Asia-Pacific 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 carrier’s 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 • Carrier’s 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 • Carrier’s 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 O&D, Revenue Management fences, etc. • No interlining / code shares / alliances • Limited use of private fares

11. Importance of Distribution Cost Reduction Cost per passenger (£), 2000 Source: Cranfield Air Transport Group

12. Carrier On-line = Direct Sales • For a carrier, the Internet means selling direct • No travel agents or intermediaries • Booking created directly in the carrier’s 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 carrier’s 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

19. Delivers Bottom Line Results • Continental: “Other sales channels cost 3 times more than continental.com.”

20. Delivers Bottom Line Results (cont.) • America West: “Online is America West’s lowest cost distribution channel and we want to shift as much of our volume there as possible.”

21. Strong Market Demand • Continental’s 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

22. Quality Delivers Results Quickly • Alitalia’s immediate results: • improved sales conversions • drop in help desk calls • 90 day implementation

23. Driving Sales • “Isn’t 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

24. 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. Query: Japan to DEN, GA only, 6/7/8 nights, departing Sept. Powerful Shopping Technology

26. What’s Next? • Direct sales is being re-defined • Carriers are starting to sell direct to travel agents, corporations and other Closed User Groups

27. What’s Next? (cont.) • 1U – ITA Software’s 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 carrier’s existing inventory system and/or any GDS • Progressively move volume off legacy onto new system • Clean interfaces to other IT & industry systems