Travel chain takes acquisition route

Instead, Algonquin has taken the acquisition route to double its size to about 100 franchises in the past four years. The twist is that Algonquin franchisees are behind all the acquisitions.

The Globe and Mail
December 2, 1998

Travel chain takes acquisition route
Algonquin Travel franchisees are teaming up with corporate head office to buy out smaller competitors as the continuing fees squeeze helps shake out the industry.
John Southerst

Travel agencies are feeling the pressure following recent announcements that United Airlines and Delta Air Lines were cutting the amount they pay to agents.

But at Algonquin Travel, the commission squeeze reinforces a determination to expand.

The usual formula for boosting a franchise chain is simple enough: open more stores. But amid falling fees and an apparent surplus of agencies, there isn’t much room for new outlets.

Instead, Algonquin has taken the acquisition route to double its size to about 100 franchises in the past four years. The twist is that Algonquin franchisees are behind all the acquisitions.

Franchising has always been a way of financing business expansion. In a variation on that theme, Algonquin and its franchisees are teaming up to acquire small chains and independents that are selling out before industry conditions deteriorate further.

“The travel industry is changing,” says Ron Greenwood, president of Ottawa-based Algonquin Travel Corp., the franchiser for Algonquin and the Voyage Funtastique chain in Quebec. “We need willing franchisees who are a little more ambitious.”

Mr. Greenwood takes on the negotiator’s role and handles the administrative and legal details. He finds agencies willing to sell, negotiates the purchase, takes care of legal costs and helps a franchisee find financing, usually vendor take-backs and small-business loans guaranteed by the federal government.

The franchisee’s job usually is to merge operations and carry the debt. Of about 20 purchases completed or pending this year, prices paid by Algonquin franchisees range from $50,000 to $1-million.

There is no shortage of buyout targets, Mr. Greenwood says. He predicts that 25 to 50 per cent of agencies will flee the business within the next decade. There are about 5,400 travel agencies in Canada, the same as in 1988, according to Baxter Publishing, a directory publisher in Toronto.

Mr. Greenwood’s most active franchise buyers are located in Edmonton, Ottawa, Montreal and Quebec City.

The consolidation is largely in anticipation of new travel industry rules. Commissions fell last year to 9 per cent for international flights; then Delta and United added $140 cap last month for a round-trip ticket.

Air Canada and Canadian Airlines have not announced intentions to match recent moves, but industry expectations are that the trend will continue. Insiders are talking about replacing commissions by charging ticket buyers a fee for agency services, such as travel recommendations, assistance in setting corporate travel policies and budgetary reporting.

It’s the kind of service only larger agencies can offer, says Michael Katz, an Algonquin franchisee in Ottawa who has engineered purchases worth $1-million for three Ottawa agencies since June. “We will be able to operate in a fee-based world.”

Still, Algonquin franchisees are not exactly anxious to see this take place. Suddenly charging for something that has always been “free” would involve immense costs in communicating the reasons and, especially, in negotiating fees with major business customers.

Still, they believe they are well positioned for the new travel regime. “Only professionals who have the service and quality staff would be able to charge fees and stick around,” says Bill Alefantis, owner of a Voyage Funtastique franchise in Laval, Que.

He closes a $360,000 purchase of a nearby travel agency on Dec. 31, taking his annual ticketing sales to $7-million from $2-million in one swoop.

“We would then become independents working for the consumer. If we know what we’re talking about, they’ll be happy to come back.”

He also sees the possibility of developing greater customer loyalty. “It will get rid of a certain amount of shopping around. You’ll have to pay a fee just to talk to someone.”

Mr. Alefantis believes acquiring other agencies is an aggressive way to capitalize on an industry undergoing major change. “I can’t see how anyone doing less than $3-million [in ticket sales] can make it in this business within three years. The only option is buying out the competition. You don’t have 15 years to grow.”

Mr. Katz felt so strongly about the opportunities for expansion through acquisition that he left a senior job as a policy economist in the federal government to become Algonquin’s largest franchisee. He pulled together loans, vendor take-backs and financing from friends and family to buy the three agencies. He now runs a business with yearly ticket sales of $17-million. He amalgamated two sites into one, and continues to consolidate functions such as management reporting, sales activities and accounting.

Mr. Alefantis also plans to shut down his smaller location. Algonquin is picking up the rent for the other site until another tenant can be found, generosity that franchisees in other chains may find surprising. But Mr. Greenwood says he sees his acquisitive franchisees are partners, not just basic franchisees. He isn’t concerned about the tail eventually wagging the dog. “I don’t care if they want to be huge,” he says. “If they are, it just speaks volumes for our company.”

As the largest Quebec franchisee, Mr. Alefantis says he “absolutely” expects to wield significant influence in Algonquin’s future. Mr. Greenwood, he says, “is going to have to hear us out a little more, because most of the major decisions will affect us more. But I think he’ll listen. He’s a smart man who’s looking at his bottom line.”

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