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Managerial Economics for Tourism Management.

Section 2

Questions in tourism management


Asst.Prof. Komsan Suriya
Faculty of Economics, Chiang Mai University December 19, 2008


When asking about tourism management, it is a question about what to be managed. Tourism management is management of transactions related to tourism activities. They are not only business activities but also non-profit activities such as national or provincial tourism promotion. Important transactions should be listed first. Then ranking of the importance in terms of value of the transactions should be made. This is a concept of value stream. Each transaction contains value. Different value is in each transaction. Thus, we will find out what are those 20 percent of transactions which contain 80 percent of the value according to the Pareto rule of 20 and 80.
 
An activity is a value stream. Many transactions are involved in a value stream. Each transaction contains its own value. The highest valuable transaction should be investigated first. Less valuable transactions will be investigated later.
 
Tourism gets involved with a lot of business sectors such as accommodation, food and beverage, transportation, tour operator, guide, entertainment, museum, handicraft and souvenir, etc. A business sector consists of many activities. What are top activities that are worth for the study? An answer is activities that make highest money return.
 
To search for those highly valuable activities, an example of transportation will be discussed here. There are two modes of the transportation for tourists. First, tourists can transport with vehicles arranged for tourism purpose only. For example, a coach or a van can be arranged for a group of tourists from hotel to tourism destination. Second, tourists have to share public transportation with local people. For example, airlines, trains and buses cannot offer seats for only tourists. Management of the two modes are different in terms of privacy, time schedule, punctuation, ticketing, embarking and disembarking places, space in the vehicle, comfort, safety, price, environmental friendliness, etc.  
 
Tourists actually experience both mode of transportation. First, they travel from their country by an airplane operated by an airline to another country. After arriving to an airport at the destination, a coach will be arranged from the airport to a hotel. Some tourists may have to catch a shuttle bus, train or subway to go to downtown with other travelers and local people. After arriving to the hotel, procedure of checking in and room service will be managed by the hotel. Tourists in a group tour will be transported to tourism sites by coaches for the whole trip. Individual tourists catch local buses, hop-on hop-off buses and subways to travel from place to place. The question is what can we manage for these activities?
I. Activities

 We may begin with listing the activities.
 Activity 1: Travel from country A to country B by an airplane
 Activity 2: Travel from airport to downtown for group tourists
 Activity 3 Travel from airport to downtown for individual tourists
 Activity 4: Travel between hotel and tourism destinations for group tourists
 Activity 5: Travel between hotel and tourism destinations for individual tourists
 Activity 6: Travel from downtown to airport for group tourists
 Activity 7 Travel from downtown to airport for individual tourists
 Activity 8: Travel from country B back to country A by an airplane


Then we think about who manage the activities. Activity 1 and 8 are managed by airlines and airport authority. They are usually big companies with massive capital, staffs, procedures, standards. Their transactions are complex. Talking about their transactions is talking about re-engineering of an airline business or an airport authority.
 
Activity 2, 4 and 6 are managed by tour operators. Having received payments for their packages, they are responsible for everything for their clients. Arrangement of transportation, accommodation, meals, entertainments are made prior to the arrival of tourists. Their transactions are simpler than those of an airline business. It is therefore easier to make some suggestions to improve their performance. We will refer to these activities as private management.
 Activity 3, 5 and 7 are managed by local government. Individual tourists share public transportation with local people. Thus, points are at the management of public transportation. Although the manager of the system is the local government, private enterprises also get involved as providers of the transportation. While infrastructure is invested by local authorities, investment in vehicles and drivers are made by private firms. We will separate activities related to the provision of infrastructure as public management and activities related to the provision of vehicles and drivers as private management.
 Managerial economics can provide solutions for both public management and private management. Different questions are arisen from both side. However, the way how economists look at the problems and how to solve the problems are not so much different. It will be based on the optimization, i.e. maximizing benefit. In the next part, we will choose an activity to study deeper to its transactions.

II. Transactions
A classical question in managerial economics is a decision to rent or buy. A private tour operator needs not to spend money to buy own a coach or a van. However, it has to ensure that the coach or van must be available during the contracted period made with their clients. Usually, it can rent a coach or van and there will be no problem. The situation will be problematic when an uncontrollable incident occurred with the shortage of coaches and vans during the tourism high season.
 
A transaction in focus now is the acquiring of a coach or a van for a period of time according to the contract made to clients.
 
A choice is the rental vehicle. The advantage is the much less investment. The weakness is a risk of unavailability of the vehicle.
 
Another option is buying the vehicle. The advantage is the certainty of the availability of the vehicle. The weakness is the much bigger investment.

III. Real world solutions
Most of tour operators made decisions to rent the vehicles. According to small amount of tourists per operator, they cannot invest much. Moreover, the amount might be even lower in some years with political problem or natural disaster. The risk of receiving less money income while paying fixed costs, depreciation in the form of maintenance cost and staff payment, is high. Besides, there are a lot of providers of rental coach and van. Therefore, the rent is a more reasonable solution.
 
Looking at the providers of rental coach and van, we found that they are more risky. Usually, their vehicles are almost fully rent during tourism high season. This means that the supply matches the demand. Unfortunately in some years when political problem or natural disaster takes place, the demand drop sharply. This is the risk that the providers know it so well. However, every business is risky. It depends on, when opportunity comes, how much the profit they can make is beyond their lost when dark cloud covers the business.

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This article should be referred as
Suriya, Komsan. 2008. Managerial Economics for Tourism Management. [online] www.tourismlogistics.com

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