Liberty Travel to Focus Only on Business Travelers

Case Type: improve profitability.
Consulting Firm: Cognizant Business Consulting (CBC) first round full time job interview.
Industry Coverage: tourism, hospitality, lodging.

Case Interview Question #00979: Your client Liberty Travel is an American travel agency in New York City, New York. Currently, Liberty Travel makes a 10% commission on all of its travel bookings. The CEO of Liberty Travel is worried because their current profit before taxes is USD $1 Million, while the industry average ranges from $2MM to $3.5MM. Why are they making less than the industry average?

Possible Solution:

1. High Level Plan of Attack

* We need to understand the revenue stream and cost structure of the travel agency and conceptualize how each transaction contributes to the bottom line.
* Focus on the types of customers the travel agency services and how each type relates to profitability.

2. Lay Out Your Thoughts

Consider using the profitability framework: Profits = Revenue — Cost = (Volume * Price) — (Fixed cost + Variable Cost)

* Focus on the cost side of the equation

3. Dig Deeper: Gather Facts/Make Calculations

Candidate: What is the total gross revenue for the travel agency per annum, on average?

Interviewer: $10 million.

Candidate: How does the revenue compare to other travel agencies with similar size?

Interviewer: They are about the same.

Candidate: What about the product line? Does the client Liberty Travel handle any bookings other than travel tickets?

Interviewer: No. They just book tickets for their customers.

Candidate: What are the different customer segments that the agency services?

Interviewer: There’s the business traveler segment, which comprises about 40% of total revenue, and the leisure traveler
segment with the remaining 60%.

Candidate: How many total transactions does the client process and what is the break down for each customer segment?

Interviewer: The total number of transactions is around one million per year. On average, about 300K go to the business
segment, and 700K to the leisure.

Candidate: Is there a cost associated with each transaction?

Interviewer: Yes, each transaction, regardless of which segment, costs $9.

Note to Candidate: Now you have all the necessary information to calculate the profitability of transactions for each segment. If you run the numbers, you will find the following information.

4. Key Findings

* The leisure travelers are draining your profitability. Either the cost per transaction is too high or the revenue per
transaction made on the leisure is too low.

5. Recommendations

* Benchmark the cost structure against other travel agencies.
* Negotiate with the airlines on the possibility of charging a premium for leisure tickets or capture a larger commission through cost charged to the customer.
* Look into the possibility of reducing cost per transaction for the leisure travelers.
* Offer the leisure traveler other products to increase revenue per transaction such as hotel bookings and travel packages.
* Become a niche player and focus only on the business traveler.