How does an airline value its branded fares?

1. How does an airline value its brandedfares? • Branded Fares features go beyond basic fare rules; they can include additional air miles, lounge access, limousine services, increased baggage allowances, or anything that will entice the traveler to choose a brand that provides the features and benefits that provide them value, above simply the lowestfare. • Branded fares are the bundling of optional services that airlines historically charged for a la carte – in addition to the base fare – or provided on a complimentary basis. We refer to these in industry terms as ancillary services and ancillary fees. These service offerings fall into the followingcategories: • Onboard sales of food andbeverages • Checking of baggage and excessbaggage • Assigned seats, preferred seats (window or aisle) or seats with additional leg room • Call center support for reservations • Fees charge for purchases made with creditcards • Priority check-in andscreening • Early boardingbenefits • Onboard entertainmentsystems • Wireless internetaccess • "Branded Fares" are a re-bundling of optional ancillary services back into an inclusive fare • Normally includes a discount versus purchase of all features ala carte Lufthansa launched its version of "branded fares" in2015 • Many U.S., Middle East, and other international airlines offer suchre-bundling

2. Airline financial analysts project over $1 Billion additional value from such branding for key carriers going forward How to an airline value its brandedfares? Segmentation First, airlines begin by understanding the ancillary purchase behavior of different market segments For Example: Business Vs Leisure VSFamily Base Case: Businesspassenger How do business passengers currently purchase their tickets, and their ancillary services? At Current prices, what ancillary services do they tend to purchase? Do they check bags? Do they purchase onboardMeals? Elasticity Would business passengers purchase more ancillary features if the prices were lower? Would they pay for checked bags if the fee were $5lower? Would they buy drinks more often if the price were $2lower? Any likely increase in purchases is reflected in ancillary priceelasticity The discount on the bundle thus translates into additional ancillarypurchases Business Passengers: Total NewPurchases Base Case (before brandedfares)

3. Market Segment Elasticity Changes due to branded fares Discount forbundle But increased ancillary may not just be because of the discount on thebundle Simplified buyingprocess The simplified buying process- one click purchases the flight along with the desired ancillary by the businesspassenger’s Incremental Revenue versusDilution The new revenue stream can be dividedbetween: Dilution (a lower price for travelers who already were purchasing the bundle at the baseprices) Incremental ancillarypurchases (due to both price elasticity and ease ofbooking) Will the total revenue actually increase when existing purchasers of the same bundle of features payless? Net Revenue Impact Factoring in AncillaryCosts Incremental ancillary purchases will drive highercosts Analysis must focus on incremental profitability, new revenue net ofcosts

4. Price of bundle offeatures • QuantityPurchased • Channel costImpact • Some airlines offer branded fare as a way to move more customers to lower cost distributionchannels • Booking directly through the airline website is significantly lower cost than booking through OTA's or traditional travelagencies • Often, the branded fares are more accessible, and much more transparent, on the airlinewebsite • Other MarketSegments • Each Segment is likely to respond differently to the brandedfares • Business: More likely to value new flexibility or onboardamenities • Leisure: Appreciate the discount relative to other airlines & more likely to move to the airlinewebsite • Family: Will value checked bags, pre-reserved seating and inflight entertainment • Total ProfitImpact • The total profit impact on the airline is the sum of the impacts across the various segments • Eg. A branded fare that targeted more ancillary purchases by business passengers would be expected to drive incremental profit in the business segments that would offset any potential dilution in othersegments. • Conclusion • Each segment is likely to respond differently to the brandedfares

5. Represent a streamlined way for certain customers to buy ancillaryservice Drive incremental ancillary purchases in their target marketsegments May drive distribution cost saving by directing more bookings to the directchannel Expect to see new variations on such branded fares as airlines continue to explore e- merchandising