Relatório Sobre o Futuro Das Viagens Corporativas - Versão em Inglês

The Future of Travel
Management Companies
in Latin America
Scenario Planning for Multinational

Business Travel Companies in Latin
America
September 2008
Index
About Scenario Planning .............................................................. 1

Abstract ........................................................................................ 1
Methodology ................................................................................. 2
Overview of Latin American Business Travel Market .................... 1
External shocks...................................................................... 1
Rapid growth in Internet penetration.................................. 1
Airlines’ cost cutting efforts ................................................ 3
Structure ................................................................................ 3
Demand............................................................................. 3
Competition ....................................................................... 5
Suppliers ........................................................................... 6
Conduct ............................................................................... 11
Performance ........................................................................ 12
Possible scenarios...................................................................... 13
Economic impact of scenarios .................................................... 15
Appendix..................................................................................... 18
Methodology ........................................................................ 18
Key factors in the scenarios ................................................. 20
About Hermes Management Consulting...................................... 29
2
Scenario Planning for Multinational Business
Travel Companies in Latin America
September 2008
Scenario Planning for Multinational

About Scenario Planning
Many have tried to understand the future purely through prediction, even though the
record to date is poor. Forecasters extrapolate from the past, imposing the patterns
they see in the past onto the future, and tend to neglect the oft-quoted statement that
‘a trend is a trend is a trend until it bends.’ The scenario approach recognizes that only
some matters may be subject to forecasting, whereas others are essentially unknown.
Scenarios are concerned more with strategic thinking than with strategic planning; and,
more specifically, with the quality of that thinking.
Scenario Planning is a structured process of thinking about and anticipating the

unknown future. It aims to examine possible futures, its impact on individuals,
organization or societies, to identify strategic directions that would be beneficial
regardless of how the future unfolds.
Abstract
What should travel agencies do if airlines continue decreasing the commissions and
overrides? How to acquire a higher productivity? What new services will travel
agencies need in the future?
These are some of the main concerns that travel agencies manageres in Latin America
actually have. However, everyone of these issues can develop in a different way,
depending on the market evolution in the next years .
This White Paper consolidates and reviews the results of an independent research
study conducted in 2008 by Hermes Management Consulting (Hermes) in Latin
America (Brazil, Mexico, Colombia, Argentina and Chile). The study was
commissioned by Amadeus in order to:
• Understand Latin America’s business travel market evolution and trends
• Identify the key issues affecting multinational TMCs in the next 3-5 years
• Develop scenario(s) on possible developments of the market and their impact

on the economics of a model TMC
The purpose of this paper is to review the study previously conducted and offer an
analysis of Latin American business travel trends identified along with
recommendations on how travel agencies can more effectively meet the needs of their
customers. It is the first time that a study of its kind has been conducted across Latin
America and thus represents a new window of opportunity for travel agencies in the
region.
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September 2008
Methodology
A sample selection of travel agencies, suppliers (airlines, hotels) and corporations
were identified in each country and interviews were conducted (more than 50
interviews in 5 different countries) with each one in order to understand the main
industry’s trends for the following 3-5 years and the key issues affecting the different
scenarios. This allowed the different scenario(s) for the next 3-5 years to be identified.
In addition, an economic model for an average TMC was developed in order to

understand and estimate the impact of the different strategies and possible market
developments on the economics of a generic TMC.
A detailed explanation of the research methodology is provided in the appendix.
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September 2008
Overview of the Latin American Business Travel

Market
During the last years, the Latin American travel industry has experienced 3 great
external shocks impacting the industry structure, the conduct and the participant’s
performance:
• Rapid internet adoption enabling the use of online channels

• Airlines’ cost cutting efforts resulting in:
o Declining revenues to TMCs.
o Further consolidation of TAs
• Record high oil prices only accelerating these trends
The industry’s structure is under a great transformation:
• Demand has experienced a high growth in business travel, aligned with

economic growth. Multinational corporations negotiate directly with suppliers
and demand sophisticated travel management from TMCs, while SMEs mostly
aim for access to negotiate and seek the best prices
• Competence between travel agencies is stronger than some years ago.
OLTAs still have room for growth in the leisure segment, but are targeting
SMEs empowered by the rise in Internet penetration. Also, the direct channels
are increasingly becoming more important, due to the airlines’ efforts to reduce
distribution costs
• Providers, mainly driven by their efforts in reducing costs and the appearance
of LCCs (Low Cost Carriers), have reduced commissions and “pushed”
towards disintermediation in the distribution channels
Facing all these industry changes, the travel agencies market has consolidated, and
travel agencies have diversified into new businesses, developing new revenue sources
to try to retain profitability. Also, by expanding, travel agencies were better positioned
to negotiate directly with suppliers.
TMC’s profitability has eroded, because they have not been able to compensate their
loss revenues from the airlines with “client-oriented” revenues.
External shocks
Rapid growth in Internet penetration

Internet user penetration in Latin America is 22% of the population in 2007, lower than
in Europe (43%) and USA (72%), although Chile (43%) and Argentina (40%), the
countries with highest Internet penetration, show levels comparable with that of Europe
(see Chart 1)
1
Online buyer penetration is the main driver, especially for Argentina (highest) and
Colombia (lowest), although online buyer behavior is still low in comparison with more
1
Online buyers/Internet users
1
September 2008
developed markets, such as USA.
Chart 1
ONLINE BUYERS BY COUNTRY
2007
Internet user penetration Online buyer penetration Online buyer penetration

x =
(% of total population) (% of Internet users) (% of population)
Chile 43.2% 33.3% 14.4%
Argentina 39.7% 40.0% 15.9%
Colombia 22.8% 27.3% 6.2%
Brazil 22.4% 37.1% 8.3%
Mexico 21.8% 33.9% 7.4%
Latin America 22.2%
Europe 43.4%
USA 71.4%
Source: D’Alessio IROL; team analysis
In the case of Argentina, the online behavior of online travelers is similar to that of USA
Chart 2
ONLINE BEHAVIOR OF TRAVELLERS
% of travelers
18
39
The online
behavior of
71 Argentine
Research but 81
not book travellers is similar
to that of USA 5 or
6 years ago, using
82%
online channels to
61% research, but not
booking in most
cases
Research and 29%
book 19%
USA Argentina USA USA

(1998) (2006) (2002) (2005)
Source: Travel Industry of America Association’s Traveler’s (Use of the Internet 2005 Edition), D’Alessio IROL; team analysis
5 or 6 years ago (see Chart 2)
Global mandate from Multinational Corporations (MNCs) that have implemented

successfully self booking tools elsewhere (mainly Europe and USA) and Internet
penetration, which is high in corporations and growing rapidly in consumers, are the
main enablers for the adoption in Self Booking Tools in Latin America.
On the other hand, content fragmentation, especially in Brazil and Mexico, is the main
barrier for self booking tools’ adoption across the region.
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September 2008
Airlines’ cost cutting efforts

Fuel accounts for 50% of total cost of airlines and is mostly out of their control, and is
expected to continue increasing in the following year. All they can do is use fuel
efficient aircrafts, and for this reason many airlines are ordering new generation
aircrafts to replace the less efficient ones.
On the other hand, airlines are focusing on cost cutting in every possible category:
• Personnel through automation of processes (online check-in and self check-in

the airports)
• Services (reducing the meals offered during flights)
• Distribution by going direct (online distribution through their web pages,
reducing commissions to TAS, booking fees to GDSs and service fee of credit
cards)
Average revenues from airlines to travel agencies have been cut in half during the last
8 years (15.0% in 2000 vs. 7.5% in 2008), still higher than in Europe (5.0%) and USA
(3.0%). Most of the revenues actually come from overrides (while in the past came
from basic commissions from the airlines), promoting consolidation of travel agencies
(see Chart 3). However, it’s expected that airlines keep cutting basic commissions and
especially incentives, following the trend of the USA and Europe, in order to continue
reducing costs.
Chart 3
EVOLUTION OF REVENUES FROM AIRLINES TO TMCs
Basic Commissions
% of ticket price Overrides
2000 2008
Mexico 16% 1% 8% 9% • Revenues from

airlines have
Argentina been cut in half
15% 3% 4% 7% • Most of the
revenues now
Brazil 14% 2% 4% 6% come from
overrides,
Colombia 15% 4% 2% 6% promoting
consolidation
Chile N/A 2% 3% 5% • Total revenues
are still higher
Europe 12% 1% 4% 5% than in Chile,
Europe and the
USA
USA 10% 0% 3%3%
Average Latin
15.0% 7.5%
America*
* w/o Chile
Source: Interviews with industry experts; team analysis
Structure
Demand
Latin America accounts for 6% of total business travel market in 2007, with the 5 main
countries (Brazil, Mexico, Argentina, Colombia and Chile) accounting for more than
80% of total Latin American business travel market (see Chart 4).
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September 2008
Chart 4
BUSINESS TRAVEL MARKET BREAKDOWN
US$ billion, 2007
100%= 763.4 100%= 45.8
Other
Latin America 3.6 6 Other
15.7
Asia 23.7 Peru 28.4% Brazil
3.5
Chile 5.0
North America 27.7 Colombia 5.2
19.2 22.9
Argentina
European Mexico
Union 39.0%
5 Countries account for more than 80% of the total Latin

American business travel market
Source: World Travel & Tourism Council; team analysis
Business travel in Latin America has grown at an annual average rate of 9% since
1988, aligned with the GDP’s growth of 7% (see Chart 5)
Chart 5
EVOLUTION OF GDP AND BUSINESS TRAVEL MARKET IN LATIN AMERICA
US$ billion, 1988=100
CAGR ’88-’07
500 Business travel
450
400 GDP
350
+9%
300
250 +7%
200
150
100
50
1989
1990
1992
1994
1995
1997
1998
2000
2002
2003
2005
2007
1988
1991
1993
1996
1999
2001
2004
2006
Source: International Monetary Fund; World Travel & Tourism Council; team analysis
There are mainly two clients segments, Multinational Corporations (MNCs) and Small
and Medium Enterprises (SMEs), not only differentiating because of their travel
spending volumes, but also because of their needs.
• MNCs
Basically looking for travel management from the TMC, where the main
issues are the following:
o Consistent service across the region and/or worldwide with

reputable providers (leading TMCs), using regional/global RFPs
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September 2008
o Enforcement of travel policy

o Management and maintenance of traveler profiles
o Expense management, MIS (statistics and reports), complex
invoicing with cost centers, help desk
o Generally adopting or considering self booking tools
o Integration of self booking tool with ERP
o Security information of passengers
Those MNCs with a travel manager will focus on optimizing total travel
expense, and how a TMC can help them achieve it (to the extent that TMCs
are differentiated). On the other hand, those MNCs where the buyer is
Purchasing or Finance tend to focus more on transaction fees only
• SMEs
o Best price
o Access to negotiated rates
o Most have none or very simple travel policies
o If managed, may require a very simple, standard fulfillment,
invoicing, expense management, reports
Competition
TMCs have a mix of fully owned and franchise operations in different countries in Latin
America, due to:
• In some cases they didn’t have time and/or resources to have fully owned
operations in every country, in addition to the fact that Latin America is not a
strategic region
• Because Latin America is viewed as a risky region, some TMC prefer to
associate with big and local travel agencies which have good insight
knowledge of the market, thus they can be present in all countries with a lower
exposure to risk due to economic and political fluctuations
About 50% of the local operations of the multinational TMCs in Latin America’s main
markets are franchised operations
Knowing that SMEs are mainly focused on price and have none or very simple travel
policies, Online Travel Agencies (OLTAs) are starting to target this segment of
business travel, although they still have space to grow in the leisure market (see Chart
6).
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September 2008
Chart 6
BUSINESS TRAVEL COVERAGE BY OLTAS
2008
Latin America Other markets

Leisure SMEs Corporations Leisure SMEs Corporations
• Despegar
• Submarino
• Expedia
• Travelocity
• Orbitz
• Latin American OLTAs are starting to target SMEs,

although they still have room for growth in leisure
• The leading international OLTAs have not entered
Latin America yet, but they plan to do so
Source: Interviews; team analysis
Online channels have increased their penetration during the last 4 years in the USA
and Europe, although it's still lower in Europe (22%) comparing to that of the USA
(48%). Their penetration in Latin America (8%) is comparable to that of Europe 2-3
years ago (see Chart 7)
Chart 7
EVOLUTION OF CHANNEL BREAKDOWN OF BUSINESS TRAVEL
US$ billion
Latin America Europe USA
113 125 102 105

105 99
98 93
5 8 14 22
36 42 48
31
42
Online* 8
95% 92% 86%
78%
69% 64% 58%
Offline 92% 52%
2007 2005 2006 2007 2008 2005 2006 2007 2008
Market trend
• Online channels have increased their penetration during the last 4 years in the
USA and Europe, although it's still lower in Europe
• Their penetration in LATAM is comparable to that of Europe, with a 1 year lag
* Direct and indirect (airlines, traditional travel agencies and OLTAS)

Source: PhoCusWright’s Online Travel Overview; team analysis
Suppliers
Total Latin American traffic has grown at 7% per year in the last 4 years, similar to the
world’s average (8%). Intra-Latin American and domestic traffic increased their share,
accounting for 86% of total Latin American traffic in 2007 and pushing the regional
growth (see Chart 8)
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September 2008
Chart 8
EVOLUTION OF AIR TRAFFIC BY REGION
In millions of passengers, Latin America
CAGR '04-'07
(%)
106.5 7.1%
101.0
97.5
91.7 13.5% -4.2%
15.1%
16.2%
Extra-Latam 17.8% 18.3% 9.7%
16.2% 16.7%
Intra-Latam 16.1%
68.1% 68.2% 7.2%

Domestic 66.1% 67.6%
2004 2005 2006 2007
• Total Latin American traffic has grown at 7% per annum in the last 4 years
• Intra-Latam and domestic traffic increased their share, accounting for 86%
of total Latin American traffic
Source: ALTA, IATA; team analysis
The airline market in Latin America has consolidated in the last 5 years, where the
main 4 airlines account for 68% of total market in 2007, and it’s expected to
consolidate even more in the next years. Argentina, Chile and Brazil are the most
consolidated markets, where the two main carriers account for more than 80% of
domestic traffic (see chart 9)
Chart 9
MARKET SHARE OF AIR PASSENGERS IN LATIN AMERICA
Percent, 2007
Total By country
(two main carriers)
100% = 106.5 million passengers
Argentina 99%
Other
TACA 9.9
Chile 89%
Aerolíneas 5.2 TAM
28.5%
Argentinas 5.4
Brazil 83%
Mexicana 5.6
Colombia 72%
AeroMexico 5.7
7.0
Mexico 47%
Copa 22.2
10.4 GOL
LAN USA 27%
Source: ANAC,JAC, DGAC, interviews, websites; team analysis
With rising oil prices, changes in the industry are accelerating:
• The leaders, with EBIT margins between 6% and 18%, will become more
efficient and consolidate their dominant positions. They are driving changes in
the industry, i.e. cost cutting in distribution, personnel and services (as
mentioned before). It’s also expected that they continue to consolidate,
probably having 3 or 4 big regional players in the next 3-5 years
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September 2008
• Some potential challengers will become leaders. They may have the size
and/or the competency to adapt to the new environment
• There could be casualties among those who don’t adapt to the new
environment. These mainly rely on government, thus their future is uncertain
Chart 10
EBIT MARGIN BY AIRLINE
% of gross sales, 2007
Copa 18.4%
GOL* 18.2% Leaders
TAM 14.9% • Driving changes in the
industry, i.e. cost cutting
LAN 10.0% in distribution,
Taca 8.0% consolidating
American Airlines** 5.4%
Avianca 1.1%
Potential challengers
Mexicana -1.2% • May have the size and/or
Aero Mexico -3.0% competency to adapt to
Pluna -4.6% the new environment
Aerolíneas Argentinas N/A
Aero Cóndor N/A
Tame N/A Uncertain
Aero Postal N/A • Rely on governments,
their future is uncertain
Santa Bárbara N/A
Conviasa N/A
Aeerosur N/A
* Data for 2006

** Latin American operations in 2006
Source: Company reports; team analysis
Also due to the increase in operational costs, mainly driven by fuel, the break even
load factor has increased in the last 5 years (54% in 2003 vs. 63% in 2007). However
airlines have managed to increase load factors (65% in 2003 vs. 71% in 2007), by
optimizing their operations, which leaves them in a strong position with the trade
The main carriers in Latin America (TAM, GOL, LAN and Copa) are expanding their
fleet, but only TAM and LAN will keep long-range aircrafts, while GOL is retrenching to
domestic/regional aircrafts after Varig’s acquisition (see Chart 11)
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September 2008
Chart 11
PROJECTED FLEET EVOLUTION OF MAIN CARRIERS
Number of passenger aircrafts
TAM GOL LAN Copa
+20% +35%
150
147
0 +27%
123 22
111 108
International 18
8
85
100% 39 +14%
78% 38
Domestic/ 92% 49
82% 43
regional 0
61% 0
62% 100%
100%
2007 2012 2007 2012 2007 2012 2007 2012
Source: Companies reports; team analysis
In line with what is happening in the USA and Europe, LCCs are increasing thier
2
participation in Latin America. Already, LCCs dominate the domestic market in Brazil
(40% of market share) and have sprouted in Mexico. LCC penetration in Brazil and
Mexico is higher than in the USA, due to GOL’s dominance in Brazil and the
government’s incentive policy in Mexico (see Chart 12).They have not developed yet in
Colombia, even though the domestic market is larger than the international market,
and it presents the third biggest domestic market in Latin America. In Argentina (due
to government regulation) and Chile (due to LAN’s presence) although there are
potential attractive domestic markets, LCCs are not expected to develop during the
next 3-5 years
Domestic travel is going to the LCC model, even for full-service carriers, and
international travel will stay full-service, regardless of the airline
2
TAM is not considered as a LCC
9
September 2008
Chart 12
MARKET SHARE OF LCCs BY COUNTRY
Percent of domestic traffic passengers, 2007
LCC share Domestic market

(% of total market) (Million of passengers)
Brazil 35% 28
Mexico 31% 16
USA 29% 640
Chile 14% 3
Colombia 4% 6
Argentina 0% 4
Source: ANAC,JAC, DGAC, interviews, websites; team analysis
The rise of LCCs puts more pressure on full–service carriers, and therefore on indirect
channels to reduce costs. Therefore, full service carriers are moving part of their
content out of GDSs. They are also disintermediating the chain through direct sales,
either online, call centers or their own offices.
This results in Brazil being the most “disintermediated” market in the world, with 77%
of air content off-GDS. Other countries, such as Mexico (due to LCCs) and Chile (on
behalf of LAN’s direct sales strategy) also show a high level of disintermediation (see
Chart 13)
Also for hotels and car rentals, although with a lower participation in total bookings and
revenues for the travel agencies, the same content fragmentation problem occurs.
Only 15% of total hotel content is present in the GDS in Latin America, and about 1%
of air bookings through the GDS also includes hotel bookings (compared with 6% of
Europe and 28% of the USA)
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September 2008
Chart 13
OFF-GDS CONTENT BY COUNTRY
% of direct air bookings
2007
2012
77%
Brazil
83%
35%
Chile
52%
28%
Mexico
52%
30%
Colombia
40%
28%
Argentina
39%
48%
Latin America
58%
Source: Amadeus; team analysis
Content fragmentation increases costs to travel agencies, by reducing the productivity

of the travel agents that should spend more time for each booking. The difference in
productivity between a booking done through the GDS and off-GDS is about 14%.
Conduct
There has been a worldwide consolidation of TMCs in the past 2 or 3 years, and it’s
now starting to occur in Latin America (TMC account for 26% of total business market),
although it is still lower than in more developed markets, such as Europe (32%) and
the USA (36%) (see Chart 14).
In the coming years, consolidation will strengthen, especially in those markets that are
still fragmented, like Latin America. Because content fragmentation is pushing travel
agencies costs up and productivity down, the worst performing TAs will be driven out
of the market.
TMCs have already started to migrate fully to a service-fee model because their client
is not the airline anymore and is now the traveler or the corporation instead. Although
there are still basic commissions from airlines, they are expected to go to 0 in the short
term, thus pushing the revenue source towards a service-fee model even further, and
developing even more other revenue sources, such as SMEs, consolidation business
and MICE.
In order to replace the lost basic commissions from the airlines, large TAs and TMCs
have started to aggregate the buying power and provide fulfillment to smaller TAs, thus
generating a new source of revenue for them and allowing smaller TAs to survive,
acting somehow as consolidators.
As mentioned before, many TMCs are affiliated or have franchised operations in

different countries with local travel agencies. This, and the higher profitability, is the
main reason for having other revenue sources not traditionally related to business
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September 2008
travel, such as leisure and inbound travel.
Chart 14
MARKET SHARE BY SIZE OF TRAVEL AGENCIES
Million of segments, 2007
100% = 81 275 385
Multinational 26 32 36
The business
Large 16 travel market is
still less
25 consolidated in
Small and 27
Latin America than
medium 30
in more developed
23 markets, such as
20 Europe or the USA
Micro 28%
20% 17%
Latin Europe USA

America
Market trend
Note: Micro: Less than 10 thousand segments per year; SME: Between 10 and 100 thousand segments per year; Large: More than 100
thousand bookings per year
Source : MIDT; team analysis
Performance
Total travel commissions and fees have declined in the last few years (see Chart 15),
showing:
• That the loss of revenues from airlines has not been offset by higher customer
fees
• Intense price competition
Chart 15
EVOLUTION OF AMEX’S WORLDWIDE TRAVEL COMMISSIONS AND FEES
Percent of gross travel sales
9.0 CA
GR
-5.1
%
8.5
8.1
7.7
2004 2005 2006 2007
Source: Annual reports; team analysis
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September 2008
Possible scenarios
The interviews conducted were the primary source to identify drivers and
their uncertainty. The impacts of drivers on MBTC business defined the
priorities/critical uncertainties.
The themes with high impact and uncertainty, also known as “pivotal” are
the following:
• Business travel growth in Latin America

• Revenues from airlines
• Content fragmentation
• Revenues from GDSs
• Adoption of self-booking in multinational corporations
• Buying behavior of SMEs
These 6 themes were used to define the different scenarios for the
business travel market in the next 3 to 5 years (see Chart 16)
Chart 16
POSSIBLE SCENARIOS
A Content aggregation
B Content fragmentation
Possible scenarios
for MBTCs for the C Content back to GDS
next 3 to 5 years
D Stagnant market
E Loss of SMEs
Source: Team analysis
A. Content aggregation
The market is expected to continue growing at an average annual rate of

5-7%, with the revenues from the airlines falling to 1%, following the
actual trend, not only in Latin America but also in Europe and USA. GDS
incentives will drop 20%, mainly driven by the airlines’ effort to reduce
distribution costs and by the high competition in the travel industry.
Although content fragmentation is expected to increase (up to 35%

compared to the actual level of 25%), it will be solved with IT
developments. Higher Internet penetration together with the solution to
the content fragmentation problem will allow the adoption of self booking
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September 2008
tools, reaching a penetration of 40%.

B. Content fragmentation

Content fragmentation is expected to increase (up to 35% compared to

the actual level of 25%), still without a solution, neither from the IT
providers nor from the GDSs. Since content fragmentation is not solved,
although the higher Internet penetration, self booking tools are not widely
adopted (reaching a penetration of 10%).
C. Content back to GDS

Content fragmentation is reduced through opt-in fees (15% compared to

the actual level of 25%). Higher Internet penetration together with the
solution to the content fragmentation problem will allow the adoption of
self booking tools, reaching a penetration of 40%.
D. Stagnant market
Stagnant demand (0% growth for the next 3-5 years), leads to stable
revenues from airlines, pushing their sales through the indirect channels
also. GDS incentives also remain stable.
Due to the recession, IT providers are focused on developing new

solutions to solve the content fragmentation issue, allowing self booking
to be widely adopted (40%).
E. Loss of SMEs

Although content fragmentation is expected to increase (up to 35%

compared to the actual level of 25%), it will be solved with IT
developments. Higher Internet penetration together with the solution to
the content fragmentation problem will allow the adoption of self booking
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September 2008
tools, reaching a penetration of 40%.
The higher Internet penetration and adoption of self booking tools will
boost OLTAs, allowing them to enter the SMEs segment
Chart 16
POSSIBLE SCENARIOS
Content fragmentation and self booking tools
• Increased • Increased • Reduced

content content content
fragmentation fragmentation fragmentation
(35%), solved (35%), not (15%) thru opt-
with IT solved in fees
• Adoption of • SBT not • Adoption of
SBT* (40%) adopted (10%) SBT (40%)
• Demand grows at 5-7% A• “Content B• “Content C• “Content back

per annum aggrega- fragmentation” to GDSs”
revenues from suppliers
• Revenues from airlines tion”

fall to 1% E• “Loss of
Market growth and
• GDS incentives fall 20% SMEs”

• Stagnant demand (0% D• “Stagnant
growth) market”
• Stable revenues from
airlines and GDS
incentives
* Self booking tools

Economic impact of scenarios

An economic model for an “average” TMC was developed, in order to
analyze and quantify the economic impact of the different scenarios.
Chart 17
PROFIT AND LOSS STATEMENT
Million US$, 2008
7 63 33 55
5 11.1%
8 7.9%
20 12.7% 52.4%
87.3%
31.7% 22
100%
23
34.9%
36.5% 8
12.7%
Airlines Clients Hotels GDSs Leisure Total Personnel Other Total Operating
EBIT
Revenues Cost of operations
Source: Amadeus, IMF, ABC studies in Brazil, Mexico, Argentina and Colombia, interviews; team analysis
With annual sales of US$ 650 million, this “average” TMC concentrates
25% of total world market for TMCs, with 3.3 million of air segments sold in
Latin America, and about 25% of content off the GDSs. In Latin America it
shows annual income of US$ 63 millios, mainly due to airline commissions
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September 2008
(37%) and client service-fees (32%), while the total cost is about US$ 55
million (mainly of personnel – 52%), with an EBIT of US$ 8 million (13% of
total income – see chart 17)
MNCs and large corporations account for 45% of gross sales, with average
revenues of 10%, mainly due to airline commissions and client service-fees
(see Chart 18). The consolidation business represents 20% of gross sales,
although with lower revenues (6%). The other business units, although
with higher revenue margins (between 10% and 13%), account altogether
for 35% of total sales.
Chart 18
SUMMARY FINANCIALS BY LINE OF BUSINESS Airlines
2008 Clients
Hotels
GDSs
Gross sales Revenues EBIT margin

Million USD Percent of gross sales Percent of revenues
MNCs and large 12

293 45% 41% 40 7 48 10% 6 12%
corps
0
Consolidator 130 20% 50% 14 23 6% 4 15%
36
9
SMEs 98 15% 54% 31 7 49 13% 6 12%
26
MICE 65 10% 17% 47 9 38 13% 7 17%
Leisure 65 10% N/A 50 10% 7 14%
Total 650 14 10% 7 13%

42% 35 42
8
Although 5 different scenarios were defined for the business travel market
in the next 3-5 years, scenario “B. Content fragmentation” will be used to
analyze the impact that the different variables have on the economics of a
typical MBTC. Scenario B was chosen because it’s considered “the most
likely to happen” if the actual trends continue.
In this scenario, fragmentation is increased without a solution from the IT

providers, and self booking tools are not adopted. Business travel market
grows at an annual rate of 5-7%, while revenues from airlines and GDS
incentives are diminished.
The lower revenues from airlines and GDS incentives will push MBTCs to
start charging their clients more aggressively, and will change even more
the business model switching the sources of income (actually about 33% of
the income are from service fees, in the next years it will be 61% - see
Chart 19)
The higher content fragmentation decreases the productivity of the travel

agents, and considering that personnel accounts for more than 50% of total
costs, the higher costs results in a lower EBIT margin (5% vs. 9%)
16
September 2008
Chart 19
IMPACT OF SCENARIO ON P&L Airlines
Clients
USD per ticket
Hotels
GDSs
Leisure
Gross sales Revenues Cost EBIT
7
Current 435 36% 33 14 11 41 9% 37 91% 4 9%
2008
2013 5 10% 95% 5%

scenario 441 7% 61 15 12 43 41 2
B
What could MBTCs do to afford these possible scenarios?
For the income, they could enhance even more hotels and other products,
with higher profitability. As mentioned before, the industry trend is to a
higher consolidation. This represents an opportunity to those agencies that
manage to survive, because they can gain market share and enter the
consolidation business.
On the productivity side, travel agencies could include the hotels in the
GDSs to increase the productivity of the travel agents. Additionally, they
could develop IT solutions, such as multi-sourcing front-office including
hotels and car rentals, as well as air tickets, standardize technology across
the region or consolidate the back-office systems.
17
September 2008
Appendix
Methodology
52 interviews were conducted with industry participants from the following
sectors:
• Amadeus
• TMCs
• Travel Agencies
• Corporate travel managers
• Hotels
• Airlines
In the following countries:
• Argentina
• Brazil
• Chile
• Colombia
• France
• Mexico
• Spain
• USA
Chart 20
SOURCES OF INFORMATION
• 52 interviews
• Covering the following sectors:
– Amadeus
– TMCs
– TAs
– Corporate travel managers
– Hotels
– Airlines
Interviews • In the following countries:
– Argentina A mix of interviews
– Brazil with industry
– Chile participants and
– Colombia desk research was
– France the basis for the
– Mexico study
– Spain
– USA
• Publicly available information on:

– Business travel industry
Desk – External factors that impact the
research industry
In addition, desk research was done with publicly available information on

the business travel industry and external factors that impact the industry.
Drivers were identified and the impacts of these drivers on MBTC business
together with the uncertainty were used to define the key drivers affecting
the business travel market in the next 3 to 5 years (see Chart 21).
18
September 2008
Chart 21
PRIORITIZATION OF DRIVERS AND ASSESSMENT OF UNCERTAINTIES
High
Medium
Low
Level of Impact on ILLUSTRATIVE
Dimension Drivers uncertainty business Key drivers
Corporate clients
• Decision- •
makers •
• End users •
What issues
To be obtained
would affect •
Travel agencies from interviews
the market •
with participants
for MBTCs?
Suppliers
• Airlines •
• Ground services •
• Other
• Interviews would be the primary source to identify

drivers and their uncertainty
• The impacts of drivers on MBTC business would
define the priorities/critical uncertainties
Splitting drivers based on impact and uncertainty allowed to frame the

definition of scenarios (see Chart 22):
• Those with high certainty and high impact (“inevitable”) must occur
in all scenarios
• Others with high impact and high uncertainty (“important”) are the
basis to build alternative scenarios
• Drivers with low impact may be discarded/set aside for simplicity
Chart 22
PRIORITIZATION OF DRIVERS AND ASSESSMENT OF UNCERTAINTIES (Cont.)
ILUSTRATIVE
To be considered Basis of alternative
in all scenarios scenarios
Impact
+
Inevitable Important
Insignificant
–
Certainty Uncertainty
19
September 2008
Key factors in the scenarios
Demand
5 factors will determine the demand for business travel in the following 3 to
5 years:
a. Evolving needs of multinational corporations

b. Buying behavior of SMEs
c. Adoption of online booking tools in MNCs
d. Environmental concerns
e. Secure transportation
a. Evolving needs of multinational corporations
Actually, MNCs require travel management from the MBTCs, although

MNCs are expecting more sophisticated services for the following
years, such as: more sophisticated solutions, systems integration with
existing ERPs, handling of all travel related content, like hotels, ground
transportation and value in optimizing total travel expense.
This could have a high impact for the MBTCs because it implies
reviewing the entire business model and the way to serve their clients
(see Chart 23).
Chart 23
KEY ISSUES FROM THE DEMAND SIDE Very high
Very low
Current Possible
Description state developments Impact Uncertainty
• More sophisticated solutions, systems • Travel • More

integration with existing ERPs management sophisticated
Evolving • Handling of all travel related content, travel
needs of like hotels, ground transportation management
MNCs • Value in optimizing total travel
expense
• Most travel is domestic • Price • Advanced

• Seek access to negotiated rates, best seekers travel
available fares, don’t have travel policy management
Buying • Buy more like leisure travelers • Basic travel
behavior of • Some value personalized service more management
SMEs • The larger / lightly managed don’t need • Online
technical integration, some standard purchasing
tools would suffice from airlines,
OLTAs
b. Buying behavior of SMEs
Actually, SMEs are “price seekers”, focusing almost exclusively in

reducing prices. They seek access to negotiated rates (best available
fares) and don’t have travel policy. Most of their travel is domestic, and
they buy more like leisure travelers than like MNCs. Some of the SMEs
specially value personalized service more than MNCs do.
20
September 2008
In the next years, the buying behavior of SMEs could evolve to:
• A basic travel management, looking to analyze all the travel

expenses, not just looking for the lowest priced ticket
• A more advanced travel management, somehow starting to
buy as MNCs
• Online purchasing from airlines and OLTAs
Although it’s not clear which of these will end up being the main buying
habit for SMEs in the next years, all of them would imply to modify the
actual business model, either by offering different services to different
clients (if SMEs start demanding travel management services, the
service offer should be different to that of MNCs) or by developing
online channels to compete with airlines and OLTAs.
c. Adoption of online booking tools in MNCs
The adoption of online booking tools in Latin America is at an early

stage. MNCs are just starting to implement online booking tools, some
from a regional initiative to ensure compliance and others from a global
mandate.
Adoption is still very low, facing start-up problems, lack of content (in
Brazil and Mexico) and cultural resistance.
For the next years, it depends on the content fragmentation issue

whether online booking tools are adopted or not. If content is solved,
it’s only a matter of time for most MNCs to adopt online booking tools
(see Chart 24).
Chart 24
KEY ISSUES FROM THE DEMAND SIDE (Cont.) Very high
Very low
Current Possible
• MNCs are just starting to implement • Early stage • Relevant use

online booking tools. Some from a in most
regional initiative to ensure countries
Adoption of compliance, others from a global (40%
online mandate adoption)
booking • Adoption is still very low, facing • Poor adoption
tools in start-up problems, lack of content due to lack of
MNCs (in Brazil and Mexico) and cultural content (10%
resistance adoption)
• If content is solved, it’s only a
matter of time for most MNCs to
adopt online booking tools
• Still very low in LATAM, but MNCs • Not an • Demand for
increasingly have global standards to issue CO2
comply with calculators
Environmental • There will be no real alternative to air and
concerns travel in LATAM in the next 3-5 years, environmental
so MNCs’ needs may limit to CO2 ly friendly
calculators and environmentally suppliers
friendly, certified hotel chains
21
September 2008
d. Environmental concerns
Actually, environmental concerns are not an issue in Latin America.

However, MNCs increasingly have global standards to comply with.
There will be no real alternative to air travel in LATAM in the next 3-5
years, so MNCs’ needs may limit to CO2 calculators and
environmentally friendly, certified hotel chains.
e. Secure transportation
Currently, the transportation for business travelers is managed directly

by corporations, mainly due to:
• A tradition for safe secure transportation / chauffer service in

LATAM, due in part to security issues that are not new to the
region and a culture of service with inexpensive labor
• Most suppliers are not very formal and are dealt with by the
corporations directly
Despite this, MNCs are increasingly demanding TMCs to manage

these services together with the rest of the content, although this will
have a low impact in the TMCs business model (see Chart 25).
Chart 25
KEY ISSUES FROM THE DEMAND SIDE (Cont.)
Very high
Very low
Current Possible
• There is already a tradition for safe • Managed • Managed by

transportation / chauffer service in directly by TMCs
LATAM, due in part to security corporations
issues that are not new to the
region and a culture of service with
Secure inexpensive labor
transportation • Most suppliers are not very formal
and are dealt with by the
corporations directly
• MNCs are increasingly demanding
TMCs to manage these services
together with the rest of the content
Competition, new entrants and substitution
5 years:
a. Consolidation of travel agencies
22
September 2008
b. Intense competition on price

c. Disintermediation
d. Substitutes for travel
a. Consolidation of travel agencies
Actually, multinational TMCs account for 26% of the business travel

market, although it’s expected to increase in the next 3 to 5 years.
Airline revenues’ dependence on volume squeezes the margins of smaller

travel agencies, forcing them to join a network, sell to a larger TA or
eventually be out of the market.
Chart 26
KEY ISSUES FROM COMPETITION, NEW ENTRANTS AND SUBSTITUTES Very high
Very low
Current Possible
• Airline revenues’ dependence on • Multination • Multinational

volume squeezes the margins of al TMCs TMCs with
smaller TAs, forcing them to join a have 26% more than
Consolidation
network, sell to a larger TA or of business 36% of
eventually be out of the market travel business
market travel market
• To the extent that TMCs are not • High • High

Intense differentiated, competition on price
competition will remain a constrain against
on price recovering the loss of revenues
from airlines
b. Intense competition on price
Currently, there is a high competition on price, to the extent that TMCs

are not differentiated, thus competition on price will remain a constrain
against recovering the loss of revenues from airlines.
The impact in the business model of the travel agencies is high,

because a differentiation strategy based only on price competition
below prices, eroding profitability (see Chart 26).
c. Disintermediation
Airlines have strong incentives to develop their direct channels for

SMEs and unmanaged corporations, but not for MNCs. Generally,
MNCS deal directly with the airlines, with net tariffs.
Actually, some airlines sell directly to leisure, unmanaged SMEs,

although it’s expected that most airlines will use extensively the direct
channels for leisure and unmanaged SMEs.
23
September 2008
The possible evolution in disintermediation in the business travel has a

high impact in the travel agencies because it could represent lower
revenues from the airlines, switching the sources of income from the
airlines to the clients.
Chart 27
KEY ISSUES FROM COMPETITION, NEW ENTRANTS AND SUBSTITUTES (Cont.)
Very high
Very low
Current Possible
• Airlines have strong incentives to • Some sell • Most airlines with

develop their direct channels for SMEs direct to extensive use of
Disinter- and unmanaged corporations, but not leisure, direct channels
mediation for MNCs unmanage for leisure,
d SMEs unmanaged
SMEs
• Developments in VC, CC, and other • Not an • Not an issue

Substitutes collaborative technologies have not issue
for travel reduced demand for travel so far, and
aren’t expected to do so
d. Substitutes for travel
Although there have been developments in VC, CC, and other

collaborative technologies, they have not reduced demand for travel so
far, and aren’t expected to do so
Supply
5 years:
a. Airline consolidation
b. Content fragmentation
c. Revenues from airlines
d. Revenues from GDSs
e. Hotel consolidation
a. Airline consolidation
Air domestic markets in Latin America are highly concentrated, with the
two main airlines accounting for more than 70% of the domestic market
in all the main markets (except for Mexico).
Some airlines have the will to expand in the region (TAM, LAN, Gol,
Copa, TACA), but their ability to do so in 3-5 years’ time is seriously
affected by restrictions on foreign ownership of airlines.
24
September 2008
LCCs are not very developed in the region except for Brazil, with a
strong participation due to the appearance some years ago of Gol.
For the following years, some cross border consolidation from some of
the main airlines is expected. Also, LCCs in Mexico are likely to
consolidate with the end of government incentives on fuel, and could
develop in Colombia, where the domestic market is larger than the
international market and there are no LCCs.
Chart 28
KEY ISSUES FROM THE SUPPLY SIDE Very high
Very low
Current Possible
• LCCs in Mexico are likely to consolidate • Highly • Consolidation

with the end of government incentives concentrat of LCCs in
on fuel ed Mexico, some
• LCCs could develop in Colombia, where domestic cross-border
the domestic market is larger than the markets, 5 consolidation
Airline international and there aren’t LCCs regional
consolidation • Some airlines have the will to expand in carriers
the region (TAM, LAN, Gol, Copa,
TACA), but their ability to do so in 3-5
years’ time is seriously affected by
restrictions on foreign ownership of
airlines
• Airlines have strong incentives to move • Highest in • Increased,
content outside of GDSs, while hotels countries aggregated
have most of their content out the GDS with LCCs back with IT
• Accessing that content requires higher and where • Increased,
Content processing costs or technology (multi carriers sell not
fragmentation source front office) direct aggregated
• Several IT providers are developing • Reduced, not
content aggregation solutions aggregated
• TAM’s growth in international flights may
lead them to use GDSs
b. Content fragmentation
Actually, airlines have strong incentives to move content outside of

GDSs, while hotels have most of their content outside the GDS.
Therefore, content fragmentation is higher in countries with LCCs and
where carriers sell direct.
Accessing the content out of the GDSs requires higher processing

costs or technology (multi-source front office), representing lower
profitability for the travel agencies and a high impact for travel
agencies in the following years.
Several IT providers are developing content aggregation solutions

(mainly multi-source front office). Also, TAM’s growth in international
flights may lead airlines to use GDSs again.
c. Revenues from airlines
Airlines commissions and incentives are still flat (about 7.5% of sales)
but under pressure due to:
25
September 2008
• Airlines’ pressure on cost cutting

• Airlines’ push to disintermediate
• Airline consolidation
For the next 3 to 5 years, revenues from airlines are expected to fall,
although the new level of commissions and incentives is still uncertain
(see Chart 29).
Chart 29
KEY ISSUES FROM THE SUPPLY SIDE (Cont.) Very high
Very low
Current Possible
• Airline commissions still fat, but • ~7.5%, • 5%
Revenues under pressure due to: decreasing • 3%
from – Airlines’ pressure on cost cutting • 1%
airlines – Airlines’ push to disintermediate
– Airline consolidation
• Two factors could drive them down • Between • Stable
– Fewer bookings with GDS US$ 1 and • Reduction, due
incentives: with the growth of LCCs 2 per to increase of
Revenues
and content fragmentation, a higher segment off-GDS content
from GDSs
portion of bookings will represent for the big • Reduction, due
lower GDS incentives, or none, or travel to increase of
even booking fees for TAs agencies off-GDS content
– Reduction of incentives: airlines’ and 20%
pressure on GDS cost could result decrease of
in lower GDS incentives incentives
• The industry is still very fragmented • Highly • Highly

• Some chains are growing thru fragmented fragmented
Hotel aggressive investments • Some minor
consolidation consolidation thru
growth of chains
• Major
consolidation
d. Revenues from GDSs
Actually, GDSs are paying between US$1 and US$2 per segment to
the bigger travel agencies. However, two factors could drive them
down:
• Fewer bookings with GDS incentives: with the growth of LCCs

and content fragmentation, a higher portion of bookings will
represent lower GDS incentives, or none, or even booking fees
for TAs
• Reduction of incentives: airlines’ pressure on GDS cost could
result in lower GDS incentives
Although there is a general agreement that revenues from GDSs are

going to fall, it’s not clear yet how strong the drop will be, depending on
different factors (see Chart 29).
e. Hotel consolidation
The hotel industry is highly fragmented, although some hotel chains

are growing through aggressive investments.
Although it’s still uncertain if the fragmentation is going to increase or

not in the following years, as hotels don’t represent a very high
percentage of the actual business mix for MBTCs, hotel consolidation
doesn’t have a high impact in defining the different scenarios.
26
September 2008
Socio, Political and Economic Issues
a. Business travel growth in Latin America
The economies and business travel are expected to maintain high

growth rates. However, political and economic instability could affect
some countries and the region, resulting in lower annual growth rates
than those of the last years (see Chart 29).
Chart 30
KEY SOCIO, POLITICAL, ECONOMIC ISSUES
Very high
Very low
Current Possible
• The economies and business travel • 13% CAGR • 13%

Business are expected to maintain high (‘02-’08) • 5-7%
travel growth rates • 0%
growth in • However, political and economic
LATAM instability could affect some
countries and the region
• Airline commissions and TAs are • Not highly • Not highly

not highly regulated in LATAM regulated regulated
• In Colombia and Chile, with highly
concentrated airlines and TAs, TAs
Regulation have managed to impose booking
fees to clients thru regulation to
compensate for the loss of airline
commissions. These fees risk being
dismantled
b. Regulation
The Latin American business travel market is not highly regulated, and
it’s expected to remain like this for the next 3 to 5 years.
For example, in Colombia and Chile, with highly concentrated airlines

and travel agencies, travel agencies have managed to impose booking
fees to clients through regulation to compensate for the loss of airline
commissions
Prioritization of themes by impact and uncertainty
To conclude, all the themes mentioned before were considered depending

on the impact and uncertainty, to develop the different scenarios.
Those themes with high certainty and high impact (“inevitable”) must
occur in all scenarios, while those with high uncertainty and impact
(“pivotal”) are the basis to define the different scenarios (see Chart 30).
On the other hand, those themes with low impact were discarded for
simplicity.
27
September 2008
Chart 31
PRIORITIZATION OF THEMES
Inevitable
Pivotal
+ • Evolving needs of MNCs • Business travel growth in

– Consistent service LATAM
across regions • Revenues from airlines
– Systems integration, • Revenues from GDSs
expense management • Content fragmentation
ERP – Airlines To be
– Travel policy support – Hotels considered for
with MIS, reports • Adoption of self-booking the scenarios
• Consolidation tools in MNCs
• Airline consolidation • Buying behavior of SMEs
Impact • Intense competition on
price
• Disintermediation
• Regulation • Hotel consolidation

• Environmental concerns • Car rental consolidation Not to be
• Substitutes for travel • Secure transportation considered for
– the scenarios
– +
Uncertainty
28
September 2008
About Hermes Management Consulting
Hermes Management Consulting (Hermes) is a Latin American consulting

firm specializing 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, and
have worked extensively for leading companies in Europe and Latin
America.
Hermes has been very active in sector analyses, company valuations,

mergers, corporate strategy and business plan development, as well as the
identification and implementation of operational improvements. These
projects have focused on the payment systems, supermarket, retail,
consumer goods, health care, energy, logistics, apparel,
telecommunications, tourism, entertainment and real estate sectors. Not
only does Hermes have extensive experience in these sectors, it has also
helped assess a variety of acquisition opportunities in numerous other
industries.
Hermes has carried out strategy, organization, operational improvements

and valuation projects, in Argentina, Brazil, Colombia, Costa Rica, Chile,
Dominican Republic Ecuador, France, Greece, Guatemala, Italy, Malaysia,
Mexico, Paraguay, Peru, Poland, Saudi Arabia, Spain, United States of
America, Uruguay, United Kingdom and Venezuela.
To learn more about Hermes Management Consulting please visit their

website at http://www.hermesmc.com.ar
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The Future of Travel

Scenario Planning for Multinational

About Scenario Planning .............................................................. 1

Scenario Planning for Multinational

Scenario Planning is a structured process of thinking about and anticipating the

• Understand Latin America’s business travel market evolution and trends

• Develop scenario(s) on possible developments of the market and their impact

In addition, an economic model for an average TMC was developed in order to

A detailed explanation of the research methodology is provided in the appendix.

Overview of the Latin American Business Travel

• Rapid internet adoption enabling the use of online channels

The industry’s structure is under a great transformation:

• Demand has experienced a high growth in business travel, aligned with

Rapid growth in Internet penetration

developed markets, such as USA.

Internet user penetration Online buyer penetration Online buyer penetration

Chile 43.2% 33.3% 14.4%

Argentina 39.7% 40.0% 15.9%

Colombia 22.8% 27.3% 6.2%

Brazil 22.4% 37.1% 8.3%

Mexico 21.8% 33.9% 7.4%

Latin America 22.2%

Source: D’Alessio IROL; team analysis

USA Argentina USA USA

5 or 6 years ago (see Chart 2)

Global mandate from Multinational Corporations (MNCs) that have implemented

Airlines’ cost cutting efforts

• Personnel through automation of processes (online check-in and self check-in

Mexico 16% 1% 8% 9% • Revenues from

100%= 763.4 100%= 45.8

North America 27.7 Colombia 5.2

5 Countries account for more than 80% of the total Latin

Source: World Travel & Tourism Council; team analysis

500 Business travel

o Consistent service across the region and/or worldwide with

o Enforcement of travel policy

Latin America Other markets

• Latin American OLTAs are starting to target SMEs,

Source: Interviews; team analysis

Latin America Europe USA

113 125 102 105

2007 2005 2006 2007 2008 2005 2006 2007 2008

* Direct and indirect (airlines, traditional travel agencies and OLTAS)

68.1% 68.2% 7.2%

2004 2005 2006 2007

Source: ALTA, IATA; team analysis

Source: ANAC,JAC, DGAC, interviews, websites; team analysis

With rising oil prices, changes in the industry are accelerating:

* Data for 2006

TAM GOL LAN Copa

2007 2012 2007 2012 2007 2012 2007 2012

Source: Companies reports; team analysis

LCC share Domestic market

USA 29% 640

Source: ANAC,JAC, DGAC, interviews, websites; team analysis

Source: Amadeus; team analysis

Content fragmentation increases costs to travel agencies, by reducing the productivity

As mentioned before, many TMCs are affiliated or have franchised operations in

travel, such as leisure and inbound travel.

100% = 81 275 385

Latin Europe USA

2004 2005 2006 2007

Source: Annual reports; team analysis