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Enrico Rao, Alpitour

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Alpitour is the leading Italian tourism company with an annual turnover of €1.3 billion and businesses including hotels, airlines and travel agencies. We talk to Enrico Rao, Group Treasurer, about the risks and challenges faced by companies operating in the tourism sector.

Enrico Rao

Group Treasurer

Enrico Rao, 37, is currently Group Treasurer at Alpitour, where he is in charge of treasury operations and currency and fuel hedging. He has 12 years’ experience in treasury and treasury IT solutions, previously working for Fiat Group in Luxembourg at the pan-European cross-border cash pool and then for Tokheim Group in Paris, implementing a European cross-border cash pool and related IT solution.

In 2005 he was a speaker at the EuroFinance conference in Munich, where he spoke about the impact and the opportunities of an ASP treasury system on the treasury organisation.

First of all, please could you give me an overview of Alpitour?

From tourist services to hotel accommodation, transport logistics and financial and insurance offers, Alpitour World is synonymous with tourism at 360o.

Alpitour Group is organised in six operating divisions (Tour Operating, Aviation, Hotels, Distribution, Incoming and Incentives) with an annual turnover of €1.3 billion. Every year, we take care of the needs of approximately one million Italians who want to enjoy their free time in our resorts around the world. Our integrated structure of travel agencies, aircraft and resorts provides a competitive service to our customers and simplifies their access to Alpitour World.

How are treasury operations organised?

Everything related to the short-term financing or the long-term funding is done by Alpitour SpA, the mother company for the whole group. The financial strategy is constructed by the Group Treasurer in accordance with the CFO at the beginning of every year and then adjusted accordingly during the course of that year. We have set up zero balance domestic cash pool structures with major Italian banks in order to improve the company’s cash flow.

On the day-to-day operational side, in each business unit we have one or two people who are responsible not only for the finance but also for budgeting and forecasts. Everything is sent to the mother company. The forecast for the treasury is done on a weekly basis and the forecast is normally up to one and a half months. It’s a rolling forecast, which means that every week we roll the forecast forward one week.

Everything related to banking relationships is also done centrally. So, basically, we try to make things very simple for the subsidiaries – they have only to focus on the business.

What particular risks do you face as a tourism company?

As a tourism company we do have some particular risks, with some of the classical ones relating to forex and interest rate exposure, particularly for our long-term funding.

For example, our currency is euro but around 30% of our turnover is paid in US dollars. Then we have some exotic currency risk, but this is a minor problem because since the introduction of the euro, many countries, especially in North Africa, are now keen to accept the euro as a currency of payment. This has simplified our operations because we have transferred the exotic currency risk onto our suppliers.

“Since the introduction of the euro, many countries, especially in North Africa, are now keen to accept the euro as a currency of payment. This has simplified our operations because we have transferred the exotic currency risk onto our suppliers.”

Then due to our integrated structure with the airline company, we are also exposed to commodity risk. We basically have to protect our unit from swings in the jet fuel price, which has been very volatile in the past year. In addition to general risks, there is also a significant impact on the level of demand for tourism package tours from external factors such as political risks (arising from outbreaks of violence, institutional changeovers, terrorism) or natural disasters in our holiday destinations.

The main threat inherent in country risk, in particular outbreaks of war or terrorism threats, is that this could lead to a fall in demand for the services offered by Alpitour Group.

Undoubtedly more keenly exposed to country risk are those regions located in emerging markets or in countries with social or political unrest, such as Kenya, Zanzibar or Madagascar, for instance. In such instances, we keep in touch with the foreign ministry, which gives advice to the tourists on where to go on vacation and how dangerous a destination could be.

Obviously, stopping a destination can lead to a substantial loss for that region, but we manage this inconvenience by diversifying our product portfolio, redirecting customers to new destinations or renegotiating with local suppliers in order to reduce the potential loss of profit.

Another risk factor is climatic upheavals, such as tidal waves, earthquakes or hurricanes, that could lead to reduced interest in visiting the destinations where these events are occurring or have occurred. No particular remedies are taken into account for these unpredictable situations, but we can redirect our customers to other destinations.

We also have some technology risk exposure. The leisure sector is strongly anchored to IT and computer system processes along the business cycles, starting with the bookings system.

The risk is that computer systems might be disrupted and cause substantial problems in operational management and customer service provision. To mitigate such risk we operate continuing maintenance programmes and we also have elaborate disaster recovery plans to cover a wide range of possible disruptive situations.

“The risk is that computer systems might be disrupted and cause substantial problems in operational management and customer service provision. To mitigate such risk we operate continuing maintenance programmes and we also have elaborate disaster recovery plans to cover a wide range of possible disruptive situations.”

What other challenges do you face in your treasury operations?

When we started three years ago, the company didn’t have any sort of treasury system – everything was done on paper. In the past three years we have set up treasury systems and we have set up cash pooling in order to get all the cash that was dispersed in the accounts in each company. We have also changed our funding structure.

The funding at the time was very expensive, because it was done with the bank overdraft which is the worst form of funding. So in 2007 we negotiated a three-year committed line with our major Italian and European banks and we use this form of funding now instead of using the overdraft.

We have also finalised a five-year loan with a syndication of banks in order to cover our long-term exposure because our financial position is highly affected by the seasonality of our business.

Italians tend to go on vacation only during June, July and August or during the Christmas period or Easter period. So we have a high seasonality on the cash flow and on the business.

Our operations are divided into the winter period, which lasts from 1st November to 30th April, and the summer period, which lasts from 1st May up to the year closing, which is 31st October.

The winter period accounts for a little more than one third of the group’s turnover, with the remaining two thirds generated in the summer period. So we end up with a positive net financial position on 31st October, but we have to manage with a negative position for around eight or nine months.

Since we have restructured our funding structure, the financial situation has changed dramatically in quite an unexpected way. So timing is important. My first boss used to say that you have to take the money when the banks want to give it to you and not when you actually need it, because you never know when the situation will turn around.

“My first boss used to say that you have to take the money when the banks want to give it to you and not when you actually need it, because you never know when the situation will turn around.”

Another major challenge has been the migration of our paper-based payment system into the electronic world. The relocation of the company’s headquarters was a driver for moving to bulk payment processing. The change of location gave us the opportunity to reshuffle our people and to rethink our processes. Now we are enjoying the benefit of this transformation in terms of more interesting pricing and, above all, added flexibility in a very sensitive process. In fact, in our business the airline company has to be paid before the customers’ departure, which means weekly payments, otherwise the carrier can refuse to provide the service.

Furthermore, in addition to our euro denominated zero balancing domestic cash pools, we are also negotiating a target balancing structure for our Spanish business unit between an Italian bank that has special agreements with our local Spanish bank. This new structure is aimed at centralising the management of funds and reducing the cash flow dispersion.

What approach do you take to managing your bank relationships?

Mainly, we are trying to keep our major banking relationship running. Fortunately, because we have negotiated committed facilities, they didn’t try to change the spread or renegotiate the contracts, and so we will be watching to see how the banking sector will evolve next year. In the meanwhile, what we are trying to do is to work closely with our banks, especially on the operational side, such as payments or setting up a cash pool structure, in order to signal that we are willing to work with them. Our strategy is to say, “I give you all the retail banking but, in exchange, you give me good prices and possibly good funding terms.” In order to be a good and long relationship, it must be a win-win situation.

We also tend to work with local banks. The mid-sized bank is no more competitive from our point of view because the pricing they offer isn’t as competitive as the biggest banks, and they’re not small enough to give you a really custom service. So mid-sized banks are basically out of the market for us until they merge together. We have some regional banks here that are very good because we are still not big enough to be able to go to a major bank and say “we want this” and have the bank react immediately. So if we want a specific service, we can approach the small banks because they are willing to work and are more captive to our needs.

What projects are you working on at the moment?

Well, basically everything has been stalled by this crisis. We don’t really have any big plans because, as I said before, in the past three years we have implemented treasury systems all over the group and we have set up a cash pooling structure, so now we are trying to assess all these things before we can start looking at other projects. One that could be interesting is intercompany netting, but this is something which has been postponed.

As a result of the crisis?

Yes, or because activity has slowed down a lot and also because if you want to make a good investment in technology, you have to evaluate really carefully whether the benefit you may get in terms of saving money with intercompany netting will repay you at least the cost of the electronic system itself.

Basically, everything has been stopped and next year we will probably start again with some new projects. So 2009 is more of a transition period.