e-Stuff

1. e-Stuff Amit Khandelwal AGIFORS 2000, New York

2. Two Parts • e-Commerce Evolution and Revenue Management • O&D fares, POS Control, and Internet bookings

3. e-Commerce Evolution and Revenue Management

4. Internet Bookings in the Airline Industry • Airline Industry percentage bookings online • 1999 – 3% • 2000 – 8% (forecast) • More than 50% of online travel sales are directly done on travel company websites compared to 20-25% on conventional channels • Bookings on Online travel sites are less fragmented compared to booking through off-line travel agencies • The top 3 travel sites account for 75% of indirect online traffic compared to 35% for top three off-line agencies Source: The PhoCusWright Yearbook 1999Analysis, Assumptions And Assessments For The Online Travel Marketplace

5. Internet Bookings in the Airline Industry • Commissions for online travel agencies are average 3-4% compared to 7% for offline. • 69% of online users “look” but do not “book” online • Southwest Airlines on target to generate $1B. in online revenues in 2000 – amounting to 25% of its total sales Source: Internet Usage by Travelers Continues to Soar Travel Industry Association of America Press Release 8 February 2000 Source: Southwest Airlines on Pace to Exceed $1 Billion in Internet Revenue for 2000 Southwest Airlines Press Release 28 February 2000 Source: “Now or Never…..”, Mary Modahl, Forrester Research Inc.

6. Total Online Travel Market Revenue $276 million $827 million $1.9 billion $3.2 billion $4.7 billion $6.5 billion $8.9 billion Total Number of Online Travel Buyers in the U.S. 1996 25.3 million people 1997 32.2 million people 1998 41.0 million people 1999 48.1 million people 2000 54.2 million people 2001 60.5 million people 2002 71.9 million people The Online Travel Pie Source: Fast Facts – Travel and the InternetTravel Industry Association of America website

7. Why Are Internet Bookings Still a Small Fraction of the Total? • Three reasons • Airlines struggle with pricing internet offerings to avoid revenue dilution and channel conflict with the conventional channels • Manual/Ad hoc process in distributing the inventory to alternate e-channels • Overall consumer penetration for buying travel online is still low • Other practical difficulties with e-ticket, website usability, fear of fraud, etc.

8. Conventional RM GDS RM System Reservations System GDS Pricing System GDS

9. Birth of e-Commerce GDS RM System Reservations System Airline Website Pricing System Internet BookingEngines e.g.,Expedia GDS

10. Distressed Inventory and the Rise of the Infomediaries Auction Websites e.g., LMT, Priceline Distressed Inventory Finder RM System Reservations System Airline Website Pricing System Internet Booking Engines e.g., Expedia GDS GDS

11. e-Commerce RM Suite Auction Databases Auction Websites e.g. LMT, Priceline e-Commerce RM Suite RM System Pricing System Reservations System eOffers Airline Website Shop bots Internet Booking Engines e.g. Expedia GDS GDS

12. What is Required? • Enabling technologies to automate distribution of inventory to multiple websites and maximize the revenue of e-Commerce transactions • Distressed inventory, special offers, preferred member deals • Business-to-business inventory distribution • Regain control of sales of inventory on Internet

13. What is Required? • Provide support for web-based auctions • Utilize multiple auction methodologies • Allow airline to monitor and report on success of auctions • Manage Internet inventory exposure • Business rules • Prevent “spiral-down” pricing • Increase load factor, reduce spoilage

14. O&D Fares, POS Control,and Internet Bookings

15. Some Facts • Most Pricing is based on Point of Origin (POO) not Point of Sale (POS) • Most O&D-based RM systems and RES systems: • Use average O&D fares by booking class ignoring fare rules • Use POS as a proxy for POO • This is done for two reasons • Booking process on RES is typically one-directional • Limited capabilities of RES lookup logic • TPF programming costs a lot

16. Some Facts • Most websites seek the following information before displaying availability • Customer information • Frequent Flyer • Complete itinerary • Search criteria • Booking requests on websites are typically routed through GDS or RES systems

17. Consequence “Airlines are struggling to value and control their bookings through the internet!”

18. Opportunities with Enriched Data Availability • Internet bookings can provide the following information for more accurate evaluation • Itinerary • POO • Min/max stay, Saturday night stay, advanced purchase, etc. • Frequent flyer information • Status • Life-time value • Buying habits

19. Opportunities with Enriched Data Availability • Conventional booking channels can also use more accurate evaluation through • Agent ID/Location for • net/market fare deals • commissions • Alliance/Codeshare value adjustments • Group or volume pricing

20. Challenges • Radical change to competitive-based pricing prevalent in the airline industry • Minimize Channel conflict and revenue dilution • Consumers will find ways analogous to “back-to-back ticketing” or “marriage breaks” or “hidden cities” • Additional lookup and response times • GDSs need to consider relaxing the two-second time limit on seamless availability • New interfaces and alternate paths for information flow

21. “Think Outside the Box” GDS eDynamic Pricing Reservations System Internet Booking Engines

22. The Crystal Ball GOODBYE BYZANTIUM“The good news for consumers is that the byzantine system of airline ticket pricing will begin to crumble as the Internet becomes an essential travel planning tool. The Web will exert incredible pressure on airlines to offer discounts and highly competitive fares to an increasingly informed public, especially one that can choose another carrier with the click of a mouse. Discounted tickets also mean slimmer margins for carriers, who'll be forced to find new sources of revenue, most likely by offering travel packages and premium services, and by catering to business travelers.” Excerpt from “Shop Talk: United Air flying on the Web”Ken YamadaRedherring.com, 16 February 2000

23. The Crystal Ball “Another way in which dynamic trade can affect inventory stocks is by making prices for certain products much more flexible. Bid-ask auction markets will proliferate, enabling commodities in oversupply to be sold efficiently at the market-clearing prices instead of either clogging channels or being dumped. Perishable or time-sensitive goods such as unused space in lorries or unsold media advertising can be sold economically, allowing intelligent yield management across industries in even highly fragmented markets. Indeed, Forrester predicts that yield-management pricing will become the norm in automated purchasing.” Excerpt from “The Net Imperative”Survey of Business and the InternetThe Economist, 26 June 1999

24. In Closing • Why are internet bookings still a small fraction of the total? • Airlines struggle with pricing internet offerings to avoid revenue dilution and channel conflict with the conventional channels • A holistic dynamic pricing engine will address this • Manual/Ad hoc process in distributing the inventory to e-channels • Tools to automate inventory distribution and manage online auctions will address this • Overall consumer penetration for buying travel online is low • Not a RM problem since Microsoft, AOL, Yahoo, CISCO, HP, IBM, numerous travel portals, and others are already addressing that in large numbers

25. In Closing • e-Commerce is going to grow and exert downward pressure on price and distribution costs • The RM tools for pricing and distributing inventory over the e-channels have to be developed as a logical extension of the conventional RM systems to have a coordinated distribution strategy • Speed will be a key to success