Changing Channels of Product Distribution - The Implications for Airlines and Regulators

1. Changing Channels of Product Distribution - The Implications for Airlines and Regulators Prepared for: Aviation in Transition: Challenges & Opportunities of Liberalization ICAO Headquarters, Montreal, 23 March 2003

2. The Airline Environment is Changing • Low Cost Airlines • ‘Simple’ product requiring innovative distribution • Facilitated by ‘Leapfrogging’ IT • Passengers adoption of internet and e-tix has surpassed expectations • Full Service Airlines • Complex product offering • Desire to target multiple market segments • Focus on FFP, CRM • But increasingly determined to fight LCC • GDS • Largely ‘disinvested’ from airlines • However, airlines retain a commercial relationship as marketing partners • GDS have recognised the power of internet and are buying into on-line travel agencies and servicing airline portals

3. Sales Channel Sophistication Airlines are determined to reduce costs, monitor channel performance and match channels to market segments • Full service complexity: online booking, intranet, call centres, syndicated portals • Low cost simplicity: 90%+ online booking • Full service airlines responding with portals…but do they match the costs of online booking?

4. Agent Productivity and Corporate Sales Driven by New Developments in IT • Airline Agent IT Products - • agent differentiation • incentive schemes • decision support system • use of detailed data • Airline Corporate Accounts IT • booking tools • monitor budgets and compliance • market knowledge systems • ultimately airlines seek integrated direct connectivity with corporates

5. ‘Pull Factors’ Driving End Traveler Appeal Airlines are using IT to optimise commercial activities including networks, FFP, CRM and Pricing • Pricing sophistication driven by prevalence of channels aimed at price sensitive segments: • Airlines enter into favored deals with preferred/owned channels • Opaque and NYOP used to sell ‘excess’ capacity • Potential downside of internet booking may be a general decline in yield due to ‘perfect competition’ • Pricing is likely to attract the increasing attention of the regulators

6. The Regulatory Challenge The main regulatory focus is on GDS and the internet • Distribution regulation previously focused on GDS. • Disinvestment of GDS potentially reduces market power • Opportunity to increase airlines’ negotiating power • GDS still have substantial power and are buying into internet • Need for internet distribution rules • Desire not to stifle internet sales channel ‘in its infancy’ • Initial issues for regulatory consideration focusing on: • Consumer protection • Airline ownership • Protecting on-line agencies • Availability of fares • Degree of airline control over sales

7. Other Less Crucial Areas That May Require Regulatory Review • MIDT: Contention that access to data and systems benefits major airlines • Corporate Connections: Extent of control required over in-house agencies • Pricing: • Issue of ‘opaque’ vs. ‘NYOP’ • ‘GDS-type’ control over availability of fares

8. Overall Conclusions • IT created an exciting array of distribution tools • Airlines’ behaviour is increasingly complex • Possible reduction in need for ‘traditional’ regulation • However great unknown is potential market power of internet booking tools • Equally, increasing passenger and airline maturity may obviate need for regulation and allow ‘the market to decide’

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