The Sale of Travel Insurance - Research Proposal Example

Joint Venture Proposal for Flynas and Caterpillar Inc. for the Sale of Travel Insurance Table of Contents Executive Summary 3 Description, History and Role of Each Company in the Joint Venture 4 Flynas 4 Caterpillar Inc. 5 The Proposed Service 7 Market Analysis 8 The Global Travel Industry 8 The Saudi Insurance Industry 9 Benefits to Customers and the Companies 10 Timelines for the Joint Venture 11 Marketing Plan 12 Conclusion 14 References 16 Executive Summary Increasingly, many countries are demanding travel insurance as a prerequisite for the admission of foreigners, much like the passport. The global air travel industry is expected to grow steadily at 5.4% per year for the next one decade. emerging markets, is going to account for most of this growth. Asia alone is projected to account for 55% of growth in global business travel. These factors combined imply growing demand for travel insurance, at least in the next one decade, hence the proposal of a joint venture between Flynas and Caterpillar Inc. for the sale of travel insurance. Currently, there is no specialized provider of such a service, a situation that presents a robust business opportunity. If implemented, the proposal will make air travel by Flynas much more convenient as passengers will enjoy a one-stop for travel and cover. Joint Venture Proposal for Flynas and Caterpillar Inc. for the Sale of Travel Insurance Description, History and Role of Each Company in the Joint Venture Flynas Flynas is Saudi Arabia’s first and only budget airline offering domestic and international flights. The company’s head office is in Riyadh, Saudi Arabia. Flynas was founded in 2007 as Nas Air and commenced operations in February of the year. Until the establishment of Nas Air, Saudi Arabian Airlines, the national carrier, was the only airline in the country. In November 2013, Nas Air rebranded to Flynas. Currently, Flynas makes 950 flights a week to several destinations around the world. As of November 2013, the airline had carried a total of 12 million customers, 3 million of them in the ten months ending November 2013. The airline, following its rebranding, targets to have carried 20 million customers by 2020 (Shane, 2013). Flynas did not offer international flights until 2009. Sharm el Sheikh and Assiut in Egypt became the airline’s first international destinations in 2009. A major milestone in the growth of Flynas came in February 2014 when the airline launched its Global Flight Routes program. The aims of the program were to provide affordable flights between the Saudi Arabian city of Jeddah and specified cities in Africa, Asia and Europe and to fly religious tourists to Saudi Arabia. Under the program, Flynas became the first airline to offer low-cost flights between Saudi Arabia and the UK with the launch of the Jeddah-London Gatwick route in April 2014. The route was the airline’s first long-haul route to Europe. The airline’s other long-haul services included those to Manchester, Islamabad, Casablanca, Jakarta and Kuala Lumpur. Medium-haul routes included Riyadh-Karachi and Riyadh-Lahore. However, in October 2014, Flynas announced the cancellation of most of its medium and long-haul services citing poor performance(Dron, 2014). The role of Flynas in the joint venture will be to provide the market for the travel insurance service. As of December 2013, there were only two airlines operating in in Saudi Arabia: Saudi Arabian Airlines, the national carrier, and Flynas, although plans were underway to licence more airlines in a bid to diversify the Saudi aviation industry and make it more competitive. Then, Flynas controlled 6% of the aviation market with the national carrier commanding the remaining 94%(Saudi Arabian Monetary Agency (SAMA), 2013). In that year alone, Flynas carried over three million passengers. This number of passengers is substantial and will provide a ready market for the proposed service. Caterpillar Inc. Caterpillar Inc. is an American corporation headquartered in Peoria, Illinois in the United States and best known for construction equipment and machinery. However, few people know that besides construction equipment and machinery, Caterpillar Inc. has two other major business divisions: engines and financial services that include insurance. Caterpillar Inc. is the worlds leader in the manufacture of construction and mining equipment, industrial gas turbines, diesel-electric locomotives and diesel and natural engines. With asset valued at $89 billion, Fortune 500 ranked Caterpillar number one in the global heavy equipment and engines industries in 2009 and number 44 overall(The Ohio State University, 2013). Caterpillar Inc. was founded in October 1909 as the Holt Caterpillar Company, although the name Caterpillar was not trademarked until early August 1910. Benjamin Holt founded the company in a bid to respond to the inefficiencies of the steam tractors of the 1890s and early 1900s(The Ohio State University, 2013). The tractors were extremely heavy, sometimes weighing up to 450 kg per horsepower. So heavy were the tractors that they often sank into the soft earth of farmlands. Prior to founding his company, Holt had attempted to improve the cumbersome steam tractors in a number of ways. For instance, he had attempted to increase the height and width of the wheels of the tractor. The result was a 14m wide tractor that was complex, costly and difficult to maintain. Holt’s photographer had observed that the tractor crawled as though it was a caterpillar. Holt seized the metaphor for the name of his company. Holt had opened his company in an abandoned factory building in East Peoria. The need to reequip the premises demanded hefty capital. However, the enterprise proved so profitable that only two years later, Holt employed 625 people, up from the 12 he had started with, and was exporting tractors to Mexico, Canada and Argentina(Krause Fund Research, 2013). Holt’s fortunes were further boosted by the First World War when Holt won contracts to supply military contracts. However, the end of the war marked a reversal of Holt’s fortunes when military contracts ended. Holt’s predicament was worsened by the fact that his heavy-duty tractors were unsuited for agricultural use. Meanwhile, Holts main competitor, C. L. Best Gas Tractor Company, had concentrated on producing tractors for farm use, such that by the time the war ended, Best had considerable market advantage over Holt. In 1925, the two rivals merged into the Caterpillar Tractor Company. Caterpillar Inc.s financial services division was established to provide financing solutions to customers and dealers for the purchase and lease of Caterpillar products(Caterpillar Inc., 2013). Financing options include finance and operating leases, instalment payment, wholesale financing and working capital loans. The division also sells various insurance products to the corporations customers. It is this division that is most relevant to the proposed joint venture. The Division will apply the knowledge and experience it has acquired from years of insuring engines and machinery to travel insurance. The role of the division in the venture will be to design and develop the service while Flynas will market and sell it to its customers. The Proposed Service Today, there are several countries, such as Cuba, which will not let foreigners in unless they have travel insurance: travel insurance is as essential as the passport. However, this is not the only reason travelers, especially the international ones, need travel insurance. Travel insurance ensures that the traveler does not become a burden to their family or friends in case of an emergency while overseas. For instance, the traveler could be taken ill and hospitalized in which case their travel insurance will cover their hospital bill. Moreover, most governments will only pay the medical bills of their citizens only when they are hospitalized in their country, not abroad. This means that even for the citizen whose hospital bills are settled by the government while in their home country, the burden rests on their shoulders while they are abroad. Today, most travel insurance products are sold as comprehensive packages such that the traveler need not worry about planning for a trip. A comprehensive travel package may include enhanced medical cover, extra costs that may be incurred due to trip cancellation and round-the-clock emergency travel among other services(Saudi Arabian Monetary Agency (SAMA), 2013). The Internet is awash with sites that purport to sell travel insurance (Saudi Arabian Monetary Agency (SAMA), 2013). These range from travel insurance firms, credit card providers, health funds and travel agents. The insurance can be bought online, over the counter or the phone. In the face of a proliferation of service providers, it is increasingly possible for a customer to get confused. However, several factors should determine the type of travel insurance that a traveler should buy and, therefore, the provider from whom to buy. The first factor is destination. The level and cost of cover vary depending on a traveler’s destination. The level of risk may vary from one region to the next. For instance, a traveler to a country experiencing civil strife may need a cover with a provision for relocation in the event of a riot. Still, not all travel policies cover such epidemics as avian flu. The second factor is the duration of stay. A one-off policy with a defined number of days suits most travelers. For a regular traveler, a yearly multi-trip policy or travel insurance on the traveler’s credit card may be a more appropriate option. The third factor that may affect the level and cost of travel cover is the purpose of the trip. Many travel insurance policies do not necessarily cover leisure activities, hence the need for the customer to scrutinize the policy for the list of covered events. The fourth factor is whether or not the traveller is carrying with them their valuables such as a digital camera or a laptop. Cover for such valuables may range from zero to $10,000, depending on whether cover for the items is included in the product offering or a premium is paid for them. Finally, the extent and cost of cover may depend on the traveler’s medical conditions(Saudi Arabian Monetary Agency (SAMA), 2013). Some policies may not cover medical conditions such as allergies, diabetes and heart conditions that existed prior to the purchase of the policy. Service providers that cover pre-existing medical conditions may demand that the customer undergoes tests before they can be covered. Market Analysis The Global Travel Industry The global travel industry is projected to grow by 5.4% a year over the next one decade(Amadeus, 2014). this growth will mostly be driven by large emerging markets of China, India, Indonesia and Russia. As a result, non-OECD air travel is set to surpass that of OECD countries for the first time and become the worlds source of air traffic by 2023. In particular, China was expected to overtake the US as the worlds leading outbound air travel market in 2014 and emerge as the worlds leading domestic market by 2017. Business travel is also expected to bounce back as ties between the developed and developing worlds increase demand for international travel. Asia alone will account for 55% of the growth in global business travel. These statistics imply increased demand for travel insurance over the next decade. Thus, if well positioned, the proposed joint venture stands to benefit from the expected growth. The Saudi Insurance Industry The Saudi insurance industry is divided into nine broad segments: protection and savings (P&S), health, engineering, energy, aviation, marine, property and fire, motor and A&L and Other. The industry is dominated by the health and motor segments, in the first and second places, respectively, mainly because the two are compulsory under government regulations(Saudi Arabian Monetary Agency (SAMA), 2013). In 2012, the two segments accounted for 75% of the industry’s total Gross Written Premiums (GWP). In the same year, the aviation segment, which includes travel insurance, accounted for 5.1% of total GWP. As of December 2013, the industry comprised 35 companies: 32 licensed, one reinsurance company (Saudi Reinsurance Company) ant two start-ups that were awaiting final approval by the regulator. The industry is dominated by the three largest companies: The Company for Cooperative Insurance, The Mediterranean & Gulf Insurance & Reinsurance Company and Bupa Arabia for Cooperative Insurance, controlling 27%, 16% and 11% respectively of the market, by contribution to total GWP in 2012(Saudi Arabian Monetary Agency (SAMA), 2013). The top five firms accounted for 62% of GWP in 2012 and 87.5% of industry profits. The majority of the remaining insurance companies reported losses in that year due to high operating costs and expansion in a highly competitive market. From the above analysis, it is evident that the aviation segment’s low market share presents opportunities for growth. There are benefits to be ripped by a dedicated travel insurer: as of December 2013, there was none. Currently, there is no evidence of an existing partnership between Flynas and any travel insurance provider. The implication is that Flynas customers must make all the necessary travel insurance arrangements elsewhere before they can board a Flynas flight. This situation provides the opportunity to provide air travel and travel insurance service “under one roof”, to the convenience of customers. Benefits to Customers and the Companies There is no evidence to the effect that there exists a partnership between Flynas and any travel insurance provider. Nor is there any proof of a planned partnership of that nature. Thus, as things stand, Flynas customers must make their travel insurance arrangements before they can travel by Flynas, especially if they are travelling abroad to countries where travel insurance in mandatory for any foreigner to be admitted. This reality, together with the large number of service providers, can make international travel tedious(Saudi Arabian Monetary Agency (SAMA), 2013). By forming the proposed joint venture, Flynas customers and those of other airlines will enjoy the convenience of travel and travel insurance services "under one roof". Besides convenience, customers will benefit from higher quality (Kale , Patil , Hiravennavar, & Kamane )of travel insurance services as the proposed joint venture will focus its human, financial and other resources on improving the quality travel insurance services it will offer. By contrast, the joint venture’s competitors’ resources will be spread across several product lines. High product quality, coupled by good customer care will give the joint venture the upper hand over its competitors. The comprehensiveness of the travel policies provide will contribute significantly to the overall quality of the product offering. Satisfied customers will reciprocate by developing loyalty to Flynas, leading to the growth of the airline. The main advantage of the proposed joint venture is the potential for both Flynas and Caterpillar Inc. to have an additional revenue stream, hence increased profitability(Kale , Patil , Hiravennavar, & Kamane ). The need for income diversification cannot be over-emphasized, especially in the case of Flynas. The airline operates in a tough Saudi aviation industry dominated by the national carrier that controlled 94% of the market. The international market also presents its set of challenges that include intense competition, currency fluctuations and political instability in certain Asian markets. Owing to these challenges, the airline did not post a profit for the first five years of its operation. Thus, a stable alternative source of revenue will go a long way towards strengthening the unique position of the airline as Saudi Arabia’s first and sole provider of budget local and international travel. The joint venture will also provide the opportunity for the two companies to combine their strengths for the growth of each other(Kale , Patil , Hiravennavar, & Kamane ). Caterpillar Inc. is a global leader in the manufacture and sale of construction machinery and equipment and engines. The corporation’s financial services division has no doubt gone a long way into making the corporation successful, by providing its customers and dealers affordable financing solutions. In addition, the financial services division has, over the years, gained considerable experience in selling insurance services. That experience can be translated into selling travel insurance. Flynas, on its part, is a fast-growing airline with a unique market position as Saudi Arabia’s only budget travel operator. That position saw the nascent airline fly over three million customers in 2013 alone. Combined, these strengths will go a long way towards making the joint venture a success. Timelines for the Joint Venture There will be three major phases I the process of implementing the proposed joint venture. The first phase will be the exploratory phase. During this phase, the two partners will undertake a feasibility study to estimate the viability of the joint venture(Kale, Patil, Hiravennavar, & Kamane ).If feasible, Flynas and Caterpillar Inc. will negotiate the form and details of the joint venture. The possible forms include the integrated, non-integrated and combination joint venture. Some of the details that will have to be agreed on include the role of each partner and the sharing of risks and benefits. If successful, the exploratory phase will give way to the growth stage that in turn, if successful, paves the way to the third phase: the stability phase. The table below outlines the various phases and the actors at each phase. Table 1: Timelines for the Joint Venture Phase Action Actor Benchmark (or Output) Timeline Exploration Undertake feasibility study Agree on the form, location and details of the joint venture The two partners Each partner’s lawyers A signed agreement between partners May 2016 Setting up of company Incorporation of new insurance company and opening of offices The two partners’ lawyers Regulators New company up and running November 2016 Growth Grow the new company in terms of branches, customers, revenue and employees The company’s management Profits November 2019 Stability Steer company towards growing profitability Company management Increasing profits November 2019 onward Source: Author, 2015 Marketing Plan Marketing Objectives:The proposed joint venture will be in the business of selling comprehensive travel insurance policies for Flynas’ and other airlines’ international travellers. By November 2017, 50% of Flynass customers should be buying their travel insurance from the joint venture. By the end of 2019, the enterprise should be meeting the travel insurance needs of all of Flynas customers. Marketing Strategy and Mix: During its first three years, the joint venture will target all of Flynas’ international travellers. After that, the company will target the customers of Saudi Arabian Airlines and other airlines. In terms of the marketing mix, the joint venture will offer only one product: travel insurance. By virtue of carrying only one product line, the company will be able to concentrate its resources on providing the best travel insurance packages in Saudi Arabia. The company, consistent with Flynas’ low-cost business model, will strive to offer the highest quality of service at the lowest cost possible. The new company will sell travel insurance directly to customers online, via their phones and over-the-counter. For the initial six months, the new company and its product will be advertised heavily in the Saudi print and electronic media in addition to social media platforms. Announcements will also be made on Flynas flights. Implementation: The proposed plan will be effected by the new companys marketing manager. Evaluation and Control: The marketing manager will report the progress of the implementation plan to the company’s chief executive officer who will in turn report to the Board of Directors(Cooper , 2000). Finance Figure 1: Product Life Cycle (Adopted from Malakooti, 2013) The new product is expected to pass through the product life cycle, represented in the graph to the left. The first three or so years will be characterized by low sales and high costs, hence no profits. Starting the fourth year, as the product grows, costs are expected to fall as sales increase, hence some profits. The product is expected to reach maturity in its fifth year or thereabout. At this stage, sales are expected to stagnate as costs fall further, hence increasing profits. Later, as more insurance firms become aware of the profitability of selling travel insurance alone and many enter that line of business, sales are expected to fall as costs stagnate, hence reducing profits(Malakooti , 2013). Conclusion This report has presented a proposal for a possible joint venture between Flynas and Caterpillar Inc. Flynas is Saudi Arabia’s first and sole provider of low-cost local and international flights and the airline has experienced rapid growth since its inception in 2007(Dron , 2014). Caterpillar Inc., on the other hand, is a world leader in the manufacture and sale of construction machinery and equipment and engines, with a financial services division that sells insurance and finances assets. Together, the two organizations represent a set of strengths that could be combined for the successful provision of travel insurance. Currently, there is no specialized insurer providing the service. The proposed joint venture will confer benefits to customers and the two partners. The rolling out of the proposal will entail three major phases: exploration, growth and stability and will be underpinned by a marketing plan. The new product is expected to pass through the various stages of the product life cycle. If implemented, the proposal could redefine convenience for the Saudi international traveler: they will be able to walk into the airport, buy travel cover and catch their flight. References Amadeus . (2014). Shaping the Future of Travel: Macro trends. Madrid: Amadeus. Caterpillar Inc.. (2013). Common Ground: Strengths We Share around the World (2013 Year in Review). Peoria: Caterpillar Inc. Cooper, L. (2000). Strategic Marketing Planning for Radically New Products. Journal of Marketing, 64.1 1-16. Dron, A. (2014, July 28). Middle Eastern carriers drop routes. Retrieved from Air Transport World: http://atwonline.com/airports-routes/middle-eastern-carriers-drop-routes Kale, V., Patil, S., Hiravennavar, A., & Kamane, S. (n.d.). Joint Venture in Construction Industry. IOSR Journal of Mechanical & Civil Engineering (IOSR-JMCE), 3.36 60-65. Krause Fund Research. (2013). Caterpillar Inc. (NYSE: CAT). Washington, Dc: Krause Fund Research. Malakooti, B. (2013). Operations and Production Systems with Multiple Objectives. Hoboken: John Wiley & Sons. Saudi Arabian Monetary Agency (SAMA). (2013). The Saudi Insurance Market Report 2013. Riyadh : Saudi Arabian Monetary Agency (SAMA). Shane, D. (2013, November 14). Rebranded Nasair aiming for 20m passengers by 2020. Retrieved from Arabian Business.com: http://web.archive.org/web/20140703194955/http://www.arabianbusiness.com/rebranded-nasair-aiming-for-20m-passengers-by-2020-526373.html The Ohio State University. (2013). Equity Research: Caterpillar Inc. Columbus: The Ohio State University. Read More