How to organize travelling business

08.07.2015 Karina Katz, lawyer

Before beginning of commercial activity an entrepreneur often asks a question to himself – what kind of business to choose? The choice often falls on the tourism industry; it is no wonder why, because people are always travelling, so there is a chance to succeed in this business. In addition, tourism is also a nice and interesting business, so the idea of creating his own travel agency seems very tempting for an open, outgoing and active person. After all, why not?!

Thus, if you finally decide – yes, I want to create a travel agency, first, you need to decide who you are going to be – a travel agency or tour operator. The difference between these concepts is very significant. Tour operator is a merchant who organizes the provision of tourist services and offers these services to clients directly or through travel agencies. Travel agency is a merchant who on behalf of the tour operator offers or sells services to clients, which are prepared by the tour operator. 

In other words, the tour operator generates a tour package – tourist product that as a standard includes transport tickets, transfer, hotel reservations, as well as a number of excursions. Tour operator sets the prices for tours and develops a system of discounts. Travel agency, in fact, is the seller – the intermediary between the tour operator and the client. Travel agency does not create the tour package, but only implements it. One tour operator can work with several travel agencies. 

It is important to understand that tour operators are entirely responsible for tourism product. That is, all claims on the organization of tours, no matter whether tourist bought it directly or through a travel agency, should be presented to the tour operator. 

If you do not fancy the perspective of simply selling the already developed tours and want to offer clients a self-created from “A” to “Z” tour, it means that your aim is to get the status of the tour operator. And here the fun begins. There is something that the new merchant full of enthusiasm and with new ideas does not even know. This is what we want to tell you about. 

So, you are the founder of the newly registered limited liability company and want to offer tours to the clients – it does not matter, in Latvia or abroad. It turns out that a desire is not enough – all tour operators (travel agencies, by the way, too) must register in the database for tour operators and travel agencies, called TATO. This is a database under the direction of the Ministry of Economics of Latvia, founded in 2010, when came into force the rules of the Cabinet of Ministers № 353 On the rights and obligations of the tour operator, travel agent and the client, the order of execution and the preparation of a comprehensive travel service, the information provided to the client and order of a monetary guarantee payment. According to these rules, TATO database collects and updates the information on travel agencies and tour operators in the current market, as well as the financial security to be provided by the tour operator. Potential travellers may use TATO to make sure that a particular merchant registered his activity as a travel agent or tour operator, as well as to make sure that the chosen tour operator has provided a guarantee of funds paid by clients. 

What kind of financial security is it? This is the guarantee of funds paid by tourists on a tour from a particular tour operator. It is a mechanism developed by the legislator to protect the interests of tourists, bearing in mind that the percentage of bankrupt firms particularly in the field of tourism is especially high. Therefore, in order to protect tourists from cases where the tour operator is unable to meet its obligations to the client in the event of its insolvency, the guarantee is necessary to compensate the damage caused in the event of tour operator’s failure to meet its obligations, as well as to bring back tourists to the country in which they began their journey. 

In order to register in TATO, a future tour operator must first issue through the so-called insurer an insurance of execution of obligations of the tour operator. It’s a certain kind of insurance policy designed specifically for tour operators, which is issued every year and, accordingly, is valid only a year. If the tour operator is unable to meet its obligations to its clients, the insurance company compensates the damage to the client instead of the tour operator, and then turns to the tour operator with recourse requirement. 

The above-mentioned rules of the Cabinet of Ministers clearly establish the amount of financial security – the amount should not be less than 28457,44 EUR. This means that the amount of the tour operator’s insurance must be precisely the same (of course, it can be even more, but most importantly – not less). In turn, the insurance premium, which the tour operator has to pay annually to an insurance company, varies a lot and can range from 300 to more than 1,000 euros. 

And here the new entrepreneur faces with an unpleasant surprise: it turns out that very few Latvian insurers offer this type of insurance, and among those few who offer, the majority refuses to issue insurance when they find out that the company has just been set up, it has no turnover, no history, no reputation. It is a vicious circle: to start commercial activities a tour operator need to register in TATO, and for registration in TATO he must purchase insurance, which most insurers refuse to provide! 

However, the situation is not hopeless. Those few insurance companies that still agree to work with future travel agency that has not yet sold any of the tour, offers several options of how to get the desired insurance. Firstly, the founder of the company may offer his property as collateral (under condition, of course, that he is the owner of real estate in Latvia). In this case, this property will be applied with the mortgage, and in case of default of the tour operator with its obligations, real estate can be sold to satisfy the requirements of the insurer. Second, the entrepreneur may offer himself as a guarantor, by signing an agreement with the insurer on the personal guarantee. In this case, the entrepreneur is responsible to the insurer with all its assets. And finally, there is a third option: the entrepreneur makes a so-called deposit (at a rate of half of the above-mentioned amount of 28457,44 EUR) to the bank account of the insurance company where the money will remain frozen for the duration of the insurance policy. The amount of the insurance premium, which the entrepreneur must pay to the insurer, depends on the chosen option – one of the three described above, and hence there is the variation in the amounts of which we have mentioned. The greater the risk for the insurer, consequently, the higher the insurance premium. 

In addition, the insurance company carefully examines the future tour operator – it is necessary to fill in an extensive questionnaire and answer to the very detailed questions, to the point that you need to specify how many tourists a year is supposed to be served, what is the estimated cost of a tour, how many tourists will be in each tour, what kind of annual turnover is planned, etc. 

The good news for the entrepreneur is that in a year when you will have to buy a new insurance, insurance companies will be much more favourable, because tour operator within the year will gain clients, experience, the company will have turnover and history, as well as financial history. Therefore, the insurance policy for the second time will be easier to obtain, and insurance conditions will not be so strict, and the insurance premium will be lower than the first time. 

The specialists of our law office will be happy to help future tour operators in all matters related to the organization of tourist business, including assistance in obtaining the insurance policy and the subsequent registration in a database TATO. In addition, we will help to resolve all remaining issues related to ensuring the success of your company – regarding the development of contracts for the provision of tourist services or representation of tour operator’s interests in all institutions. Feel free to contact us for full consultation.

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