The sagging fortunes of some Internet players is a sobering
reminder that profitability, not total sales, is the ultimate test
of a company's viability.
The gross revenues of major Web operators are impressive but
eventually these firms have to show earnings to maintain the
infusion of capital and the public's confidence.
The tendency to equate rising sales, rather than profits, with
success is not a phenomenon created in the Internet era. It is all
too familiar to anyone who has observed the travel industry over
time.
The travel business always has defined success in terms of
volume. In our own recent Top 50 travel agency roundup, published in
Travel Weekly and here on twcrossroads.com, we describe the leaders
in terms of gross revenues, not profitability.
Similarly, the Travel Weekly Louis Harris survey, published
since 1970 and about to be updated later in the summer, uses gross
sales as a yardstick of industry performance.
There are reasons for this emphasis on the top line including
the fact that most travel businesses are privately held and are
under no obligation to report financial results.
But the use of top-line performance figures also reflects a lack
of sophistication in business management that has characterized the
retail travel industry over the years.
Agencies have improved their financial management skills but
many still would benefit from training programs to help them
analyze the components that lead to profit or loss.
Among the more enlightened agencies, financial managers are able
to examine the performance of each agent to determine the
individual's contribution to the company's profitability.
With more commercial accounts handled on a fee-for-service
basis, these agencies can build upon their understanding of their
cost elements to price their services in a way that ensures
profitability.
In this difficult market, where airline commissions have
plummeted and service fees for airline tickets have become
commonplace, the need to understand the cost of a sale is more
critical than ever.
Even with the rising tide of service fees in agencies, it is
suspected that many agencies continue to lose money in the air
category and need to raise fees further.
But this type of business decision only can be made if agencies
have a full understanding of all their costs.
The days of trumpeting top-line results are fading away. The
total value of what is sold should no longer be regarded as a sign
of a healthy business.