AsiaPacific Symposium

1
Asia-Pacific Symposium
Reducing Distribution Costs
Macao, 16-17 September 2004
Michael Randall VP Worldwide Business
Development ITA Software, Inc.
2
Overview

• Reducing distribution costs
• With modern pricing systems
• Growing direct sales online
• Building customer loyalty leveraging carriers
  brand
• How different is the Asian experience?

3
Airfare Pricing

• Many airlines have outsourced airfare pricing to
  GDSs
• Pricing is complicated
• Networks dramatically increase the number of ways
  of going from A ? B the number of pricing
  options
• Private fares / code shares / alliances /
  interlining / dramatically increase the number of
  pricing options
• Revenue Management seeks to optimize pricing
  across the network points of sale
• Pricing logic is different in USA / Canada vs ROW
• Industry standards overridden by carrier
  exceptions

4
Airfare Pricing (cont)

• ATPCO / SITA rule structures are complicated
• Pricing system needs to process a hierarchy of
  records, footnotes and tables, linked with
  stringing logic
• Pricing is integrated with other systems
• Fare creation distribution through ATPCO / SITA
  
• Distribution through travel agents and GDSs
• Revenue Management Revenue Accounting
• Reservation systems
• Customer Relationship Management systems

5
Airfare Pricing (cont.)

• GDS pricing systems based on legacy software
  running on mainframe hardware
• TPF IBM / Unisys
• Systems were originally designed for flag
  carriers serving regulated markets
• Systems are costly to maintain difficult to
  integrate
• Some airlines maintain their own proprietary
  pricing systems
• Pricing just simple itineraries only
• Support simple, non-ATPCO standard rule
  structures
• High maintenance support costs
• Primarily support res centers

6
Airfare Pricing in Asia

• Same legacy technology issues
• Carriers frequently maintain proprietary pricing
  systems
• Fare creation and distribution is fractured
  filing through ATPCO, SITA as well as into
  private fare databases
• Greater emphasis on private fares than published
  fares
• Less complicated networks but with strong RM
  emphasis many POS customizations

7
Airfare Distribution

• Traditionally, airlines have sold through travel
  agents other third party channels
• Travel agents depend on GDS pricing systems and
  other IT services
• Traditional distribution channels are costly
• average ticket price 374
• segment fees 16.00
• commissions 10.82
• agency fee to pax 26.55
• total fees 53.37
• Source US DOT, 2003

8
Growth Channel The Internet

• Online sales have tripled since 2000 as total
  sales have declined
• 20-30 of tickets purchased online, increasing 5
  points each year
• Most travelers get their information online
• Corporates/travel agents shopping online, then
  booking offline
• Online sales split 50/50 between airline web
  sites online travel agents

9
Growth Channel The Internet (cont.)

• Some carriers are more successful than others
• Some carriers with almost 100 Internet
  distribution
• Some carriers have growth rates of 200 / 300 per
  annum
• Leisure sales greater than corporate sales
• Asia has the Internet penetration but air
  distribution trails North America
• Cross shopping sites (Orbitz, Expedia,
  Travelocity) not as established yet
• Impact of Low Cost Carriers more recent
• Carriers have invested less in Internet
  distribution

10
Low Cost Carriers (LCCs)

• LCCs tend to distribute primarily through the
  Internet
• Avoid travel agency distribution costs
• Avoid GDS pricing systems
• Asian model the same
• LCCs avoids airfare pricing complexity
• Traffic is point to point
• Pricing is simplified (refundability one way x 2
  return)
• Leg based market pricing no OD, Revenue
  Management fences, etc.
• No interlining / code shares / alliances
• Limited use of private fares

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Importance of Distribution Cost Reduction
Cost per passenger (), 2000 Source Cranfield
Air Transport Group
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Carrier On-line Direct Sales

• For a carrier, the Internet means selling direct
• No travel agents or intermediaries
• Booking created directly in the carriers
  inventory system
• Maintain build direct relationship with
  customer
• No third party intermediation
• Leverage brand customer proposition
• One of the web sites I need to check
• Requires modern technology and ease of use
• End users do not have travel agent skills
• End users have expectations about what is a good
  site

13
Selling on the Internet

• Quality of customer experience is important
• Make it easy to find and buy what you are
  looking for
• Tailor experience to match individual customer
  requirements / preferences
• Show available prices for every flight
• Fewest possible steps from query to purchase
• Quick response times
• What is shown, can be bought

14
Selling on the Internet (cont)

• Ensure the carriers web site is the best place
  to find purchase fares
• Provide a more extensive or better range of
  product than available through online sites or
  travel agents
• Capability to shop price all trips, all
  passenger types, all classes of services, etc.
• Private fare support for special events,
  promotions, etc.
• Automated support for ancillary transactions such
  as refund/reissue, frequent flier shopping, etc.
• Asia channel issue best fares through travel
  agents?

15
Legacy Technology the Internet

• Legacy pricing systems not suited to Internet
  demands
• Shopping is difficult receive price at a time,
  not all relevant prices at once
• Process is not customer friendly pick outbound,
  then return, check availability, price, iterate
• Systems are very difficult to customize for
  different market requirements and demands
• Numerous bottlenecks restrict scalability
• GDS costs for availability other transaction
  charges quickly add up
• Short cuts developed using pre-constructed tables
  for routings, fares, etc.

16
Airfare Shopping The Challenge

• Look at all the schedules
• Evaluate all faring solutions
• Provide all the best answers at once
• Carrier determines what is best

17
Enabling Technology

• Modern pricing systems have enabled Internet
  distribution

18
Network Carriers the Internet

• Modern pricing systems have enabled Internet
  distribution by network carriers
• Capable of quickly and accurately pricing any
  itinerary across the network
• Enables airfare shopping where carrier determines
  what are best solutions
• Low maintenance, high performance, high quality
  systems
• Airfare pricing complexity is transparent to user
  
• Cost effectively support Internet look to book
  ratios
• Deliver a user experience that builds customer
  loyalty

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Delivers Bottom Line Results

• Continental Other sales channels cost 3 times
  more than continental.com.

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Delivers Bottom Line Results (cont.)

• America West Online is America Wests lowest
  cost distribution channel and we want to shift as
  much of our volume there as possible.

21
Strong Market Demand

• Continentals results with a modern pricing
  system, QPX by ITA Software
• Started project September 2002 launched January
  2003
• In first 90 days, more than 50 days where sales
  exceed 3 million per day
• In previous five years, daily sales exceed 3
  million only once before
• October 2003 YTD sales exceed 1 billion
• Daily sales now regularly exceed 10 million
• 200 annual growth rate continuing to trend
  upwards

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Quality Delivers Results Quickly

• Alitalias immediate results
• improved sales conversions
• drop in help desk calls
• 90 day implementation

23
Driving Sales

• Isnt it better to keep prices non-transparent?
• Internet is here growing
• Impact of LCCs, cross shopping sites network
  competitors that are Internet-enabled
• Objective is to make it easy to purchase travel
• Deliver a range of prices to enable trade-offs,
  not just the lowest fare
• Direct internet sales deliver cost, customer
  loyalty customer relationship advantages
• Need to segment customers markets

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Driving Sales (cont.)

• Modern pricing shopping systems enable direct
  selling
• quickly provide all the best answers, priced
  checked for availability
• customize solutions for markets, travelers,
  events, etc.
• Modern pricing shopping systems enable
  upselling
• In a single response restricted / unrestricted,
  refundable / non-refundable, private / published
  across all classes, all passengers, all passenger
  types
• Search on specials, promotions, etc.
• Automatically build suggested add-on itineraries
  from a destination
• And much more

25
Powerful Shopping Technology
Query Japan to DEN, GA only, 6/7/8 nights,
departing Sept.
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Whats Next?

• Direct sales is being re-defined
• Carriers are starting to sell direct to travel
  agents, corporations and other Closed User Groups

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Whats Next? (cont.)

• 1U ITA Softwares IATA designator code
• Soon to launch a modern res system sales,
  pricing shopping, CRM, inventory, check-in,
  departure control
• A cost-effective, portable modern res system on a
  small farm of PCs
• Low risk, progressive migration strategy
• Copy booking and ticket records from 1U to a
  carriers existing inventory system and/or any
  GDS
• Progressively move volume off legacy onto new
  system
• Clean interfaces to other IT industry systems