GLOBAL STRATEGY AND LEADERSHIP

PRE-SEEN EXAM CASE STUDIES

CPA PROGRAM
SEMESTER 2 2014

CONTENTS:
MINOR CASE STUDY:
DAKZ PERFORMANCE SPORTS APPAREL.2
MAJOR CASE STUDY:
AN INTRODUCTION TO THE AUSTRALIAN TRAVEL AGENCY INDUSTRY.9

MINOR CASE STUDY:

DAKZ PERFORMANCE SPORTS APPAREL

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DAKZ PERFORMANCE SPORTS APPAREL

The following case is fictitious, and any resemblance to real persons is purely coincidental. The
financial data contained in this case is for illustrative purposes only, and may not represent
actual industry performance.
The Industry
The global athletic apparel and footwear industry is big business, generating huge profits and
including globally-recognised brands such as Nike, Adidas and Asics. In 2013, the combined
market for athletic apparel and footwear was estimated to be USD 178.1bn. The athletic apparel
market contributes approximately 38 per cent to the market.
A growing segment of the athletic apparel market is the highly specialised category of
compression apparel. Compression apparel is designed to improve athletic performance by
reducing muscle vibration and improving circulation. This type of apparel has been credited, not
only with increasing athletic performance, but also with reducing recovery time and postexercise soreness.
The category of compression apparel has seen exponential growth in the past five years, with
some US industry reports suggesting annual sales growth of 55 per cent from 2007-08 to 200910, and total sales growth of 68 per cent from 2010-11 to 2012-13.
The following table demonstrates the size of the various segments of the athletic apparel and
footwear market, highlighting growth in the compression apparel category:
Year
Total
Apparel&
Footwear
(USD)
Total Athletic
Apparel
(USD)
Compression
Apparel
(USD)
Compression
Apparel (%)

2008-09
158.2bn

2009-10
163.0bn

2010-11
167.9bn

2011-12
172.9bn

2012-13
178.1bn

47.5bn

50.5bn

63.8bn

65.7bn

67.7bn

2.4bn

3.7bn

4.4bn

5.4bn

7.4bn

5.1

7.3

6.9

8.2

10.9

Although Australia is a relatively small market in relation to the global athletic apparel market
(estimated to be in the order of AUD 1.2bn), the global brands still predominate, with the
balance of market share contested by several smaller innovative and specialised manufacturers
with niche brands. Product category market shares in the US are similar to those in the
Australian industry.
The Australian market is perceived as an ideal market to test product developments on
educated and informed consumers. This is because Australia has a relatively high level of per
capita participation in regular exercise and sporting activity. Also, while the US market for

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athletic apparel grew at a Compound Annual Growth Rate (CAGR) 1 of 0.8 per cent from 2008
to 2012 2, the Australian market grew at a CAGR of 8.3 per cent from 2008 to 2012 3.
Finally, in addition to the relatively high levels of physical activity per capita, the highlydeveloped Australian economy is dominated by a large proportion of consumers who are early
adopters of new technologies and products, with high disposable incomes.
One of the newer brands in the compression apparel category is Dakz, a wholly
Australian-owned business that began as a start-up and was created by a group of elite athletes
with an entrepreneurial dream.
The Organisation
Dakz has been a highly successful business in Australia, producing a wide range of athletic
apparel, including performance apparel. The company was started by Will Winsome and Sally
Armstrong in early 2007, from simple beginnings. Sales were modest in the 2007-08 financial
year (approximately $4.0m), but grew exponentially in 2008-09 following the 2008 Olympics and
a national distribution deal with a major sporting goods retailer. Dakz started making
compression apparel for triathletes, before quickly diversifying into small production runs of
cycling and running clothes for athletes and active Australians. Dakz has subsequently
expanded into a broad range of performance, fitness and compression wear for active people.
The following table shows the companys sales and profit results over the past five years (all
figures are in AUD):
Year
Sales
Expenses
Gross Profit

2008-09
13.1m
12.0m
1.1m

2009-10
23.3m
20.3m
3.0m

2010-11
33.9m
25.7m
8.2m

2011-12
44.9m
33.8m
11.1m

2012-13
66.5m
44.9m
21.6m

The People
Dakz has a well-established organisational structure, comprising a Board of Directors and an
organisation of dedicated and passionate employees led by an executive management team
that has largely been in place since the companys commencement.
The Board was established in early 2009, and is comprised of seven Australian businesspeople
and accomplished sportspeople. There are currently no international board members.
The Chair of the Board is Sir Rod Fisher, a distinguished Australian businessman and former
Olympian. Sir Rod has served on the boards of many Australian listed companies.
The Deputy Chair is Sally Armstrong, co-founder of Dakz and wife of Dakz CEO, Will Winsome.
Sally is a former Australian national swimming champion in the 50m Butterfly. Sally is not
involved in the operations of the business on a daily basis. However, she is an active Board
member and holds the largest individual shareholding in the company. Sally is committed to
Dakzs international expansion.
1

The Compound Annual Growth Rate is an average of the year-on-year annual growth rate. It is calculated by
considering the ending value, beginning value, and the timeframe to be measured. It assumes growth occurs at the
same annual rate, which clearly does not occur in reality.
2
Feb 2012 The US Athletic Apparel and Footwear Industry Outlook to 2015 Evolving Niche Segments in
Sportswear
3
Feb 2013 Australia Athletic Apparel and Footwear Industry Outlook to 2017 Surging Participation in Sports Paving
Way for Growth

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Other board members include:

Joanna King, former Australian netball captain, now a sports commentator and media
consultant;
Buzz Sawyer, the Australian Creative Director for international advertising agency, X & Z
Matters;
Jeff Watson, a partner at leading international law firm, BTW, specialising in intellectual
property and copyright law;
Chris McDonald, owner of IT consulting and service provider, In The Clouds; and
Caroline De Carlo, the Community and Industry Partnerships Manager for the recently
established non-government organisation, Indigenous Sports Australia.
Will Winsome, CEO, is a former Australian marathon runner and Olympian. Following his
retirement from elite sport in 1998, he completed an Executive MBA at a leading Australian
business school. Will leads the Dakz executive management team, and has been an involved
and engaged leader, manager and mentor at Dakz. He is always present at product launches
and store openings, and is very popular with Dakz employees. Dakz employees often comment
on how Will always seems to be thinking several steps ahead of everyone else, and how he is
highly driven and often seems obsessed with new ideas for products or commercial
opportunities for Dakz. They admire his persistence and resilience, as well as the way he
always seems to achieve his goals.
Leading the organisations strategy development is Jane Taylor. Jane became the General
Manager Strategy for Dakz in May 2010, after a successful career as a management consultant,
specialising in the Australian and international retail industries. Prior to joining Dakz, Janes
most recent career achievement was the establishment of the flagship Australian retail store of
a well-known European fashion manufacturer and retailer. Jane also has experience assisting
Australian businesses to develop new markets internationally. She worked with a popular
Australian stationery retailer to expand into Asia via a joint venture, and also assisted an
Australian travel goods brand to establish a product distribution franchise model in Asia.
Ken Tuckey has worked with Dakz since it started business in 2007. Ken has been involved in
the production process at Dakz throughout its history, and was promoted to the role of General
Manager Operations in 2009. Prior to joining Dakz, Ken was a semi-professional football player,
and also worked part-time in sales, marketing and business development roles in the
sportswear and promotional merchandise industries. Ken is the primary contact for all of the
companys suppliers, and frequently travels to meet with the companys contract manufacturer
in China. Ken has recently been diagnosed with a rare illness and is planning to retire from
Dakz within the next six months.
Ewan Meehan has worked with Dakz since 2008 in the role of Chief Financial Officer (CFO).
Ewan is a CPA and has held a diverse range of roles throughout a career spanning more than
20 years. His roles have included Financial Controller for a large logistics and distribution
business, and more recently, CFO of a multi-national business which services the mining and
resources sector. Ewan is an avid sportsperson and chose to join Dakz in 2008 to pursue his
passion for assisting a medium-sized, entrepreneurial business to grow and be successful.
The executive management team leads a team of dedicated and passionate employees of
approximately 200 full-time equivalent staff, comprised of full-time and part-time employees, as
well as casual workers who supplement the team to meet seasonal peak workloads.
The culture at Dakz has typically been one of energy and excitement. As the company has
grown from one success to the next, the core group of early employees have been individuals
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who love sport and exercise, and often participate at an elite level. Dakz provides a high degree
of flexibility to its employees to attend training sessions, competitions and championships, both
domestically and internationally. Dakz also provides a generous discount on products
purchased by employees, and holds a number of family and friends special clearance sales on
sample and discontinued lines throughout the year.
Dakz was named as an Employer of Choice in the 2011 Australian Human Resources
Association Employment Awards. Employers are nominated by employees, and the awards are
based on selection criteria as voted by employees. Interestingly, Dakz was not nominated for an
Employer of Choice award in 2012 or 2013.
Product Development
Dakz invests a considerable amount of its financial resources in research and development of
its products. Previously, the focus has been on clothing for participation, such as compression
tights, T-shirts and shorts, triathlon suits, and lightweight running singlets and shorts. The
company plans to introduce some additional product lines over the coming years. These include
outerwear such as rain jackets, track suits, hoodies and other items designed to be worn before
and after sporting activity.
Currently, a new product line that Dakz is contemplating is in the area of compression sleeves
and guards. These are compression wear items that protect selected parts of the body, such as
arm sleeves and calf sleeves. These products are designed to provide a range of benefits,
including increased circulation to enhance recovery and reduce soreness, as well as providing
sun protection.
Based on US sales data, the protective sleeves category is the fastest-growing and most
profitable category in the compression wear market.
Suppliers & Manufacturers
Dakz currently has a team of in-house designers and sports scientists. The seven designers
come from a variety of professional backgrounds, including fashion, sportswear, swimwear and
lingerie. The three Dakz sports scientists specialise in biomechanics and exercise physiology.
In addition to its in-house expertise, Dakz also engages local universities and sports science
institutions to conduct research and testing in order to maintain its high standards of product
quality and innovation.
Samples are generally created in Australia in a purpose-built facility at the Dakz head office,
which is located close to Melbournes Tullamarine Airport. Dakz has a highly-experienced team
who cut, make and trim the sample garments prior to large-scale production.
Production occurs at a Chinese, family-owned sportswear clothing manufacturer with whom
Dakz has had a relationship for the past 7 years. Until recently, Dakz has been pleased with the
quality and timeliness of products from its Chinese manufacturer. However, Ken Tuckey has
expressed concerns to the executive management team that the existing manufacturer is
unlikely to have the capacity to deliver the additional quantities required to meet anticipated
demand, and within reasonable timeframes. This is because the owner of the Chinese factory
will not acquire the new machinery required to produce additional quantities of products in a
timely manner.

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Sales and Distribution

Dakz operates its own network of retail stores in Australia, with approximately 20 outlets.
Distribution also occurs through major chains of sporting goods retailers and department stores.
Dakz does not currently operate any company-managed retail stores in any international
markets. However, it utilises the services of international distributors and sales agents in smaller
Asian markets, such as Singapore and Taiwan, who arrange distribution of Dakz products into a
small number of sporting goods retail stores.
Online sales are an increasingly important sales channel for Dakz, with a surge in online sales
in large markets like the US and Europe during 2012-13. Online sales now account for
approximately 10 per cent of all of Dakzs global sales.
Although Dakz has a sales presence in certain countries, such as Singapore and Taiwan,
through agency agreements in place, it does not currently operate any company-owned offices
outside of Australia. However, this will almost certainly change as the company increases its
market development activities, depending upon the entry mode that Dakz chooses for each
market.

The Need for Change

In 2013, the Board approved the companys Strategic Plan, which included the following:

Vision: To be one of the 10 most-recognised global sporting brands; and

Strategy: Work towards achievement of the company vision by increasing sales by 10
times over the next 10 years.

Through recent product development, the company has been able to achieve close to 40 per
cent market share in the Australian market for compression apparel, with negligible or
immaterial market share in international markets.
Despite several strategic planning and information sessions conducted by the CEO and
Executive Team for all employees, there currently appears to be a high level of inertia,
confusion and uncertainty within the organisation and its employees. This is likely to be due to
the scale of the proposed changes and global ambitions at Dakz, which many employees are
finding difficult to comprehend. Furthermore, many of Dakzs original employees joined Dakz
because it was a small, friendly, and vibrant company that was popular and well-respected in
the Australian market. There is a growing perception among many employees that the company
is becoming focused purely on a global presence, growth and profits, and will forget the
employees that helped it to become successful. This is despite assurances from Will Winsome
that the company is planning to introduce an employee share program offered to full-time
employees who have been employed by Dakz for more than 10 years.
Two of the directors participated in a recent government-sponsored Asian trade mission, where
they saw some of the challenges Dakz may face in achieving the companys vision. Amongst
these challenges was the sheer quantity of retail outlets in Asian markets, and the regulatory
barriers imposed on wholly foreign-owned companies setting up in some Asian countries.
Despite the perceived challenges, the directors still see many opportunities for Dakz to achieve
some quick wins in international markets.
At a recent Board meeting, these two directors presented an explanation of the international
expansion opportunities. As a result of this presentation, the Board commissioned an analysis of
international expansion opportunities by external management consultants. These consultants

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will engage with the executive management team, employees and other stakeholders in
conducting their analysis. The Board is expecting the management consultants final report in
the near future.

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MAJOR CASE STUDY:

AN INTRODUCTION TO THE AUSTRALIAN
TRAVEL AGENCY INDUSTRY

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AN INTRODUCTION TO THE AUSTRALIAN TRAVEL AGENCY

INDUSTRY
In 2013, the Australian travel agency industry had estimated revenue of $3.0 billion and
estimated profit of $521 million. The industry is classified as being in the mature stage of its
lifecycle, with total industry revenue having increased by 1.1 per cent from 2008 to 2013.

Industry services, customer segments and demand

Industry services

Australian travel agencies arrange travel bookings on behalf of Australians travelling both
domestically and internationally, as well as international travellers coming to Australia.
Essentially, travel agencies act as intermediaries between suppliers of travel products and
services and the travelling public by making bookings on behalf of travellers. They do not supply
their own travel products to customers, but act as the middleperson (e.g. agency) between the
traveller and the travel supplier. To take bookings on behalf of other travel suppliers, the travel
agencies must be licensed by the relevant licensing authorities.
The industry offers travellers a wide range of services. These services can be as simple as
providing travel information and making reservations and bookings for singular travel
components, to booking organised tours and arranging complex travel itineraries within
Australia or overseas. The industrys key products include travel information and bookings for
transportation (e.g. airlines, ships and rental cars), accommodation (e.g. hotels, motels and
serviced apartments), tourist activities and attractions (e.g. theme parks and museums), and
insurances.
Australian travel agencies also provide packaged travel for overseas visitors to Australia. This
can include making bookings, arranging tours within Australia, and arranging accommodation,
ground transport and insurance. These agencies also provide local advice, guides and
interpreters, and develop specialised itineraries for individuals or groups. Group size can vary
from enough travellers to fill a tour bus to groups that can fit into one 4-wheel drive vehicle for
smaller, specialised tours. The revenue for these services is directly related to inbound tourism
numbers.
Importantly, travel suppliers such as airlines that offer their services direct to travellers (e.g.
Qantas) are not considered to be part of the Australian travel agency industry, because they do
not take bookings on behalf of other travel suppliers, such as Virgin. Travel suppliers of this kind
have forward integrated to allow travellers to make direct bookings, but only for those travel
products that are owned by the suppliers themselves. Some travel suppliers (e.g. airlines) also
provide a booking service for other travel suppliers (e.g. hotels). These arrangements are not
considered to be part of the Australian travel agency industry for the purpose of this case study.
B

Customer segments

There are two broad customer segments for the industrys products:

Leisure travellers: persons travelling for holiday or leisure purposes, accounting for
approximately 70 per cent of all travel bookings.

Business travellers: persons travelling for reasons related to their employment, accounting
for approximately 30 per cent of all travel bookings.

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A large number of travellers contribute to both of these customer segments. For example, a
business traveller may travel often for work purposes and also travel during holiday periods for
leisure purposes.
C

Demand for travel agency services

Demand for travel agency services is largely affected by the demand for travel products in
general. The industry is sensitive to economic factors and other factors that affect travel. Major
events, such as September 11, the SARS and Avian bird flu outbreaks, and the war on terror,
have all contributed to fluctuations in inbound tourist numbers over the last thirteen years. The
global financial crisis (GFC) impacted individual and business travel from 2008 to 2010.
However, Australia emerged relatively well from the GFC, with growing disposable income and
a strong dollar, and the travel industry recovered quite well in the following years to 2013.
There are four major drivers of demand for travel agency services, largely based on the demand
for travel products more generally:

General economic conditions: Customer sentiment has significant impact on the demand
for travel. As travel is perceived to be a discretionary purchase, households typically
tend to reduce such expenditure in times of economic downturn. The global financial
crisis, fluctuating interest rates, and a low wage growth in Australia over the past few
years have resulted in customers having to exercise fiscal restraint and reduce leisure
travel.

Available leisure time: The availability of recreational leave and the ability of workers to
take holiday leave, impact industry demand. With less people taking extended leave,
long holiday bookings (3 to 4 weeks) are in decline. However, this decline in extended
holidays has been offset by growth in shorter holidays, with many Australians opting for
extended weekends and short breaks.

International tourism: As a large proportion of the travel agency industry revenue is

derived from international airline ticket commissions, the growth in Australians travelling
overseas has a large impact on industry demand. The number of Australians travelling
overseas has increased from 4.8 million in 2008-09 to 6.8 million in 2012-13. At the
same time total international visitor numbers to Australia only increased modestly from
5.5 to 5.8 million over the same period.

Business travel needs: Cost pressure on profitability, the increase in telephone and
video conferencing through technological advancements, and a decline in business
conference activity have all contributed to a reduced demand for business travel, both
domestically and internationally. To reduce travel costs, many large organisations buy
their services directly from travel suppliers, such as airlines and accommodation
providers, rather than use the services of travel agencies.

Industry value chain, revenue and structural trends

Industry value chain

Traditionally, travel suppliers have distributed their products through travel agency stores.
Leisure travellers would typically consult a travel agency store or travel agency website to find
and receive information on their destination and travel options, make a booking, and collect or
print their tickets. Business travellers would call their corporate travel agent to make their
booking.

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The Australian travel agency industrys value chain is illustrated in Figure 1 below:
Figure 1
Australian travel agency industry value chain
Travel Suppliers
Transport Suppliers
Domestic Airlines
International
Airlines
Cruise Ships
Rental Cars
Trains, Ferries etc.

Accommodation
Suppliers
Hotels
Motels
Serviced
Apartments
Hostels
Caravan Parks

Tourist Attractions
Museums
Theme Parks
Amusement Parks
Tourist activities

Insurances
Travel
Car Hire
Luggage
Cancellation

The Industry
Direct to
Customers

Travel Agency Retail

Stores

Travel Agency Websites

Travel Customers
Leisure Travelers

Business Travelers

Industry revenue stream

Travel agencies earn revenue in three broad ways.

1

Commissions paid by travel suppliers: Commissions accounted for about 85 per cent of
industry revenue in 2013. Travel suppliers (i.e. airlines, accommodation and transport
providers, and insurance companies) pay a commission to travel agencies when
bookings are made on their behalf. The travel agency charges the traveller the full ticket
price of the travel booking, including commissions, and transfers this amount, less the
agreed commissions, to the travel suppliers that are providing these services to the
traveller. Commissions typically comprise two components:

A front-end reward which is a fixed percentage paid on the value per ticketed
booking.

A back-end (often referred to as an override) payment, which is a variable bonus

for reaching agreed sales targets with a particular travel supplier. This type of
commission typically applies to larger travel agencies.

Within this industry, the split between front-end (fixed) and back-end (variable)
compensation has generally been about 3:1.

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Booking fees charged to travellers: Booking fees accounted for about 10 per cent of
industry revenue in 2013. Some travel agencies charge customers a fee for making
travel arrangements on their behalf. Generally, the more complex the travel itinerary, the
higher the fee charged to reflect the time and effort undertaken by the travel agency on
the travellers behalf. This type of arrangement is more prevalent for business travellers,
where the companies that engage a travel agency to make all travel arrangements on
their behalf pay a fee per booking. In recent years, some travel agencies have also
started to charge leisure travellers a fee for making a booking.

Advertising fees: These fees accounted for about 5 per cent of industry income in 2013.
Some large travel agencies earn income from allowing travel suppliers to advertise in
their brochures, travel information magazines and websites.

Table 1 shows typical commissions earned by travel agencies for various products provided by
travel suppliers.
Table 1
Typical travel agency commissions
Commission
Per Booking
(%)

Volume of
Total
Bookings (%)

Total
Commission
Revenue (%)

Less than 5

15

International airline tickets

10-15

35

29

Hotels and accommodation

15-20

15

17

Cruises

20

15

20

Other land items (cars, tours, activities

etc.)

20

10

13

20-30

10

16

Product
Domestic airline tickets

Travel insurance

Commissions from domestic airline ticket sales are in decline. This is due to changes in the way
customers purchase domestic airline tickets. Customers are increasingly purchasing their
leisure travel by booking directly over the phone or online rather than through travel agencies. In
2006, Qantas announced that it would no longer pay base commissions to travel agencies for
domestic and New Zealand flights, and that it would reduce commissions from international
flights from 7 per cent to 5 per cent. Domestic airfare price reductions have further compounded
the decline in the value of commissions earned from domestic flights.
Commission from international airline ticket sales is the main source of revenue for the industry.
Cruise ship travel is also increasing its share, as popularity for this form of travel grows.
However, domestic travel packages (including travel insurance, car rental and accommodation)
continue to be an important source of revenue for the industry.
C

Structural changes in the industrys value chain

The structure of the industrys value chain has been changing rapidly in recent years.
Traditionally travel suppliers sold their products through retail store-based travel agencies where
leisure and business travellers would go to make their bookings. However, with the advent of

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travel industry technology, competition for travel revenue, particularly leisure travel, has
intensified. There are two main factors impacting the industry in this regard:

Online travel agencies:

The emergence of online travel agencies has heightened competition and is a major
threat to the traditional store-based travel agencies (also known as bricks-and-mortar
travel agencies). Over the past seven years, online booking has emerged as the
preferred booking method for many travellers, as they increasingly become comfortable
with making online payments and transactions. In addition, traditional store-based travel
agencies are finding that customers are more knowledgeable than ever about their travel
destinations and potential travel plans due to increasing internet usage. Most customers
have researched destinations and associated prices for airfares, accommodation and
attractions before walking into any store-based travel agency. They no longer need the
expert travel information that travel agencies have traditionally provided.

Online travel supplier websites:

Increasing customer preference for booking travel online has influenced travel suppliers
to develop their own websites to attract direct bookings online. The global financial crisis
and the growth in low-cost airline providers in Australia, such as Virgin, Jetstar and Tiger
Airways, have encouraged customers to bypass the traditional travel agencies and make
their bookings online directly with the travel suppliers. This way, customers can take
advantage of discounted rates that are only available online. Direct customer bookings
reduce the cost per booking and improve overall profitability for travel suppliers, because
they no longer need to pay commissions to travel agencies. Savings on commissions are
then partially passed on to customers as discounted fares.

Industry experts estimate that about 35 per cent of all airline ticket bookings in Australia are now
made online, and this is expected to increase to 60 per cent in the next five years. Each year,
internet-based booking services are improving in their functionality, meaning they can be used
to organise more complex travel itineraries. As a growing percentage of travellers move to
booking online and value the convenience it offers, many may never return to using traditional
store-based travel agencies.
The emergence of online travel agencies such as Webjet, Expedia and Zuji (mainly for flights),
and Wotif.com (for accommodation), is a significant threat to retail, store-based travel agencies.
These online companies help travellers to locate the cheapest travel options without having to
visit multiple direct travel supplier websites. Online-only travel agencies can achieve reasonable
profitability from a combination of low commissions and fees charged directly to customers.
Expedia and Zuji abolished fees in 2011 on all flights booked in Australia. These two businesses
now rely on a low commission from airlines, plus extra profits achieved by cross-selling higher
margin products and services to customers. Fee cutting by online travel agencies is a significant
threat to the profitability of traditional travel agencies that have higher fixed operating costs, such
as store rent.
More international competitors are expected to enter the Australian travel agency industry as
technology makes entry easier. In 2010, the search engine Google emerged as a major new
entrant to the travel industry. This followed Googles purchase of flight information software
company, ITA, for USD 700 million. Google uses ITAs software to search the websites of the
worlds airlines and makes it easier for customers to search for flights, compare flight options
and prices, and purchase tickets. Google earns 5 to 10 per cent of its advertising revenue from
online travel searches. To avoid losing this revenue, Google decided not to sell airline tickets
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itself for a period of 5 years until 2015. Rather, Google directs searchers to various direct airline
websites where they can purchase their tickets. Australian online travel agencies are
unconcerned with Googles entry to the airline ticket search market. Data shows that Australians
dont want another distribution system, especially one that requires the customer to search for a
ticket on Google and change to another website to purchase.
As a result of the growth of online travel bookings, it is important to understand current trends
that impact customer behaviour as well as future threats and opportunities for travel agencies.
The internet has revolutionised the way people buy travel services such as flights and holidays.
Industry journal, Travel Weekly, found in 2012 that 66 per cent of surveyed respondents go
direct to airline websites to make their bookings. Further, 78 per cent of consumers cite online
booking methods (being online direct, online agency, or search site) as being their method of
booking, because they were seeking the cheapest price. This is cause for concern for storebased travel agencies, as their potential customers pick up brochures and information in store
and then go online to make their bookings to take advantage of discounted fares.
Australian industry associations have highlighted research about the United Kingdoms leisure
travellers as being relevant to Australian travel agencies. The research conducted by Tealeaf
(2010) on a sample of internet users showed that the amount of choice on the internet was
damaging brand loyalty. Only 12 per cent of respondents said they book their holidays with the
same travel agency or travel supplier every time. As more customers decide to book separate
parts of their holiday package with different travel suppliers, only 14 per cent said they would
book all the components of a holiday from the same website. For internet-savvy customers,
factors like price, variety and customer experience come to the fore in the decision-making.
Over 62 per cent of survey respondents cited price as a major consideration when booking a
holiday.
In Australia, research on internet traffic mirrors the trends experienced overseas, with many
Australians also buying their tickets directly from the airlines. According to Boyd (2010), the Roy
Morgans research showed that the most popular travel websites in May 2010 were as shown in
the following table:
Table 2
Most Popular Travel Websites, 2010

Website

Share of Online
Bookings Made (%)

Qantas

9.5

Virgin

8.9

Jetstar

8.8

Webjet

6.3

Wotif.com

6.2

Flight Centre

5.6

Expedia

1.7

Zuji

1.3

All other

51.7
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This research confirmed industry fears that, for the first time, airline websites have replaced travel
agencies as the main method of booking an airfare online. This trend has continued in the last
four years, with more consumers making bookings directly or via online travel websites.
The trend towards online travel bookings is also increasing for business travel. However, rather
than book directly through travel supplier websites, the majority of business travel is booked
through online corporate travel agency services. These corporate travel agents have
sophisticated systems which consolidate individual airline, accommodation and ground transport
website content, and allow the business traveller to book their whole trip on the one corporate
travel website.
Industry response to structural change
In response to structural change in the industry and the strong competition from online and
direct bookings systems, many major traditional retail store based industry competitors have
established their own online presence and now offer online booking services. This has enabled
some to expand into overseas markets, particularly the United Kingdom and the United States,
in search of growth and profit opportunities through virtual shop-fronts in these markets. These
companies generally charge a booking fee for online bookings, ranging from between $15 to
$50 per booking for domestic travel and more for international bookings. Commission revenue is
earned from the travel providers in addition to the booking fees paid by customers.
The advantage to customers and business travellers of retail store based travel agency
websites is that they often consolidate all travel booking requirements in one location, and
customers have the ability to pick up tickets and information in-store as well as receiving
booking advice and assistance. It also allows the major travel agencies to capitalise on the
strong brand awareness customers have for their store outlets, and to convert this brand
awareness into awareness and acceptance of their online services.
Research has shown that almost half of the airline tickets in the world are purchased online, but
most people who try to do this are frustrated by the experience. There are too many choices for
customers to select from. For example, at any one time there can be 300 different ticketing
choices available to someone wanting to fly in Australia from Sydney to Melbourne or Sydney to
the Gold Coast. Customers can buy full-fare seats with catering and checked-in luggage, ultracheap fares with no catering and carry-on luggage only, and many combinations of these
elements. Navigating through different travel supplier websites to search the various options is
time-consuming, and can be frustrating. Often, by the time customers have finished their
research, the fare option they decide to select is no longer available, because airline websites
are updated frequently throughout the day to optimise airline yield management.

Industry Key Success Factors

The following four key success factors are identified as critical for competitors in the industry:

Being part of a buying group, promotion and marketing scheme: This lowers costs and
increases market presence. It is important to capture as much market share as possible
by presenting multiple brands to different consumer segments. For example, provide an
online presence for consumers who want to book for themselves, and retail stores for
those who want advice and a face-to-face experience. Also, having different brands
targeting different types of consumers can provide multiple access points but leverage
buying power.

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Having a loyal customer base: For retail store-based travel agencies, it is important to
provide professional service to clients through an ongoing training program for
employees, to generate repeat custom. For online only travel agencies, easy customer
signup and login are important. Websites should remember key customer information to
speed up the online booking process for return customers. Making available high-quality
and accurate information online is also important for online travel agencies.

Proximity to key markets: Being situated in a highly-visible location can attract local and
drop-in customers for traditional retail stores. For online bookings, utilising tools such as
search engine optimisation (SEO) and search engine management (SEM) is important to
ensure good placement in search results related to travel and bookings associated with
travel.

Access to the latest available and most efficient technology and techniques: A
computerised information and reservations and bookings system lowers costs and
provides quality customer service and convenience.

Industry experts predict that in order to be successful in the industry in the future, competitors
must hold an advantage in each of these of these key success factors. It will no longer be
sufficient to compete on the basis of one or several key success factors alone.

Competitive landscape

Competition in the industry is high and expected to increase.

Increasing awareness of pricing as a result of the growth in online bookings has intensified
price-based competition. Loss of sales from retail store-based travel agencies to online direct
bookings with travel suppliers is increasing the competition for market share. As a result,
significant consolidation has occurred within the industry, and it now consists of only two or
three major shop-front travel agency franchises. Industry experts suggest that in the future,
price will continue to be the key basis for competition in the industry, as technology has
increased consumer transparency of pricing across different travel agency competitors.
However, offering the lowest prices is not the only basis upon which to compete. There are
some important non-price elements in the competitive environment. These include the quality of
service provided, detailed knowledge of destinations and products on offer, location, and wordof-mouth recommendations.
According to Travel Weeklys Travel Booking Trends Among Leisure Travellers 2011-2012
survey, retail travel agents scored highly on client satisfaction among consumers who used the
services of a retail travel agency to book travel within the previous12 months. Strong
satisfaction ratings also establish consumer loyalty to a retail travel agent, with 65 per cent of
consumers using the same retail travel agency to handle transactions where two or more trips
were booked.
The survey found that 70 per cent of those who travelled more frequentlythree or more trips
per yearrelied on the same agent to book each trip. Strong personal relationships and advice
are an important component in the industry. A correlation was also identified between the use of
a retail travel agent and length and total expenditure of the trip booked. Bookings made by an
agent reflected an average length of 7.8 nights compared to 5.3 nights where an agent was not
involved. Agency clients were reported as spending about 47.5 per cent more, on average, than
bookings made without a retail agency involvement. This is good for retail travel agency
operators, as satisfaction implies that clients are likely to remain loyal, and more expensive
product sales means higher commissions.
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Consumers are also favouring travel agencies that specialise, because there is a higher level of
trust and integrity perceived in specialists. Consumers believe the agencies know more than
they do, and that knowing the details can make a large difference to the overall trip. Consumers
believe that this type of knowledge cannot be gained just from reading information online.
Survey respondents indicated that 12 per cent of their bookings were through a retail travel
agent because they wanted expert advice. Conversely, just 1 per cent of bookings where expert
advice was required was with an online travel agent or direct with the travel supplier.
However, the challenge with the current business model for retail travel agents is that this
advice and expertise is offered at no cost to the consumer, with many consumers going to a
retail travel agent to scope out products and get objective information, and then later booking
directly with a travel supplier or an online travel agent. Consumers seek retail travel agents out
because they are experts. On this basis, an industry consultant has suggested that one option
for retail travel agencies is to charge for the advice offered as a consulting fee. He argues that,
the idea of simply retailing other peoples products versus being a knowledgeable consultant
is not a viable business model for agents, particularly as internet competition becomes more
fierce.

Two approaches to competing in the industry

The following case facts discuss two competitors in the industry that have adopted different
business models: Flight Centre Limited (FCL) and Webjet Limited.

Flight Centre Limited is an established travel agency in Australia. The company services
both leisure and business travellers through retail stores as well as through an online
presence. A full range of services and travel supplier products are offered. The company
has been described by industry experts as a traditional bricks-and-mortar travel agent
with limited online capability.

Webjet, by contrast, is a relatively new entrant to the industry. The company operates
online only with no retail shops, targeting the leisure traveller. The company has grown
substantially in recent years. Industry experts have called Webjet the new kid on the
mature block with internet savvy.

Flight Centre Limited

Listed on the Australian Securities Exchange (ASX), FCL is Australias largest travel agency,
with more retail stores than all other industry competitors. FCL offers a comprehensive travel
booking service to leisure and business travellers, resulting in the company being regarded as
the travel experts and a trusted travel provider.
History
FCL commenced with the opening of a discount travel store in Sydney in 1980. The company
was listed in December 1995, and has expanded via a combination of organic growth and
acquisitions. By 1990, FCL had opened stores in New Zealand, the United Kingdom (UK) and
the United States (US). The UK and US offices were closed in 1991 as a result of the Gulf War.
Expansion began again with a move to South Africa in 1994, Canada in early 1995, and a return
to the UK later that year. US operations recommenced in late 1999.
FCL has established different brands to cater for different segments of the travel market. It is
credited with revolutionising the retailing of international air-travel in Australia, shifting to a
model where profitability was driven by volume rather than margins. Initially, the company built a
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price advantage via by-passing airline ticketing and seeking out lesser-known airlines as travel
suppliers.
Business model
FCLs strategy is to be a world class retailer of travel products to leisure and corporate
customers. The company has grown its international market share to become a global leader in
the leisure and business travel segments. The company is organised into two major divisions:

The leisure travel division

Currently selling about $9 billion of travel each year (at total ticketed value (TTV) that is,
the total amount price paid by the traveller for the booking which includes the ticket price
plus any commissions, fees and surcharges), FCL has a comprehensive global
distribution network of travel suppliers such as airlines, hotels and car rental businesses.
Its brand name is easily recognised and is well-regarded internationally. In Australia, the
company targets different types of leisure customers through its Flight Centre, Student
Flights and Escape Travel brands. It provides a variety of travel products that range from
simple domestic airline tickets to complete overseas packages, which include
international airfares, accommodation, meals, tours and activities.

The corporate travel division

Currently selling about $5 billion of travel each year (at total ticketed value), this division
has undergone significant growth over the past five years. Major companies are signed
to long-term travel agreements under which FCL arranges all business travel
requirements. The company charges the relevant ticketed value for the various
components of the booking (e.g. airline, accommodation, hire car) and a booking fee per
booking. The value of the booking fee depends on the overall ticketed value of the
booking, as well as the level of complexity and number of different travel components
included in the booking. This division has many large corporate customers, and is the
travel supplier of choice to a large number of Top 1000 companies in Australia.

FCLs scale enables the company to use its global purchasing power to negotiate better deals
with travel suppliers for both leisure and business travel products. For the whole FCL business,
airline tickets make up about two-thirds of booking turnover while the remainder comes from
land products (predominantly hotels). The latter have grown in importance over the past few
years and are responsible for much of the apparent growth in leisure margins. At a recent
financial results presentation, the FCL management confirmed that 77 per cent of leisure
customers, who bought an air ticket through FCL, also purchased a land product. Hence, crossselling is a critical component of the business.
FCLs strategic response to online travel bookings over the last ten years
The way in which customers make travel bookings has changed over the past ten years. This
has presented significant threats and opportunities for FCL.
In 2004, the company recognised the changing environment and announced that it would
resource the development of an online presence. Various company announcements referred to
its consolidated e-commerce business and clicks-and-mortar strategy, and expressed desire
to focus on worlds best practice in retail, phone and online sales. The focus would be on the
companys ability to offer the customer a complete travel agency service, no matter how
customers wanted to make their booking.

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However, in 2011, in an environment where travel booking was inexorably moving online,
this strategy had not been fully realised. FCLs strategy at this time was to be a trusted travel
expert providing a complete service to satisfy all of the travel needs of the customer. The
company marketed itself as taking the worry out of travel by guaranteeing to have the widest
range of options around the globe, servicing customers through a broad network of retail travel
agencies. FCLs CEO declared internet bookings were an accessory to our model and that it
wouldnt become that important to us.
While leisure customers were able to book domestic flights online, they were still unable to book
an international flight on the companys website. The website only provided an estimate of start
from prices. In order to book or enquire about international flights, customers had to log an
expression of interest which was then followed up by someone from the company who then
contacted the customer via phone or email.
Some industry analysts described this as an unacceptably slow approach for many modern-day
customers who knew what they wanted to book and did not need to talk to someone. However,
this was a deliberate strategy. FCL had chosen not to promote a strategy that would take
revenue away from its stores, and potentially damage relationships with its employees in the
process. Retail stores have long leases which are not easily terminated and represent a high
fixed cost for the company. In addition, the company is known for its strong personal service
and its ability to tailor travel bookings to suit the needs of individual customers. Hence having
enquiries referred to a store-based employee for follow-up enabled the company to maximise its
booking revenue and maintain its reputation as the travel expert.
In 2012, there was no doubt that some customers had been lost as a result of FCLs retail-only
approach. Less than optimal booking turnover had been partly compensated for by higher
margins. However, as growth in online bookings was predicted to continue, a strategic review
was commissioned. This review concluded that FCLs strategy of allowing online customers to
book only low-margin domestic travel on its website needed to be changed. International flights
were higher margin (even the simple destination-to-destination type) and the review
recommended that to improve customer service and lower margins, these also be bookable by
online customers.
Following this strategic review, FCL announced a new strategic blueprint to guide the company
through its next stage of growth. FCL will transition from a travel agent to a world-class retailer
of travel products to leisure and corporate customers. The company has stated that, being a
world class retailer means we are the brand or business people identify with and go to. It is very
different to being an agent, a middle man, [or] a dealer for someone elses product. The fiveyear strategic blueprint focuses on retail efficiency, area-based structure, corporate travel
growth, supplier relationships, enquiry management, customer care, and helping its emerging
businesses become successful sooner. Industry analysts have broadly been supportive of the
latest strategic approach by FCL. However, some have questioned the companys ability to turn
what is still effectively a retail-based travel agent into a multi-channel provider of travel products.

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Seven strategic goals were identified in the 2013 Annual Report as requirements to successfully
implement this strategy, as quoted below:
Strategic Goals
1. Brand and specialisation
Evolving our brands to truly specialise in specific areas of travel and have clear customer value
propositions. All brands must be able to answer three questions that clearly illustrate why they
are the customers best alternative in their particular segments:
i. What do they have that is special?
ii. What do they know that is special?
iii. What do they do that is special?
2. Unique Product
Making, combining and sourcing exclusiveproducts and services, rather than simply selling
suppliers products [our] brands must have something unique that distinguishes them from
suppliers and competitors product that is different and interesting and not readily available
elsewhere by creating travel packages such as all-inclusive holidays such as arranged tours
including excursions as well as transport, accommodation and meals.
3. Experts, not agents
Ensuring each [of our] brands people are experts in understanding the brands speciality and
that they, in turn, are backed by travel gurus, who are readily available if additional expertise
is required.
4. Redefining the shop
Corporate, wholesale and retail spaces reflect that FCLs people are retailers first and
foremost, not office workers.
5. Blended access
Ensuring [our] brands are always available to customers. They can touch, browse and buy all
of [our] products when and how they want at 2am, 2pm or any time in between online,
offline, at a shop, or by email, chat, phone or SMS.
6. Information as power
Profiles and patterns gaining a better understanding of customer habits and proactively using
this information, thereby developing and delivering better products and increasing [our]
relevance to customers.
7. A sales and marketing machine
Ensuring each corporate brand has the largest and best business development manager
(BDM) network, and that each leisure brand has a promotion and advertising plan and
deployment that create opportunities to increase market share.
Recent performance
For the year to June 2013, FCL reported strong results, showing overall revenue and profitability
growth. Total ticketed value (TTV) exceeded $14.2 billion ($13.2 billion in 2012) and should
exceed $15 billion in the year ended June 2014 if FCL achieves its growth target. In addition,
the company was able to generate a revenue margin of 13.9 per cent in 2013 total
commissions and revenue earned off TTV (13.8 per cent in 2012). Profit before tax (PBT)
surpassed $300 million for the first time, just two years after the $200 million milestone was
achieved, finishing ahead of expectations for the year at $349 million ($330 million in 2012).
FCL has now delivered 16 year-on-year PBT increases in its 18 years as a public company,
despite many external challenges that have arisen and impacted on overall travel bookings.
In the 2013 year, FCLs share of revenue was around 74 per cent commissions from the
provision of travel services, 20 per cent relating to revenue from the provision of travel
packages, and 6 per cent from other related services. Employee benefit costs were around 63
Page 21 of 27

per cent of total expenses (62 per cent in 2012), with sales and marketing costs at about 8 per
cent (9 per cent in 2012),and rental expense relating to store leases 7 per cent (7 per cent in
2012). Earnings per share, dividends and FCLs share price were all at record levels during
2012-13. The company was the fifth-best performing top 200 stock in 2012-13, on share price
growth.
However, industry analysts expressed concern over the lack of growth in leisure bookings for
the company. According to Tourism Australia, between 2008 and 2013, the number of
Australians who departed temporarily for an international holiday, or to visit friends or relatives,
rose about 26 per cent to 4.7 million. Over the same timeframe, FCLs leisure booking turnover
declined. The stagnant growth in the leisure division of FCLs business therefore implies that a
greater number of leisure travellers are choosing to book their travel with someone else. By
contrast, the corporate travel division of FCL has experienced strong growth, and this division
now represents 40 per cent of FCLs total booking turnover.
Threats for Flight Centre
Prior to the internet, retail travel agencies controlled the market for travel purchases. FCLs main
competitors were other chains, such as Harvey World Travel and Jetset, and numerous
independent agencies. Having grown rapidly through the 1980s and 1990s, FCL was able to gain
first mover advantage in sourcing attractive deals from travel providers, while its size provided
scale advantages on the cost side. FCL chose to pass on the majority of these savings to
customers, undercutting the competition and gaining a dominant market share in Australia.
However, FCL is now among the most expensive of many distribution options available to travel
suppliers. This, combined with the declining leisure travel sales being experienced, is likely to
reduce the companys bargaining power with travel suppliers.
The most significant threat to FCL comes from direct distribution. Travellers can easily go online
and book directly with Qantas, Singapore Airlines or Hilton Hotels, for example, in a way that
was quite difficult ten years ago. This saves the travel supplier from paying commissions. Over
the years, airlines have cut the commissions that they are prepared to pay to both online and
offline travel agencies. If airlines keep reducing commissions, online travel agencies may still be
profitable in a growing market. However, traditional travel agencies, with their higher fixed cost
structure, might have trouble covering costs. Over the past few years, FCL has moved to
increase the level of front-end commission at the expense of back-end commission. The push to
re-weight compensation in favour of fixed commission is partly a reflection of a tough economic
environment, but also an indicator that sales growth is harder to achieve given FCLs large size.
However, negotiating terms with suppliers can be challenging. For example, when FCL wanted
greater up-front commissions from Singapore Airlines, the airline refused. FCL then took
Singapore Airlines off its panel of preferred airlines and its agents no longer actively encouraged
the promotion of the airline. This led to a 70 per cent reduction in sales by FCL of Singapore
Airlines tickets. FCL transferred the majority of these flights to other airlines, proving its
influence on the industry and the value of its expert advice. Singapore Airlines renegotiated with
FCL to prevent any further loss of sales.
The concern, however, is that sometime in the future one of the important international airlines
may construct a business model that will not involve significant commissions to travel agencies.
With continued erosion of the travel agencies share of the total market, the construction of a
new business model becomes increasingly likely. If one airline can carry on business without
the involvement of the largest travel agency chain, other airlines will have a commercial
imperative to follow.

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The risk of a significant change in the compensation structure of the industry is growing each
year. The reduction in airline commissions is damaging the profitability of the travel agency
industry. When customers choose to book elsewhere, there is an overall loss of commission
revenue to the industry. With the loss of air travel sales, FCL might also lose the chance to sell
an accommodation product to the 77 per cent of its leisure customers who currently purchase
accommodation with their airline ticket. Accommodation sales are also under threat from both
direct sales by travel suppliers and through internet sites such as Wotif and HotelClub, where
customers can book online directly for hotels and gain access to discounted prices and lastminute deals.
FCL is responding to these threats by moving aggressively into niche markets where it believes
it has a competitive edge. For example, FCL acquired the single retail outlet of a travel agency
focused on cruise packages. FCL expanded this to 12 outlets with plans for 60 more outlets. It
aims to capture 30 per cent of an estimated $1 billion ticketing revenue market in Australia
alone. Cruise sales are higher margin sales for the travel agency. This is an area of travel
booking which can involve complex options in relation to itineraries, cabin types etc. It therefore
seems more naturally suited to face-to-face sales and personal service that a traditional travel
agency offers.
The key defence of FCL to date against the changing leisure travel segment has been to focus
on the corporate travel market where service is as important as the price. The FCLs relatively
personalised approach has been the key to its growth in this market, especially in the category
of the higher margin, small and medium enterprise (SME) market. The corporate segment of the
business offers growth opportunities. When this segment is combined with the existing leisure
business of FCL, the two together might still provide the company with negotiating power over
suppliers for some time to come. However, the continued growth of online bookings by
consumers is a key concern that FCL must address, and has finally been recognised in the
companys current strategic blueprint.
B

Webjet Limited

Listed on the Australian Securities Exchange (ASX), Webjet Limited (Webjet) is an Australian
online travel agency that offers flights, hotel bookings and car hire via its various branded
websites. As Australia and New Zealand's leading online travel agency, Webjet is recognised as
the leader in online travel tools and technology. The companys technology enables customers
to compare, combine and book the best domestic and international travel flight deals, hotel
accommodation, holiday package deals, travel insurance and car hire worldwide. Webjet
promotes itself as a convenient, quick and simple way to book travel at a low cost. Its selfservice approach means the customer is the expert, and the companys role is only to present
the various options available for the traveller to choose from. Webjet is known to be
technologically-focused and innovative in online travel booking.
History
Webjet was founded in 1998 by a former traditional travel agency executive, and listed on the
ASX in 1999. Over the past decade, Webjet has done what many technology companies
promised to do but failed to deliver: become a key enabler of the shift from bricks-and-mortar to
online commerce. The company is one of a handful of dotcom companies trading at a higher
share price now than it was in 2000. Today, the company has an online presence in Australia,
New Zealand, the US (since April 2010), Singapore and Hong Kong (since late 2010), the
Middle East, North Africa and Southern Europe (2012).

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Business model
Webjet began by offering domestic airline tickets online direct to leisure customers. The
company earns revenue by taking small commissions from travel suppliers on bookings made
via its website. It also charges suppliers a fixed-rate service fee for all bookings that it makes.
The company also earns revenue from an online booking fee charged to leisure travellers who
use its online services. Webjets ability to consolidate all domestic airline information onto one
webpage was the major differentiator for the company over individual airline websites. This
made it easy for the leisure customer to compare different airline fares in relation to costs, travel
times and destinations on a single website.
In the early to mid-2000s, the company marketed itself through highlighting this benefit. The
marketing message focused on choice and convenience, such as having multiple airline and
fare options on a single webpage. Webjet was the first online travel agency in Australia to
introduce this type of comparison tool. To further highlight the technological focus of the
company, Webjet has also introduced an iPhone application for buying air tickets in Australia.
This provides leisure travellers with even more convenience for making bookings anywhere,
anytime and for travellers to take greater advantage of online low price offers from travel
suppliers.
Having established a strong brand name with leisure customers, Webjet expanded to leverage
its flight booking brand into other related travel services. The company sought to be a fullservice online travel agency. When booking flights, travellers are also presented with a range of
travel options such as accommodation, car hire and insurances. Convenience and intuitive
software aims to drive customer traffic from the initial airfare transaction into a host of related
services. Since 2011, Webjet has grown its sales of online hotel bookings from $2 million to $57
million in the first half of 2014.
Despite being able to offer most travel needs online, Webjet was not a registered insurance
agent until recently. The website allowed customers to search for travel insurance and could
recommend various options, but was unable to transact insurance sales directly. Instead it had
to refer the customer to various insurance company websites. This gap was resolved when
Webjet entered into an alliance with Allianz Insurance to be an agent, and travellers can now
purchase Allianz insurance, either as part of a booking or as a stand-alone purchase.
Webjet is different from other travel agencies, both online and traditional retail stores, in a
number of ways. Firstly, the company has access to the flight schedules of all the Australian
domestic airlines. This means that when a leisure traveller conducts a search, they can be
confident of being presented with all available tickets and prices. Secondly, having an online
presence means the company operates twenty-four hours a day, seven days a week. The retail
based travel agencies, in contrast, are limited in their operations to shop trading hours. In
addition, Webjet offers a guarantee that the price offered on a ticket will not change for 30
minutes. This guarantee helps to counter the problem of airlines changing their pricing and
making fares unavailable during the time it takes a customer to progress from selecting a flight
to paying for it. Webjet is the only travel agency that offers this price guarantee.
An analysis of Webjets database shows that bookings are not skewed towards people in their
twenties and thirties, despite the general belief that young Australians drive online ticket
purchases. The demographic of Webjets customer-base is similar to the Australian
demographic; people in their sixties and seventies, who are internet-savvy, are actively using
Webjet to research their holidays and to buy tickets. The company has an active customer base
of about 1.5 million people.

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In late 2012 Webjet entered into a binding agreement to purchase online travel agent
competitor, Zuji, from Travelocity for $25 million. Zuji was founded in 2002 and had grown to
become the number one online travel agency in air ticket sales in Hong Kong and Singapore,
with a substantial presence in Australias online travel agency market. Zuji initially commenced
operations as an online air travel booking service only, and then expanded its operations into
the hotel booking and packaging. Webjets investor briefing outlined the strategic rationale for
the acquisition as:

Enhance Webjets already leading online position in Australia;

Obtain an online leadership position in important Asian travel and leisure markets and a
platform for further growth in Asia;
Gain scale in Webjets emerging hotels segment; and
Create the potential for back-office synergies across the combined entity.

Zuji continues to function under the same brand name within the expanded Webjet Group. Zujis
business is progressively being migrated to Webjets IT infrastructure platform.
Also in 2012-3, Webjet launched Lots of Hotels. This new brand is aimed at the online businessto-business (B2B) hotels market, that is, businesses looking to book through an online travel
agency business, and launched in 10 countries including the Middle East, North Africa and
Southern Europe. In the first half of 2014, Lots of Hotels has expanded to operate in 18 markets
with plans to launch in another 30 markets by 31 December 2014. TTV is about $65 million a
year, with a strong margin contribution to the overall Webjet financial result. The strategic aim of
this new operation was to broaden Webjets revenue beyond only leisure travellers, by offering
an online accommodation service to businesses, as well as increasing overall margins due to
higher commissions received for hotel bookings compared to airfares.
In June 2014, Webjet announced an extension of its Australian business by launching Webjet
Exclusives, providing the companys 1.5 million registered customers with exclusive travel deals
that are not available elsewhere. Webjet Exclusives offers directly-contracted travel products
including hotels, resorts, land and air packages, tours and cruises. The Webjet Exclusives site
offers these deals across key domestic and international holiday destinations, appealing to a
wide range of leisure consumers.
The exclusive deals often provide valuable inclusions at no extra cost. One of the key
differentiators from other deal sites is that all offers featured on Webjet Exclusives are
exclusively created and negotiated with suppliers, and are not available on other websites. This
is to offer customers the best possible holiday deals that cannot be found anywhere else. Each
Webjet Exclusives purchase comes with a 21-Day No Questions Asked Money-Back
Guarantee. Customers can request a refund for any reason within 21 days of their purchase.
Webjets new business venture is led by travel executive Paul Ryan, who has experience from
previous managerial roles with Flight Centre and deal website operator Scoopon.
Recent performance
Despite the fluctuation in performance of the industry over recent years, Webjet posted a
significant increase in revenue to 2013. Total transaction value (TTV) was $883 million in 2013
($768 million in 2012). In addition, the company was able to generate a revenue margin of 8.6
per cent in 2013 (7.5 per cent in 2012), as the impact of the Lots of Hotels increased
commissions flowed through. However, despite strong TTV and revenue margin growth, profit
after tax (PAT) declined by 52 per cent to $6.5 million ($13.6 million in 2012) due to costs
associated with the acquisition of Zuji, and set-up of the Lots of Hotels operations. Revenue was

Page 25 of 27

also diversified as a result of the broadening of business operations, with 92 per cent of total
revenue earned in Australia in 2013 (98 per cent in 2012).
In 2013, Webjets share of revenue was 50 per cent commissions from the provision of travel
services and 50 per cent from customer booking fees. Employee benefit costs were around 26
per cent of total expenses (24 per cent in 2012), with marketing costs at about 27 per cent (32
per cent in 2012), and technology expenses 8 per cent (4 per cent in 2012). Earnings per share,
dividends and Webjets share price fluctuated from 2012 to 2013 from reduced PAT.
The companys performance has been attributed to a strategic business model that relies more
on service fees rather than on earning commission on air ticket prices. While air ticket prices
have fallen substantially, the companys service-based revenue model still allows it to grow due
to an increase in bargain hunting by customers. And with the growth in discount airline tickets,
particularly those offered by companies such as Virgin and Jetstar, the company has been able
to target those customers looking for a cheap flight. Webjet makes money as a result of the
fixed service fees it charges the travel suppliers, no matter how low airline ticket prices may
drop. Analysts have been generally positive about the recent expansion into accommodation
bookings and the B2B market, as this delivers higher commissions.
Threats to Webjet
Webjet has experienced strong TTV growth to date, and has developed a strong brand
presence amongst leisure customers. However, Webjets website is still primarily used for flight
bookings only, and the company is struggling to gain market share from Wotif.com and
Lastminute.com for accommodation booking services.
Of further concern to Webjet is the trend for major international online airline ticket agencies to
reduce customer booking fees for online transactions. This trend would imply that the company
potentially faces the threat of the loss of this booking fee revenue stream. In 2011, Expedia, one
of the largest sellers of online airline tickets in the United States, and Zuji announced zero
booking fees to customers for online transactions. The Webjet share price fell as a result, but
the impact was temporary. Webjet charges a $19.95 booking fee compared with a fee of $18.95
by Bestflights.com.au, $16.95 by Flightcentre.com.au and $14.95 by Travel.com.au. Almost 12
months after the no-booking-fee announcement by Expedia and Zuji, Webjet continued to
maintain market leadership with 14 per cent of the online ticket segment, which is about three
times the market share of Expedia. However, Expedia has invested in marketing its brand in
both the US and Australia, which may erode Webjets advantage. Webjet has used brand
investment to its advantage to date, spending $20 million over the past few years.
Given the entry of the traditional bricks-and-mortar retail travel agents into the online booking
area, Webjet faces strong competition from powerful industry competitors such as Flight Centre.
Having educated the leisure customer to search online for the cheapest prices, consumers are
now increasingly prepared to search across multiple websites to find the lowest prices. In
addition, aggregator website such as Trivago.com, Wotif.com and HotelsCombined.com now
make it easy for a customer to see the prices across a range of travel provider websites, and
select the lowest price for the booking. This is a threat to Webjets growth in the accommodation
segment.
Business customers generally want more than an online booking tool only when dealing with a
travel provider. Large organisations want a travel provider that can meet all their travel needs,
including offering rebates for exceeding certain dollar amounts and account management
services. These organisations want a corporate travel agency to negotiate a range of prices for
the company with various hotels, rental car hire companies and insurance providers, which are
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set for generally a 12-month period. Webjets B2B model, via Lots of Hotels, replicates a leisure
traveller service, which offers the best price on the day, rather than an agreed price.
As a listed company, share market performance is an important performance measure for
Webjet. Webjet is not valued as highly as other companies in the e-commerce space and
shareholders are concerned about the companys lacklustre profit after tax, earnings per share
(EPS), and dividend results which have limited share price performance. This is despite the fact
that Webjet has a strong balance sheet, with about $45 million in cash in the bank and no debt.

Sources:
Boyd, T. (2010), Webjet well placed to repel rivals, The Weekend Australian Financial Review, 2425 July,
Chanticleer, pp. 64 and 61.
Brown, G. (2009), A new perspective on Flight CentrePart 1 in Stocks in Detail on Intelligent Investor.com.au,
Issue 281, 29 September http://www.intelligentinvestor.com.au/articles/Flight-Centre-FLT/A-new-perspective-onFlight-Centre-Part-1.cfm (accessed March 2011).
Flight Centre Limited, 2013 Annual Report, pp. 1, 6 and 36.
http://admin.flightcentrelimited.com/sites/flightcentrelimited.com/files/1.%20FLT%202013%20Annual%20Report_0.pd
f (accessed July 2014).
IBISWorld, N7220, Travel Agency and Tour Arrangement Services in Australia, April 2014, p. 18.
Nielsen/Netratings (2007), Booking holidays and flights online: What is the opportunity for travel companies selling
online, Harvest Digital, February.
Tealeaf (2010), The eBooker: Understanding how travel customers use the web, Harris Survey Whitepaper.
Travel Weekly, ibid, July 30, 2012, pp. C6, C8 and C10, Percentage of Booking Methods,
http://travelweekly.texterity.com/travelweekly/20120730#pg21 (accessed July 2014).
Webjet Limited, Media Release Webjet launches Webjet Exclusives, 6 June 2014,
http://investor.webjet.com.au/media-release/webjet-launches-exclusives/ (accessed July 2014).

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