Fw: Why the weekly payment will be the Final Nail for me
Travel Agent
Sent: Tuesday, May 10, 2011 10:32
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Subject: Why the weekly payment will be the
Final Nail for me
Dear Fellow members of TAAI ,
We are faced with the greatest challenge in the last 60 years. I refer to the impending IATA weekly payment cycle and will explain why I believe it is the greatest challenge travel agencies in India have ever faced.
First a brief background of conditions as they stand today
Every month we collect and pay to IATA about 4,000 crore rupees almost 50,000 crore rupees annually . This is by no means a small sum, we write receipts ( Air Travel Tickets) worth 130 crore rupees every single day. Our customer enjoy an average credit of 30 days from us. While we collectively extend credit of Rs. 4,000 crores to our customers we get a credit of under Rs 2,750 crores from IATA . This means we as TAAI members have collectively invested Rs. 1,250 crores of our own money so that the airlines can keep flying to near full capacity. While the airlines are investing Rs 2,750 crore , we are investing Rs. 1,250 crores from our side . For a gross annual revenues of Rs 50,000 crores, the airlines invest just Rs 2,750 crores whereas for mere annual revenues of Rs 800 crores which is our annual revenue (many airlines do not pay us any commission and the few that do pay us a meager % on the basic fare only) we invest Rs. 1,250 crores. The airlines invest only 5.5% of their gross revenue and we invest 156.25% of our gross total revenue. Almost 25% of our gross revenue goes to servicing financing cost. That is, we spend about Rs. 187 crores a year as interest. Even as agents you invest your savings and do not need working capital facilities with Banks please do not forget that there is a loss of interest and opportunity cost of owned Capital .
Why is weekly payment the greatest challenge we have ever faced
IATA now wants to change the fortnightly payment cycle to weekly. Once weekly payment is introduced investment equations change substantially. While airlines will still get a gross revenue of Rs 50,000 crores and hopefully agents will still earn the paltry Rs 800 crores a year, under weekly payment, airlines will have to invest only Rs 1,500 crores whereas the agents will have to fork out the balance Rs 2,500 crores. This means the airlines invest only 3% (5.5% earlier) of gross revenues and the agents invest 312.5% (156.25% earlier) of their gross revenues. Our interest payments (assuming that we can raise that kind of money in the short term) will jump from Rs. 187 crores to Rs. 375 crores taking away almost 50% of our gross income. While zero percent brought commissions from 5% to 0%, weekly payment makes our commissions minus - 2%, yes you read that correctly its is minus 2%. Every time we sell an airline ticket we will end up subsidising the airline.
We agents are survivors and we will without doubt find ways to reduce our costs. So assuming that we can live with -2% commission , can we find the additional Rs. 1,250 crores that are needed to stay in business once the weekly payment cycle is introduced? This is not a simple yes or no answer. Firstly it took us 60 years raise funds of Rs. 1,250 crores. Over the years as volumes steadily increased we increased our borrowing and personal investments to current levels. This time round we have to raise Rs. 1,250 crores not in 60 years, not even in 60 months but more likely in just 60 days. Unless your are a multinational company or related to the Ambanis, your are unlikely to be able to raise that kind of money in just 60 days.
We all know how long banks take to sanction working capital limits. For a moment let us assume that we can make banking wheels turn at Formula 1 speed but can we meet the terms and conditions that the banks will impose. Banks will want fresh security of Rs 1,250 crores, where are we going to find that kind of freehold fixed assets? Banks will want debt to equity ratios of under 2:1 ( accepted general norm for a fund based commitment ) , this means even if we have fixed assets that we are willing to pledge to the banks we will be expected to invest Rs 418 crores of our personal funds for the banks to be able to lend the balance. Do we have Rs 418 crores loose change lying around as an industry , as TAAI members ?
Weekly payment is a "win win for all"
We are told that weekly payment is a win win for all. The only benefit that weekly payment bring us is a reduction in IATA bank guarantee/ insurance limits. Is this really a benefit? Is the saving in insurance premium/ bank guarantee charge significant enough to offset the challenges pointed above?
Insurance premium is just about 1.5% of monthly sales. Currently we take an insurance policy for 35 days sales and pay a cumulative insurance premium of Rs. 70 crores p.a. Our interest cost at present is Rs 250 crores (see brief background) so the total cost is 187 + 70, Rs. 257 crores. With the new system we will required to take insurance for 20 days which translates to a premium of Rs 40 crores per year, a paltry saving of Rs 30 crores whereas our interest burden rises by Rs 187 crores. We end up spending a total of Rs 375 + 40, Rs 415 crore that is Rs 157 crores more every year. Can anyone please explain to me how spending Rs 157 crores more for the same income is a win for me please be kind enough to explain that !
Should we feel let down by our leadership?
Our leaders are telling us that they stalled weekly payment for several months. Did they! To answer this we need to understand how IATA works to change rules that apply to travel agencies. The PaConf takes all the decisions that affect agents across the world. Before an item is decided upon by the PaConf, it is presented to the APJC for discussion. Weekly payment was on the agenda for almost 3 years at APJC meetings in India. Why did our leaders not share this information with us three years ago? A sub committee was formed by the APJC to consider weekly payment, why did the sub committee not consult Chapters and Regions? Why did the sub committee not present a white paper for discussion by its members , what were our leaders when they were told of the challenge ? The PaConf is meeting in September 2011 this year and baring some miracle it will definitely approve weekly payment in India. Why are the leaders now asking us for our comments on weekly payment when only the formality of approval by PaConf is remaining ? What is the action they took to keep it from being implemented? What is the course of action they propose to take between now and September when weekly payment becomes a reality? They spent Rs 6.3 lakhs on DGCA , did they seek DGCA's intervention on weekly payments ? What is DGCA's opinion ?
Is it not humbling to see that we as TAAI members drive the revenues for the industry , these figures are just for IATA BSP not for the low cost carriers , who too demand investment from us , these numbers make us realize that in India it is I and you as Travel Agents who matter .Will the airlines be able to find a a reliable resource which invest it own financial and human Capital to make them keep flying . Can they even remotely dream of establishing such a powerful and near defect free distribution network . Today every stakeholder in our industry be it the Airlines , Hotels , CRS , and many service providers acknowledge that you and I as Travel agents as an institution has stood the test of time and are creditworthy . Just ask yourself what would your client do when he learns that you will now reduce his credit period , is credit now an important par t of the package of services we deliver ? Will he not think it is now perhaps better to get the services of the net , will he not be encouraged to renegotiate your service charges . Will it make sense for you and me to continue running the risk of this credit which in most cases is not even secured or backed by a BG from our clients.
Every problem that we encountered over the last decade or so is a mere irritant compared to this one and yet our associations have done precious little to either protect our interests or to educate us on how to cope with the challenge. This my Friends is going to much bigger then any other problem that we as an industry have faced till date, and it may well be the final nail for many in our industry .
Yours Truly
Sanjay Narula
Apex Travel & Tours
New Delhi
Member of TAAI
Figures given above are approximate but close E & OE