The challenge
The unprecedented demand seen once the world re-opened after lockdowns, only accelerated Nirvana Travel & Tourism’s top line growth which was already increasing at a healthy rate.
However, this situation also put tremendous pressure on its operations and working capital. With fortnightly wire payments to the International Air Transport Association (IATA) that had to be made with no delays on one hand, and a much longer receivable cycle on the other, the company’s cash conversion cycle was stretched. At the same time, guarantee requirements by IATA had locked up a substantial amount of liquidity.
“While we had a short-term loan facility from a local bank to bridge the working capital gap, the increasing interest payments were hitting our bottom line,” explains Sultan Boudargham, Chief Financial Officer.
The virtual credit card programme from Citi was a great payment tool, but it could only be used for non-ticketing payments such as hotels, which were only a small part of the company spend. To allow the business to grow in a sustainable manner, it was looking for a solution with the following objectives:
- To further streamline its payment operations.
- To improve its working capital position.
- To increase profitability and liquidity buffer to cater for unexpected situations.
The solution
In anticipation of the above challenges, the company started discussions with its banking advisors at Citi Commercial Bank (CCB), pre-covid, to design a solution that would combine the operational and financial benefits of its virtual card account (VCA) with a financing programme to cater for its working capital requirements.
Along with its partners at Citi, it came up with an innovative solution, whereby the Citi VCA would become its primary payment channel, funded via a short-term loan facility from a local bank.
This solution has enabled the company to drive considerable operational efficiencies powered by Mastercard’s API-driven VCA, in terms of faster reconciliation and booking turnaround time – critical for Nirvana’s business. Further, using the VCA as the primary payment channel has given it significant breathing room in terms of working capital by extending days payable outstanding (DPO) by at least 20 days, as it moves away from fortnightly IATA payments.
“The use of VCA also allows us to release considerable cash collateral, which was tied up against guarantees issued to IATA, thus boosting liquidity,” says Boudargham. “The commercial rebate offer from Citi on the VCA helped offset our financing cost on the short-term loan facility, which resulted in a significant improvement to our profit margin.”
“Financing solutions are like suits, there are many readymade, but the best fitted are those that are custom made – and the Adam Smith Award is the pure silk tie that compliments that suit.”
Sultan Boudargham, Chief Financial Officer
Best practice and innovation
This deal showcases how the proactive treasury team at Nirvana Travel & Tourism, in anticipation of upcoming challenges, brought together its banking/financial services partners, viz. Citi, Mastercard, and local bank ADCB, and key suppliers, viz. Emirates and Etihad airlines, to design an innovative payments solution on the back of a club financing deal, which introduced operational efficiencies and improved liquidity as well as profit margins.
Key benefits
- Cost savings.
- Reduced the impact of the increase in borrowing interest rates.
- Enhanced working capital.
- Process efficiencies.
- Increased automation.
- Risk mitigated.
- Errors reduced.
- Manual intervention reduced.
- Increased system connectivity.
- Future-proof solution.
- Improved key performance indicator (KPI) metrics.
The global travel industry has been through a tumultuous period since 2020, with many players going under from the impact of worldwide lockdowns. Players such as Nirvana Travel & Tourism, that survived and came out stronger after the pandemic, were then faced with an unprecedented uptick in demand – a positive development on the surface, but one that put tremendous pressure on its operations, finances and ultimately customer experience.
This solution is unique – in bringing together all the above benefits under one, seamless, well-structured programme, and leveraging synergies across multiple service providers. This is a replicable structure, at least for large travel agencies, that can leverage their flows and financial network to drive acceptance of cards in the travel industry, ultimately benefiting the entire sector.
