Destination Management System

BUSINESS MODEL AND FINANCIAL FAISABILITY

Constraints

Apart of the reliability and efficiency, funding and profitability are decisive factors of success in the development and implementation of a DMS. Commercial attributes and ability to generate profits must therefore be taken into consideration, as future private investors will mainly be looking at a successful revenue model that will ensure their return on investment. Thus, the careful balance between private and public funding, takes its importance in the representativeness and comprehensiveness' objectives of the system as well as its commercial viability as describe in the 5Cs framework (Buhalis & Spada, 2000).

For the MNTO, a joint venture business model with private investors is the prerequisite to fulfill fundamental requirements needed for a DMS to attain its representativeness as well as to help foster its commercial viability. The World Travel Organization (WTO) estimates that a major DMS may cost between $500,000 and $8,000,000 to develop and $250,000 to operate (WTO, 1999). Fortunately tourism organizations do not have to develop these systems. They can lease systems from leading Information System (IS) companies and license the database software for few hundred thousand dollars.

MNTO joint venture should opt for a full range of DMS services or suite of tools as described previously. High cost of developing such system is to be expected. Therefore the future public/private joint venture should consider both

options of developing/owning the system or leasing it from a major leading IS Corporation.

In recent years, however declining revenues of Morocco's government have led to more intense competition for budget resources with result that funding must now be supported by rigorous justification. They are expected to contain well-stated objectives, measurable results, and clear cost effectiveness figures. Other than government subsidies MNTO's main source of revenues, come from transient hotel occupancy taxes. The MNTO capital investment in a DMS needs to show that its implementation will generate visitation that wouldn't have occurred otherwise. MNTO needs to demonstrate the marginal impact. There is no doubt however that a successful DMS will further international tourist arrivals, especially the high spending independent, sophisticated traveler and foster economic development and growth. But for MNTO it must also produce yielded tax revenues from visitor incremental spending, exceeding the promotional investment. But most significantly a DMS will reduce traditional promotional material expenses and generate substantial economies in business and work processing. That is a reinforcing factor for MNTO to seek a private - public joint venture to ensure the DMS commercial viability.

Financial Analysis

The project financial analysis is an attempt to demonstrate the financial viability of a DMS implementation for a MNTO/ private entity venture. Assumptions are derived from different figures pertaining to different previous DMSs. Revenues projections are solely author's game number based on conservatives assumptions on Internet figures in travel buying in major tourism outbound markets combined with online Morocco's lodging capacity offer generated by the projected membership over five years.

Two different options have been considered for the purpose of the financial feasibility:

1) A build/own option enabled by the ventured company.

2) A leasing option, involving a third party, the lessor of the DMS. The results reveal a net disadvantage of the leasing option with actual assumptions. However should revenues fall under the projections figures, it will produce financial drawbacks, that will favor the safer leasing option. The following tables provide a detailed analysis of the Net Present Values of incremental cash flows (CFs), for both options, combined with different scenarios involving corporate tax rate, projected numbers of reservations, commissions rates from online reservations transactions and their effects on Net Advantage Leasing (NAL). Revenues projections are undeniably the most important aspect of a viable DMS's financial analysis. Thus, number of

reservations and average online transactions are the most deterministic financial factors for it commercial success.

DMS FINANCIAL ANALYSIS

Table 10

Basic

assumptions inputs

OPTION BUILD		OPTION LEASING
Cost of Capital	8%	Cost of Capital	8%
Marginal Corporate		Marginal Corporate tax
tax rate	40%	rate	40%
Total Cost of DMS
Capital Investment	($8,000,000)
Loan term	5
Interest rate on loan	8%
Loan payment	($2,003,652)	Lease payment	($850,000)
Maintenance expense FC	($1 ,000,000)	Maintenance expense	$0
Call Center VC	($400,000)	Call Center	$0
Total Operating expenses	($1 ,400,000)
After tax rate on loan	5%
Average amount
RESA	$350	Average amount RESA	$350
% Commission
Charges	15%	% Commission Charges	7%

Table 11

Projected
Revenues

Option 1 Build Own		Y1		Y2			Y3		Y4			Y5
Projected Res Revenues
RESA #		35,000		50,000			100,000		250,000			500,000
Tot Rev		$1 2,250,000		$1 7,500,000			$35,000,000		$87,500,000			$1 75,000,000
Tot Commission Rev		$1 ,837,500		$2,625,000			$5,250,000		$13,1 25,000			$26,250,000
Projected Membership Revenues
Membership		1500		2000			4000		7000			10000
Fees		$500		$500			$500		$500			$700
Total Rev		$750,000		$1 ,000,000			$2,000,000		$3,500,000			$7,000,000
Total Projected
Revenues		$2,587,500		$3,625,000			$7,250,000		$1 6,625,000			$33,250,000
Option 2 Lease		Y1		Y2			Y3		Y4			Y5
Total Revenues	Projected		$857,500		$1	,225,000		$2,450,000		$6,1	25,000 $1		2,250,000

Table 12

Loan Amortization

Loan Amortization schedule

Periods Balance Payment Interest Principal Balance

1	$8,000,000 ($2,219,278)	$960,000	($1,259,278)	$6,740,722
2	$6,740,722 ($2,219,278)	$808,887	($1 ,41 0,391)	$5,330,331
3	$5,330,331 ($2,219,278)	$639,640	($1,579,638)	$3,750,693
4	$3,750,693 ($2,219,278)	$450,083	($1,769,195)	$1,981,498
5	$1,981,498 ($2,219,278)	$237,780	($1,981,498)	$0

Table 13

Financial Outputs

DEVELOP/OWN OPTION	Y0 Y1	Y2	Y3	Y4	Y5
DMS Cost	($8,000,000)
Borrowing CFs	($2,219,278)	($2,219,278)	($2,21 9,278)	($2,21 9,278)	($2,219,278)
Operating Costs (F+V)	($1,400,000)	($1,400,000)	($1,400,000)	($1,400,000)	($1,400,000)
Revenue CFs	$2,587,500	$3,625,000	$7,250,000	$1 6,625,000	$33,250,000
Interest tax shield	$384,000	$323,555	$255,856	$180,033	$95,112
EBT	($647,778)	$329,277	$3,886,578	$13,185,755	$29,725,834
Tax = 40%	$0	$131,711	$1 ,554,631	$5,274,302	$1 1,890,334
Net CF's	($647,778)	$197,566	$2,331 ,947	$7,91 1,453	$1 7,835,500
NPV Owning CFs	$1 0,531,905.14
LEASE OPTION
Leasing CF's	($850,000.00)	($850,000.00)	($850,000.00)	($850,000.00)	($850,000.00)
Pmt tax Savings	$340,000.00	$340,000.00	$340,000.00	$340,000.00	$340,000.00
Revenues	$857,500.00	$1,225,000.00	$2,450,000.00	$6,125,000.00	$12,250,000.00
EBT	$347,500.00	$715,000.00	$1,940,000.00	$5,615,000.00	$11,740,000.00
Tax = 40%	($139,000.00)	($286,000.00)	($776,000.00)	($2,246,000.00)	($4,696,000.00)
Net CF's	$208,500.00	$429,000.00	$1,164,000.00	$3,369,000.00	$7,044,000.00
NPV Leasing CFs	$8,755,218.25

NAL Net Advantage of Leasing ($1 ,776,686.88)

Table 14

Financial Scenarios Summary

Scenario Summary

Current Values: Scenario 1 Scenario 2 Scenario 3 scenario 4

($1,776,686.88) $1,208,675.02 $4,71 8,162.73 $2,91 1,544.55 $3,684,493.58

250,000 250,000 70,000 70,000 250,000

500,000 500,000 200,000 200,000 500,000

100,000 100,000 40,000 40,000 100,000

35,000 35,000 15,000 15,000 35,000

50,000 50,000 25,000 25,000 50,000

$350 $250 $350 $350 $350

40% 40% 40% 0% 0%

15% 15% 15% 15% 10%

Changing Cells:

Av Res ResaY1 ResaY2 ResaY3 ResaY4 ResaY5 Tax

Comm.

Result Cells:

NAL

Notes: Current values column represents values of changing cells at time scenario summary report was created. Changing cells for each scenario are highlighted in gray.