis Fare management activities Fare management activities account for $1.6 or 7.0% of total costs per ticket. Content procurement activities represent $0.9 or 4.0% of the total cost per ticket. Fare upload and management activities account for $0.7 or 3.0% of the total cost per ticket. Fare upload and management is a major challenge for traditional consolidators. It is timeconsuming and critical as it is the starting point of all their quality control checks. US airlines work with ATPCO, which uploads all public and private fares into the GDS. Non- ATPCO airlines (mostly ethnic or non-us based) require consolidators to upload their fares into their GDS. The uploading and management of non-atpco fares increases the cost of this activity. Provided agencies which show consolidator characteristics continue to grow, this will become a crucial activity of their business system. Agencies with consolidator characteristics also worry about contract changes and quality control, and need to keep their reservations personnel and travel agents up-to-date with relevant information on all contract changes. These measures are taken in order to avoid or reduce the issuance of airline debit memos (ADMs) In efficient agencies with consolidator characteristics: Fare rules are checked thoroughly before being published Changes in contracts are sent to all personnel and are available on an internal database accessible to all employees and agencies 26

Concerning mark-up management, these are manually defined based on market analysis. Agencies with consolidator characteristics do not use management tools to automate their pricing strategy. In order to improve efficiency and performance in content procurement and fare upload & management activities, in the future, US ethnic agencies with consolidator characteristics should try to: Include analysis of the sales share of each carrier in order to improve conditions negotiated with each one of them Segment clients in order to introduce differential rates or service fees for each travel agency Provided these agencies continue to grow, investing in tools such as fare management and fare filing platforms, mark-up tools and yield management tools could help increase productivity in these activities. Sales activities Sales activities account for $10.7 or 47.2% of the total cost per ticket, being the most expensive set of activities. Distribution & marketing activities are the main cost, accounting for 29.1% of the total cost Distribution & marketing activities are the main cost, accounting for 29.1% of the total cost per ticket. Marketing is significant and has a high dispersion among the sample due to the fact that two out of four agencies have a strong online presence for their retail segments and need to market aggressively. Agencies with consolidator characteristics are increasingly redirecting their marketing efforts towards more profitable lines of businesses such as tour operator (B2B and B2C) and online (B2C). Tour operator business is a higher margin product itself, while B2C sales can give them a better margin from the very same products they already sell to sub-agencies. Reservation activities account for 18.1% of the total cost per ticket. GDS is the main booking channel, as these agencies do not have internet booking engines for their B2B segment. In addition, they have small call centers as well as remote GDS office IDs given to sub-agencies. In general, agencies with consolidator characteristics have both booking and ticketing activities together and these are performed by agents. One out of four agencies has split these activities, reducing the incidence of airline debit memos (ADMs) and the need for control activities. In order to improve efficiency in these activities and increase revenues, in the future ethnic agencies with consolidator characteristics should: Invest in internet booking engines for their consolidation activity with a high level of integration with GDS specific to their needs Analyze the return on marketing investment 27

Back-office and support activities Back-office and support activities account for $10.2 or 45.8% of the total cost per ticket. Back-office activities account for 24.6% of total costs; this significant percentage is mainly due to the high level of manual activities Back-office activities comprise 24.6% of total costs. This significant percentage is mainly due to the high level of manually performed activities, for example: manual entry of commissions once the ticket is issued, manual handling of ticketing queues according to the urgency of each ticket, manual control activities regarding: passenger information, taxes, mark-up and commissions, credit control, etc. In general, these agencies prepare their reports manually, collating information from their back-office system. In efficient US ethnic agencies with consolidator characteristics: ARC reports are checked regularly so that all figures from the back-office match the weekly report Reporting includes the analysis of sales breakdown by airline and travel agency In order to improve efficiency in these activities and provided these agencies will continue to grow in their consolidator activity, in the future they should: Have automated credit card controls, thus helping reduce fraud and costs (quality control and scripting) Manage queues with specific priorities to avoid the need for a queue manager Invest in reporting tools Support activities account for $4.4 or 21.2% of the total cost per ticket. These include technology management, human resources management and firm infrastructure activities. US ethnic agencies with consolidator characteristics usually have low IT investment levels. With income shrinking during 2009, many agencies have delayed their automation process and do not consider IT investment a priority. Additionally, they lack a technology investment plan and do not have specific resources assigned for business process design activities. However, agencies are aware of the importance of online bookings as a complementary sales channel. Provided these agencies continue to grow, in the future they should invest in or develop their online booking channel for the B2B segment, supported by an internet booking engine with a high level of integration with the GDS. 28

Profitability and productivity analysis US ethnic retail agencies have average gross sales per ticket of $368.2, 12% lower than ethnic agencies with consolidator characteristics. However, they have a higher net margin (14.5% vs. 7.2%) and a higher EBIT/net income ratio (32% vs. 25%) than agencies with consolidator characteristics (see Chart 26). This results in an average net income per ticket of $17.0 in ethnic retail travel agencies, which more than doubles that of ethnic agencies with consolidator characteristics ($7.5). Chart 26 ANALYSIS OF PROFITABILITY OF TRAVEL AGENCIES 2009, in US$/ticket ( ) % of Gross Sales Ethnic retail agencies Ethnic agencies with consolidator characteristics Gross Sales 368.2 (100.0%) 418.2 (100.0%) Cost of services sold 312.1 (84.8%) 381.6 (91.2%) Discounts 2.8 (0.7%) 6.5 (1.6%) Net income 100% 53.3 (14.5%) 100% 30.1 (7.2%) Total costs 68% 36.3 75% 22.6 EBIT* 32% 17.0 25% 7.5 * EBIT: Earnings Before Interest and Taxes Source: Participating agencies; Hermes' analysis US ethnic retail agencies show lower gross sales per ticket and a higher cost per ticket than ethnic agencies with consolidator characteristics. Therefore, they have a higher break-even -9.9% vs. 5.4%- (see Chart 27). Chart 27 TOTAL REVENUE BREAK-EVEN COMPARISON 2009, average ethnic retail agency and agency with consolidator characteristics Average # tickets sold ( 000) Cost per ticket (US$) Gross sales per ticket (US$) = Total revenue break-even (%) US Ethnic retail agencies 11.5 36.3 368.2 9.9% US Ethnic agencies with consolidator characteristics 62.9 22.6 418.2 5.4% Source: ABC Studies; Hermes analysis 29

Regarding the productivity analysis, results are shown in Chart 28: US ethnic agencies with consolidator characteristics are more productive in terms of tickets per full-time-equivalent (FTE): each FTE sells 3,352 tickets a year, more than twice than ethnic retail agencies FTEs They are also more productive in terms of gross sales per FTE and net income per FTE However, agencies with consolidator characteristics have higher on average personnel costs per FTE (41% higher) This results in employees costs accounting for 39.8% of the net income they generate in US agencies with consolidator characteristics, compared with 33.6% of US ethnic retail agencies Chart 28 ANALYSIS OF PRODUCTIVITY OF TRAVEL AGENCIES 2009, average ethnic retail agency and agency with consolidator characteristics Tickets/FTE (#) Gross sales/fte ( 000 US$) Net income/fte ( 000 US$) Personnel costs/ FTE ( 000 US$) Personnel costs/fte as % of Net income/fte (%) US Ethnic retail agencies 1,595 587 85.0 28.5 33.6 US Ethnic agencies with consolidator characteristics 3,352 1,402 101.0 40.2 39.8 Source: Participating agencies; Hermes' analysis An analysis of personnel productivity per function and its comparison between US ethnic retail agencies and agencies with consolidator characteristics shows that (see chart 29): Personnel costs per FTE for operating and administrative personnel in US ethnic retail agencies are 12% and 39% lower than in US ethnic agencies with consolidator characteristics, respectively Operating personnel in ethnic agencies with consolidator characteristics is 2.7x times more productive in terms of Tickets/FTE, while administrative personnel is 1.37x times more productive While operating personnel costs in US ethnic retail agencies are $ 12.0 per ticket, US ethnic agencies with consolidator characteristics show a significantly lower cost of $5.0 per ticket In spite of the lower productivity of the administrative personnel in ethnic retail agencies, due to their significantly lower personnel cost per FTE, the administrative personnel cost/ticket is lower than in ethnic agencies with consolidator characteristics 30