HRG: Cost Control, Technology Yielded Fiscal Pre-Tax Profit

Travel management company Hogg Robinson Group announced yesterday that it pushed underlying pre-tax profits up 15 percent to £28.4 million for the year ending March 31, despite a revenue fall from £351.3 million to £326.8 million.

Profitability in Europe, HRG's biggest region, declined by £3.9 million, but a move out of the red in North America helped HRG improve its overall performance. Even though client expenditure fell 12 percent worldwide, or 17 percent at constant exchange rates, the company said a client retention level topping 90 percent, new account wins and, above all, tighter cost control improved results. The average number of employees fell 14.7 percent during the course of the year, leading to a 7.2 percent drop in personnel costs.

However, said CEO David Radcliffe, "it was not just about cost reduction, but about reshaping the business. For example, we closed down offices in the Nordic region to serve clients from European centers. There has also been a lot of technological innovation, especially in North America." Perhaps the most striking figure to emerge from North America was that the proportion of bookings made through online reservation tools shot up from 29 percent to 41 percent.

A statement from HRG read: "We have restructured our North American operations through a variety of measures, including reducing the number of office locations, introducing more sophisticated and flexible telephony and transaction processing systems, and increasing the number and proportion of travel consultants working from home. All these initiatives have contributed to the sharp rise in underlying operating profit margin."

In recent years, HRG has positioned itself as a full-service travel management provider, contrasting this philosophy to those of its major rivals, which it has claimed are transaction-based providers. Radcliffe denied that the changes of the past year have brought its strategy in line with competitors.

"Our competitors are fulfillment-based, whereas we are more rounded service providers," he said. "Even though we have closed offices, we are still not offering low-cost call centers, which are a far more scripted environment. We offer business centers, where customers can call and ask for help.

"During the early days of the ash crisis, some of the 25,000 calls we received were from our competitors' clients asking for help because their own TMCs were only offering a fulfillment service," Radcliffe added.

One intriguing sentence tucked away in the financial statement accompanying the figures said: "At the end of the year, we signed a deal with a customer to supply a branded version of our online booking tool together with access to our other corporate travel technology, which will open new revenue streams for both parties." Asked to elaborate on this, Radcliffe told EuroBTN, "A customer for a TMC could mean a global distribution system, where we are providing them with tools, but they are labeling them as their own brand." He declined to name the GDS in question.

Looking ahead, HRG said transactions already have bounced back to pre-recession levels in such Asian markets as China and Singapore, which is fast emerging as a regional hub for multinational service. The company expects a more gradual return to pre-recession levels in Europe and North America. Trading was flat for April and May despite the considerable disruption caused by the ash crisis.

However, although the U.K.-based investment research analysis firm Collins Stewart forecasts HRG's underlying operating profits will rise 10 percent in the year ending March 2011, it also tips pre-tax profits to remain flat. This is because HRG, like many other businesses, will have to renegotiate its banking terms at a higher rate when these expire in 2011 and due to a deficit in its pension liabilities. The deficit for HRG's U.K. pension plan increased last year by £64.6 million to £115.9 million.