ADAMSON UNIVERSITY

Graduate School
ADAMSON UNIVERSITY

In Partial Fulfillment of the Requirements for the Subject

Risk Management

Risk Management for Travel Agencies:

A Market and Operational Risk Analysis

Review of Related Literature and Studies

SUBMITTED BY:

Lapuz, Mark Chris (MC)

SUBMITTED TO:

Miss. Eden Alberto, MBA, MPA

Professor

January 16, 2016

PORTFOLIO 1
1

G R A D U A T E S C H O O L
 ADAMSON UNIVERSITY

Introduction

Nowadays, all businesses are constantly facing several types of

risk. One tool to solve this is the concept of risk management. Risk

management refers to the practice of identifying potential risks in

advance, analyzing them and taking precautionary steps to reduce or curb

the risk (The Economic Times, 2015). Since there is a constant presence

of risk, the only way to solve this is the anticipation of risks and utmost

preparation ahead of time.

One of the world’s largest industries is tourism. Tourism refers to

the activities of people travelling to and staying in places outside their

usual environment for not more than one consecutive year for leisure,

business and other purposes (UNWTO, 2010). The industry of tourism

aims to provide people which we often call as tourists, the activities that

are not part of their usual routine and are usually done on places they do

not reside for a limit of one year. The main objective of the tourism

industry members is to give the tourist a recreational experience which

serves as their mode of business. The entities which provide the

requirements of the tourists are called the travel trade businesses. Travel

trade businesses refer to people and companies that resell travel products

that they have bought and/or reserved from other parties. It is also the

collective term for tour operators, wholesalers and more particularly, the

travel agencies. (TTG Media Magazine, June 2010 Ed.; p.23). The travel
2

G R A D U A T E S C H O O L
 ADAMSON UNIVERSITY
trade entities therefore serve as the middlemen or third-party entities

which assist the clients or the tourists. Travel agency is an entity

engaged in the business of extending to individuals or groups, travel

services and assistance to include documentation, ticketing, booking for

transportation and/or accommodation; arrangements, handling and/or

conduct or tours within or outside the Philippines whether or not for a

fee, commission or any form of monetary consideration (Article 243 of

Republic Act 9593 or Tourism Act of 2012). The model implemented by

travel agencies are similar with other agency businesses which contract

with suppliers and then resell them to clients on a higher price or

through other source of income such as varied margin or percentage

commission.

The main purpose of risk management for a travel agency business

is to identify those areas in the operations of a business which, if

ignored, will leave the entity exposed to serious financial loss

(Patterson, 2013). This paper attempts to answer the following questions

“How to identify the business risks: market, and operational risk?”,

“What are the market, and operational risks involved?” and “How to

solve the market and operational risk for a travel agency business?”.

The succeeding section of the paper presents the different findings,

explanations, perspectives, and analyses that will help solve the

problems determined.

G R A D U A T E S C H O O L
 ADAMSON UNIVERSITY

Market Risk

Market Risk is defined as any marketing related activity or event

that is uncertain leading to the variability and unpredictability of prices

for products, and pay for production inputs (Crane, 2014). In the

Philippines, market risk may mean as the possible uncertainty that may

rise from negative perception of the consumers once an unanticipated

event in the business occur (Salcedo & Cruz, 2011, pp. 102-104). This

means that the occurrence of market risk is visible on both local and

international setting.

According to Dolnicar and Laesser on their research entitled

“Travel Agency Marketing Insights and Strategy in Switzerland” (2012),

the tourist perception tends to be of critical risk in the operations of the

business. As how Laesser (2012) stated it, “a travel agency as a service-

oriented business should focus on how the tourists assessed their

services”. This idea will then be related to the over-all performance of

the travel agency. Based on the study of Santos (2014), Travel agencies

with high orientation on customers are likely to reflect high business

performance. This high performance will then be tied up with an

attractive market value of the travel agency stocks or certificates of

ownership.

G R A D U A T E S C H O O L
 ADAMSON UNIVERSITY
How to Identify Market Risk?

Based on the study of Lawton and Weaver (2011), the best method

of identifying market risk is through demand forecasting and analysis.

The trend in the demand reflects the condition of the market. Their

findings determined a direct relationship on the historical demand and

the level of success of marketing strategies being implemented per year.

This means that once the strategy fails, the demand for the products and

the services of the business will be highly affected. These results have

been agreed by Shankar, et. Al in the travel agency operations through

his study entitled “Customer satisfaction and loyalty in online and

offline environments of travel agencies” which was presented in 2013.

Shankar (2013) mentioned on his analysis that though the demand for

travel and tourism services are highly unpredictable, a simple move in

marketing function may encourage or discourage tourist purchase and

expenditure.

The research of Lim (2012) on the other hand gives credit to pre-

tour market research as the more effective way of market risk

identification. Lim stated that travel agency operations involve a very

complex and complicated business flow that everything should come into

preparation and product development. The type of tour package that will

be offered by the counter-counselor determines the level of

diversification of the products and services of the travel agency.

G R A D U A T E S C H O O L
 ADAMSON UNIVERSITY
According to the report of Travel Industry Association of America (2010,

p.14), the anticipation of the travel agency on what a walk-in client may

inquire should be an important factor to determine what can please the

tourists.

Moharrer and Tahayori (2010) pointed the importance of post-tour

evaluation as a way of identifying future market risk. The perceived

assessment of the tour group on the conducted tour determines possible

requirements of the tourists belonging to the same market segment which

might also avail the services of the travel agency. The result of

evaluation determines the possible flaws that might affect the positive

acceptance of the market from the previously provided service. This

belief was seconded by the study of Dela Pena (2010) which cited that

the only way to identify future market risk is through a survey or

evaluation process from a previously conducted itinerary.

What Are the Market Risks Involved?

According to Santos (2014), Manzano (2013) and Lumagui (2011),

the market risks involved in travel agencies are classified into two: risk

involved in negative word of mouth advertising and the risk involved in

the absence of market for a niche product.

The most common risk on travel agency and tour operations is risk

that resulted from negative word of mouth advertising. As how Lumagui

G R A D U A T E S C H O O L
 ADAMSON UNIVERSITY
(2011) emphasized it, testimonials from previous clients greatly affect

how the possible market evaluates the services offered by travel

agencies. Kotler (Tourism Marketing Principles and Practices, 2010; pp.

246-247) mentioned that word of mouth advertising is the least

expensive referral marketing technique that tackled tourist motivation.

Santos (2013) and Manzano (2011) focused on too specific type of

offering as a type of market risk. This is because once the travel agency

offers a tour package that is not even interesting on the eyes of the

general tourists, no clients will transact to the travel agency. This is also

supported by Kotler (Tourism Marketing Principles and Practices, 2010;

pp. 247-248) as once you don’t have to offer what the tourist wants and

offer an uninteresting tour package instead is the start of the tourists

doubting the capacity of the travel agency to deliver.

How to Solve Market Risks?

There are three major solutions proposed to solve or at least

minimize market risks. These are the diversification of tour package and

offerings (Brown, 2015), establishment of customer relationship

management system (Card, 2013) and promotion of product quality

assurance and guarantee (Cho, 2012).

The diversification of tour package and offerings means that the

travel agency sells a varied list of tour itineraries for the clients. Brown

G R A D U A T E S C H O O L
 ADAMSON UNIVERSITY
(2015) stated that diversification minimizes any possible market risk.

Santos (2013) and Manzano (2015) supported this solution, as giving the

tourists several options will make them build the interest for travel

agency products and services.

Card (2013) however thinks that the establishment of customer

relationship management system as a critical tool for solving market

risk. The type of risks that can be solved through this are those that

resulted from negative perceptions of the tourists. According to Lumagui

(2010), building of CRM forms customer loyalty which will discourage

the tourists to spread negative testimonials and comments about travel

agency products and services.

The main solution for solving market risk according to Cho (2012)

is the use of product quality assurance and guarantee .According to him,

delivering quality services will discourage future market risk strategies

since pleasing the clients or the tourists upon the delivery of the service

that they avail won’t necessitate these anymore. As how Kotler (2010)

explained it, trying to provide the service that is worth the money that

these tourists paid for gives them a positive and lasting impression of the

service of the travel agency.

G R A D U A T E S C H O O L
 ADAMSON UNIVERSITY
Operational Risk

Operational risk is defined as the risk of loss resulting from

inadequate or failed processes, people and systems or from external

events (JP Morgan and Chase Journal, November 2014 Issue, p.17). The

actual conduct of the business flow determines the existence of

operational risk. However, it has been proven that operational risk is

often present with other types of risk. It can even overlap other types of

risk (Salcedo & Cruz, 2011, pp. 105). This signifies the importance of

operational risk. Any negative impact brought about by operational risk

can damage the entire system of the business. As how operations is being

defined by Kotler (2010), the actual flow of business determined the

benefits that will be multiplied to other functions.

Claravall (2014, pp. 250-254) in his text “ Travel Agency and Tour

Operations in the Philippines” mentioned that the most important risk

that should be managed by a business related to tourism is the

operational risk. This is because tourism conducting requires critical

skills for scheduling and itinerary execution. This is why travel agencies

in the country will not implement a tour package without the provision of

operation risk management. Santos (2014) stated that the members of

operational risk management sessions should be the reservations officer,

the tour guide, the marketing officer and the tours department manager.

G R A D U A T E S C H O O L
 ADAMSON UNIVERSITY
How to Identify Operational Risk?

Situational or Simulation Analysis is the most common technique

in identifying the operational risk. According to Jacoby (2012),

Situational analysis is a process of risk assessment by which a

procedural analysis is conducted to spot and identify possible threats in

the actual execution of the system. In travel agency and tour operations,

Claravall (2014) cited that situational analysis can be done by a thorough

evaluation of the tour package components from the itinerary, supplier-

base, reservations and costing. A meeting or briefing between the

members of the operations function is usually conducted before the

actual tour to spot possible risks in the execution of the tour package.

Other proposed strategies for identifying operational risks are

SWOT Analysis (Kotler, p. 278-A), Tree Diagram (Kotler, p. 278-B) and

Failure Mode and Effect Analysis (Kotler, p. 278-C). SWOT Analysis

refers to the environmental analysis of the business operations which

will determine the business’s strengths, weaknesses, opportunities and

threats. Tree Diagram assesses risk through rooting possible causes and

trying to mitigate these possible risk causes. The FME Analysis is a type

of cause and effect analysis but qualifies the causes of failure into

several modes and severity in relevance to the possible results or effects.

10

G R A D U A T E S C H O O L
 ADAMSON UNIVERSITY
What Are the Operational Risks Involved?

The risks involving travel agency operations can be classified into

two groups: risks in planning failure and management and risks in the

actual conducting of the tour (Claravall, 2014, pp. 245-246).

The risks involved in planning failure will be those which resulted

from reservation mistake, documentation omission, costing omission, and

supplier-market requirement matching. These types of risks are brought

about by the failure of the operations staff to consider the essential tour

package components that will be offered to the tourists. Reservation

mistake means a deficiency in the details of the booking that might affect

the actual service that will be provided to the tourist. Documentation

omission involves problems related to travel documents validity such as

passport and visa. Costing omission means over-pricing or under-

quotation which will give the travel agency a loss in terms of profit.

Supplier-market requirement matching risk involved the risk of

developing the product that is requested by the tourists but cannot be

pursued because of lack of capacity in the supply side.

The risks in the actual conducting of the tour are the unanticipated

events and occurrences that may pop-up out of nowhere during the actual

conducting of the tour. Examples of this type of risk are medical

emergencies, transportation break-up and weather disturbances. These

events, since unexpected, are often the test of the ability of the travel

11

G R A D U A T E S C H O O L
 ADAMSON UNIVERSITY
agency to deliver what they promised to their clients despite the

unanticipated circumstances.

How to Solve Operational Risks?

Jarvenpaa (2010), Kim (2012) and Ku (2014) devised strategies to

mitigate and control the operational risks.

Jarvenpaa (2010) suggested the designing of travel policy and

procedures to minimize and control operational risks. It is the most

important task to be completed as it forms the basis for managers,

administration staff, and end-users to fully understand their

responsibilities when organizing tour packages and services. The policy

and procedures also fulfill the corporate responsibility in managing not

only employee safety but also client or tourist welfare and will result in

the whole organization having the same processes, procedures, and

escalation measures. Additionally, it sets the levels of service the travel

agency would require from third party providers which can be one of the

tools to support the safe travel management program.

Kim (2012) proposed the selection and supervision of travel

advisory services integration. Several organizations provide differing

levels of services with a variation of cost structures. To integrate the

knowledge of the possible negative circumstances that may occur will

12

G R A D U A T E S C H O O L
 ADAMSON UNIVERSITY
surely be disseminated by several government and private entities or

organizations.

Ku (2014) stated that operational risk management lies on the

hands of the employees. In depth awareness and training on product

development, itinerary planning and tour conduction will hone the skills

of the travel agents to prepare what can be prepared and to remedy the

unanticipated events while the tour was conducted. Training the

employees about the different risk management, identification and

assessment tools will also help the operations function to fair well

despite difficult circumstances.

Synthesis and Conclusion

Travel agencies, being one of the major travel trade businesses, are

prone to risks. Managing these risks is always a challenge for all the

members of the organization. An effective coordination between the

functions enables the organization to work as a system that may mitigate

and control the risks.

Risks that should be managed vary from marketing to operations

perspective. The market or marketing risk is concerning the clients or the

tourists and how can they be taken care of by providing quality

experience and service. The operational risk is on the actual delivery of

the tour package components which were availed by the tourists. Both of
13

G R A D U A T E S C H O O L
 ADAMSON UNIVERSITY
these risks are related in a sense that operations may dictate the post-

tour perception of the tourists which is under the marketing function.

There are several techniques in determining, assessing and

controlling the market and operational risks. The researcher recommends

the use of not only one of the identified techniques but rather all of the

techniques to secure both the market and operations aspect of the

business.

In terms of market risk protection, effective customer focus should

be done to maintain the positive notion of the tourists regarding the

service offered by the travel agency business. Building loyalty through

customer relationship management is also an effective tool as it

generates rapport and trust that might generate positive word of mouth

testimonials and feedback.

On the operational risk protection, conducting situational analysis

will not eliminate all the possible risks but rather mitigate and control

those unexpected events and circumstance. The employees should be

flexible in integrating quick strategies to maintain the comfort and

convenience of the tourists.

Lastly, the operational and market aspect of the business are

critical aspects and functions. Though they may require distinct risk

14

G R A D U A T E S C H O O L
 ADAMSON UNIVERSITY
management strategies, the operations and market risk protection should

be anchored on the company’s main objective, customer satisfaction.

15

G R A D U A T E S C H O O L
 ADAMSON UNIVERSITY

References:

 Anderson, H. 2011. Principles of Risk Management and

Insurance., Vol. I, II. American Institute for Property and Liability

Underwriters, 2nd Ed.

 Brown, M. R., R. Muchira & U. Gottlieb. 2012. Privacy Concerns

and the Purchasing Of Travel Services Online . Information

Technology & Tourism, 9, 15–25. 41

 Card, J. A., C.-Y. Chen & S. T. Cole. 2013. Online Travel Products

Shopping: Differences between Shoppers and Non-shoppers . Journal

of Travel Research, 42, 133-139

 Cho, Y. C. & J. Agrusa. 2011. Assessing Use Acceptance and

Satisfaction Toward Online Travel Agencies. Information Technology

& Tourism, 8, 179- 195 .

 Claravall, B. 2014. Travel Agency Management and Tour Operations

in the Philippines, 3 rd Ed. Adventure Holidays Tours Printing and

Publishing. Ermita, Manila, Philippines

 Crane, L. 2014. Travel Insurance and Risk Management . Lewis

Publishing; Fort Houston, HO.

 Dela Pena, S. 2010. An Analysis on Post-Tour Strategies Linked to

Risk Management of Travel Agencies . Far Eastern University: Manila,

Philippines
 Dolnicar, F. & Laesser, T. 2012. Travel Agency Marketing Insights

and Strategy in Switzerland . Swiss Publishing Inc.: Geneva,

Switzerland.

16

G R A D U A T E S C H O O L
 ADAMSON UNIVERSITY
 Jacoby, J. and L. B. Kaplan. 2012. The Components Of Perceived Risk

in Proceedings of the Third Annual Conference of the Association for

Consumer Research , 2012.

 Kotler, H. 2010. Tourism Marketing Principles and Practices .

Prentice-Hall Publishing. London, United Kingdom: UK. Low-Cost

Ed.
 Lawton, A. & Weaver, B. 2013. Demand Forecasting and Analysis: A

Key for Travel Agency Risk Management . Cambridge University :

London, United Kingdom.

 Lim, P. 2012. The Importance of Market Research for Travel Agency

Operations. Far Eastern University: Manila, Philippines

 Lumagui, D. . 2011. Consumer Behavior As Risk Taking :Risk Taking

and Information Handling in Consumer Behavior . Far Eastern

University: Manila, Philippines

 Manzano , R. . 2015. Motivations of Pleasure Travel Products: a

correspondence analysis . F ar Eastern University: Manila,

Philippines
 Moharrer, M., H. Tahayori, S. H. Z. Amir Albadavi and H. Perzon .

2010. Satisfaction In E-tourism A Case Of European Online

Customers. IADI: International Conference e-Commerce.

 Patterson, G. 2012. The Fiscal Doctor . Ezine Publishing; San

Francisco, California, CA. 3 r d Issue

 Republic Act No. 9593. The Tourism Act of 2012. Department of

Tourism Manual Guides. Manila, Philippines

 Salcedo, J. & Cruz, A. 2012. P rinciples of Risk Management:

Philippine Setting . C & E Publishing: C.M. Recto, Manila.

17

G R A D U A T E S C H O O L
 ADAMSON UNIVERSITY
 Santos, B. 2014. Research on Marketing Strategies and Risk

Management of Selected Travel Agencies in Manila . San Beda,

College, Manila:Philippines
 Shankar, V., A. Smith and A. Rangaswamy . 2013. Customer

satisfaction and loyalty in online and offline environments for travel

agency. International Journal of Research in Marketing, 20(2), 153-

175.
 The Economic Times. 2015. Bennett, Coleman & Co., Ltd.
 Travel Industry Association of America. 2010. Economic Review of

Travel in America (Report), http://www.tia.org

 TTG Media Limited, June 2010 , New Bridge Street House, 30-34

New Bridge Street, London EC4V 6 BJ

 United Nations World Tourism Organization Journal, December 2010

Issue, pp.14-15

18

G R A D U A T E S C H O O L